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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
D.C. 20549

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FORM 20-F

|o                                                                                                   
|----------------------------------------------------------------------------------------------------
|REGISTRATION
  STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT
  OF 1934
|                                                                                                    
|OR                                                                                                  
|                                                                                                    
|x                                                                                                   
|ANNUAL REPORT
  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934              
|For the fiscal year ended December 31, 2003                                                         
|                                                                                                    
|OR                                                                                                  
|                                                                                                    
|o                                                                                                   
|TRANSITION REPORT
  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934          
|For the transition period from . to .                                                           
|                                                                                                    
|Commission file No.0-29742                                                                          

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

ISRAEL
(Jurisdiction of incorporation or organization)

10 ZARHIN STREET,
RAANANA 43000, ISRAEL
(Address of principal executive offices)

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

Not Applicable

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

Ordinary Shares,
nominal value NIS 1.0 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:

12,976,695 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:

YESxNOo

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

ITEM 17oITEM
18x

1

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TABLE OF CONTENTS

|       |                                                              | Page
|------ | ------------------------------------------------------------ | ----
|PART I |                                                              |     
|       |                                                              |     
|       | Item 1.  IDENTITY OF DIRECTORS, SENIOR OFFICERS AND ADVISERS |     
|       |                                                              |     
|       | Item 2. 
  OFFER STATISTICS AND EXPECTED TIMETABLE           |     
|       |                                                              |     
|       | Item 3. 
  KEY INFORMATION                                   |     
|       |                                                              |     
|       | A. Selected Financial Data                                   |     
|       |                                                              |     
|       | B. Capitalization and Indebtedness                           |     
|       |                                                              |     
|       | C. Reasons for the Offer and Use of
  Proceeds.              |     
|       |                                                              |     
|       | D. Risk Factors.                                             |     
|       |                                                              |     
|       | Item 4. 
  INFORMATION ON THE COMPANY                        |     
|       |                                                              |     
|       | A. History and Development of the Company.                   |     
|       |                                                              |     
|       | B. Business Overview.                                        |     
|       |                                                              |     
|       | C. Organizational Structure                                  |     
|       |                                                              |     
|       | D. Property, Plants and Equipment                            |     
|       |                                                              |     
|       | Item 5. 
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS      |     
|       |                                                              |     
|       | A. Operating Results.                                        |     
|       |                                                              |     
|       | B. Liquidity and Capital Resources.                          |     
|       |                                                              |     
|       | C. Research and Development, Patents and
  Licenses          |     
|       |                                                              |     
|       | D. Trend Information.                                        |     
|       |                                                              |     
|       | E. Off Balance Sheet Arrangements.                           |     
|       |                                                              |     
|       | F. Tabular Disclosure of Contractual
  Obligations.          |     
|       |                                                              |     
|       | Item 6. 
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES        |     
|       |                                                              |     
|       | A. Directors and Senior Management.                          |     
|       |                                                              |     
|       | B. Compensation.                                             |     
|       |                                                              |     
|       | C. Board Practices.                                          |     
|       |                                                              |     
|       | D. Employees.                                                |     
|       |                                                              |     
|       | E. Share Ownership.                                          |     
|       |                                                              |     
|       | Item 7. MAJOR SHAREHOLDERS AND RELATED
  PARTY TRANSACTIONS  |     
|       |                                                              |     
|       | A. Major Shareholders.                                       |     

2

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|         | B. Related Party Transactions                                                              |  | 56   
|-------- | ------------------------------------------------------------------------------------------ |  | -----
|         |                                                                                            |  |      
|         | C. Interests of Expert and Counsel.                                                        |  | 56   
|         |                                                                                            |  |      
|         | Item 8. 
  FINANCIAL INFORMATION                                                           |  | 56-57
|         |                                                                                            |  |      
|         | Item 9. 
  THE OFFER AND LISTING                                                           |  | 57-58
|         |                                                                                            |  |      
|         | A. Offer and Listing Details.                                                              |  | 57-58
|         |                                                                                            |  |      
|         | B. Plan of Distribution.                                                                   |  | 58   
|         |                                                                                            |  |      
|         | C. Markets.                                                                                |  | 58   
|         |                                                                                            |  |      
|         | D. Selling Shareholders.                                                                   |  | 58   
|         |                                                                                            |  |      
|         | E. Dilution.                                                                               |  | 58   
|         |                                                                                            |  |      
|         | F. Expenses of the Issue.                                                                  |  | 58   
|         |                                                                                            |  |      
|         | Item 10. ADDITIONAL INFORMATION                                                            |  | 58-71
|         |                                                                                            |  |      
|         | A. Share Capital.                                                                          |  | 58   
|         |                                                                                            |  |      
|         | B. Memorandum and Articles of Association                                                  |  | 59-63
|         |                                                                                            |  |      
|         | C. Material Contracts.                                                                     |  | 63   
|         |                                                                                            |  |      
|         | D. Exchange Controls.                                                                      |  | 63   
|         |                                                                                            |  |      
|         | E. Taxation                                                                                |  | 63-71
|         |                                                                                            |  |      
|         | F. Dividends and Paying Agents.                                                            |  | 71   
|         |                                                                                            |  |      
|         | G. Statement by Experts.                                                                   |  | 71   
|         |                                                                                            |  |      
|         | H. Documents on Display.                                                                   |  | 71   
|         |                                                                                            |  |      
|         | I. 
  Subsidiary Information                                                               |  | 71   
|         |                                                                                            |  |      
|         | Item 11. QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISK                      |  | 72-73
|         |                                                                                            |  |      
|         | Item 12. 
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                         |  | 73   
|         |                                                                                            |  |      
|PART II  |                                                                                            | 
|         |                                                                                            | 
|         | Item 13. 
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                |  | 73   
|         |                                                                                            |  |      
|         | Item 14. 
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
  PROCEEDS |  | 73   
|         |                                                                                            |  |      
|PART III |                                                                                            | 
|         |                                                                                            | 
|         | Item 15. 
  CONTROLS AND ROCEDURES                                                         |  | 74   
|         |                                                                                            |  |      
|         | Item 16. 
  Reserved.                                                                      |  | 74   

3

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| | A. AUDIT COMMITTEE FINANCIAL EXPERT                                         |                        | 74
| | --------------------------------------------------------------------------- | ---------------------- | --
| |                                                                             |                        |   
| | B. CODE OF ETHICS                                                           |                        | 74
| |                                                                             |                        |   
| | C. PRINCIPAL ACCOUNTING FEES AND SERVICES                                   |                        | 74
| |                                                                             |                        |   
| | D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES                   |                        | 75
| |                                                                             |                        |   
| | E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
  PURCHASERS |                        | 75
| |                                                                             |                        |   
| | Item 17.                                                                    | FINANCIAL
  STATEMENTS |   
| |                                                                             |                        |   
| | Item 18.                                                                    | FINANCIAL
  STATEMENTS |   
| |                                                                             |                        |   
| | Item 19.                                                                    | EXHIBITS               |   

4

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PART I

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

Our
consolidated financial statements are prepared in United States dollars and in
accordance with generally accepted accounting principles in the United
States.  All references to dollars or
$ in this annual report are to United States dollars, and all references to
Shekels or NIS are to New Israeli Shekels. 
On June 28, 2004, the exchange rate between the NIS and the dollar, as quoted by the Bank of
Israel, was NIS 4.498 to $1.00.

Statements
in this annual report concerning our business outlook or future economic
performance; anticipated revenues, expenses or other financial items;
introductions and advancements in development of products, and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters,
are forward-looking statements as that term is defined under the Private
Securities Litigation Reform Act and U.S. 
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, or SEC.

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, 1999,
2000, 2001, 2002 and 2003 and the consolidated balance sheet data as of
December 31, 1999, 2000, 2001, 2002 and 2003 set forth below have been
derived from our audited consolidated financial statements. The selected
consolidated statement of income data set forth below with respect to the years
ended December 31, 2000, 2001, 2002 and 2003 and the selected consolidated
balance sheet data as of December 31, 2000, 2001, 2002 and 2003 set forth
below have been derived from our consolidated financial statements that were
audited by Kesselman & Kesselman, a member of PricewaterhouseCoopers
International Limited. The selected consolidated statement of income data with
respect to the fiscal year ended December 31, 1999 and the selected
consolidated balance sheet data as of December 31, 1999 set forth below
have been derived from our consolidated financial statements that were jointly
audited by Kesselman & Kesselman, a member of PricewaterhouseCoopers
International Limited, and Rosenblum-Holtzman, independent certified public
accountants in Israel. The selected consolidated financial data set forth below
should be read in conjunction with Item 5 -- Operating and Financial Review and
Prospects and our consolidated financial statements and notes to those
statements for the years 2001, 2002 and 2003 included elsewhere in this annual
report. Historical results are not necessarily indicative of the results to be
expected in the future.

|                                                       |  | Year ended December 31,               |       
|------------------------------------------------------ |  | ------------------------------------- | ------
|                                                       |  |                                       |       
|                                                       |  | 1999                                  |       
|                                                       |  |                                       |       
|                                                       |  | (in thousands, except per share data) |       
|                                                       |  |                                       |       
|Consolidated
  statement of income data                |  |                                       |       
|Revenues:                                              |  |                                       |       
|Product sales                                          |  | $                                     | 15,748
|Services and projects                                  |  |                                       | 9,058 
|                                                       |  |                                       |       
|Total revenues                                         |  |                                       | 24,806
|                                                       |  |                                       |       
|Cost of revenues:                                      |  |                                       |       
|Cost of product sales                                  |  |                                       | 2,541 
|Cost of services and projects                          |  |                                       | 3,343 
|                                                       |  |                                       |       
|Total cost of revenues                                 |  |                                       | 5,884 
|                                                       |  |                                       |       
|Gross profit                                           |  |                                       | 18,922
|                                                       |  |                                       |       
|Operating expenses:                                    |  |                                       |       
|Research and development expenses-net                  |  |                                       | (5,202
|Selling and marketing expenses                         |  |                                       | (4,795
|General and administrative expenses                    |  |                                       | (3,295
|Other general income (expenses)net                    |  |                                       | (35   
|                                                       |  |                                       |       
|Total operating expenses                               |  |                                       | 13,327
|                                                       |  |                                       |       
|Income (loss) from operations                          |  |                                       | 5,595 
|Financial income (expenses)-net                        |  |                                       | 1,162 
|Gain arising from issuance of shares by a subsidiary   |  |                                       |      
|Other expenses                                         |  |                                       |      
|                                                       |  |                                       |       
|Income (loss) before taxes on income                   |  |                                       | 6,757 
|Taxes on income                                        |  |                                       | (1,484
|Share in losses of an associated company               |  |                                       | (67   
|Minority interests in losses of subsidiaries           |  |                                       | 156   
|                                                       |  |                                       |       
|Net income (loss)                                      |  | $                                     | 5,362 
|                                                       |  |                                       |       
|                                                       |  |                                       |       
|Earnings (loss) per share:                             |  |                                       |       
|Basic                                                  |  | $                                     | 0.50  
|                                                       |  |                                       |       
|                                                       |  |                                       |       
|Diluted                                                |  | $                                     | 0.49  
|                                                       |  |                                       |       
|                                                       |  |                                       |       
|Weighted average number of shares used in computation: |  |                                       |       
|Basic                                                  |  |                                       | 10,796
|Diluted                                                |  |                                       | 11,046

6

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|                                  |  | Year ended December 31, |       
|--------------------------------- |  | ----------------------- | ------
|                                  |  |                         |       
|                                  |  | 1999                    |       
|                                  |  |                         |       
|                                  |  | (U.S. $ in thousands)   |       
|                                  |  |                         |       
|Consolidated
  balance sheet data |  |                         |       
|Cash and cash equivalents         |  | $                       | 15,195
|Working capital                   |  |                         | 26,209
|Total assets                      |  |                         | 45,662
|Total debt                        |  |                         | 4,191 
|Shareholders equity              |  |                         | 33,331

B. Capitalization
and Indebtedness

Not applicable.

C. Reasons for
Offer and Use of Proceeds

Not applicable.

D. Risk Factors

You
should carefully consider the risks described below and in the documents we
have incorporated by reference into this annual report before making an
investment decision. Our business, financial condition or results of operations
could be materially adversely affected by any of these risks. The trading price
of our ordinary shares could decline due to any of these risks, and you may
lose all or part of your investment.

Risks Related To Our Business

A continuation of the general
deterioration of the economy worldwide could materially adversely affect the
retail food industry, our primary target market, more intensely than other
sectors, which would have a material adverse effect on our results of
operations.

Our future growth is critically dependent on
increased sales to customers in the retail food industry. We derive the
substantial majority of our revenues from the sale of software products and the
performance of related services to the retail food industry worldwide,
including supermarkets, convenience stores and restaurants.  The success of our customers is directly
linked to economic conditions in the retail food industry, which in turn are
subject to intense competitive pressures and are affected by overall economic
conditions.  The general deterioration
of the economy worldwide has resulted in a curtailment of capital investment by
our existing and potential customers. 
The attacks on the United States on September 11, 2001 and subsequent
terror attacks worldwide have caused a further decline in the global
economy.  As a result, many companies,
including our existing 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 uncertainty regarding the adoption of
  our current and future products, including our relatively new Application
  Service Provider, or ASP, and e-market applications;

7

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| | technical difficulties with respect to the
  use of software solutions and services developed by us; and
|- | --------------------------------------------------------------------------------------------------------
|  |                                                                                                         
| | seasonality in customer purchasing and
  deployment patterns.                                           

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

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

Sales to
national supermarket and convenience store chains typically are large in size
and represent a significant portion of our revenues. Two of our customers each
accounted for more than 5% of our revenues during 2002. Two of our customers
(including one of the two mentioned in regard to 2002) accounted for more than
5% of our revenues during 2003.  We
anticipate that sales to a few customers in any given reporting period will
continue to contribute materially to our revenues in the foreseeable
future.  A significant reduction in
sales to these large chains could significantly reduce our revenues.

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

Because the
gross margins on product revenues are significantly greater than the gross
margins on services and project revenues, our combined gross margin has
fluctuated from quarter to quarter, and it may continue to fluctuate
significantly based on our revenue mix between product revenues and services
and project revenues.  Our operating
results in any given quarter may be adversely affected to the extent our gross
margins decline due to our generating in that quarter a greater percentage than
average of services and project revenues.

Our business will suffer to the extent the .Net platform or our products
based on the .Net platform do not achieve market acceptance.

In 2003, we
began developing new versions of our products based on the Microsoft .Net
platform, or the .Net platform.  The
risks of our commitment to the .Net platform include the following:

| | the possibility that prospective customers
  will refrain from purchasing the current versions of our products because
  they are waiting for the .Net platform versions;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                          
| | the possibility that our .Net platform beta
  customers will not become favorable reference sites;                                                                       
|  |                                                                                                                                                                          
| | the ability of the .Net platform to support
  the multiple sites and heavy data traffic of our largest customers;                                                        
|  |                                                                                                                                                                          
| | the ability of our development staff to
  learn how to efficiently and effectively develop products using the .Net
  platform;                                           
|  |                                                                                                                                                                          
| | our ability to transition our customer base
  onto the .Net platform when it is available;                                                                               
|  |                                                                                                                                                                          
| | Microsofts ability to achieve market
  acceptance of the .Net platform; and                                                                                             
|  |                                                                                                                                                                          
| | Microsofts continued commitment to
  enhancing and marketing the .Net platform.                                                                                         

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

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

Any
changes to third-party hardware and software platforms and applications that
our products work with could require us to modify our products and could cause
us to delay releasing a product until the updated version of that hardware and
software platform or application has been released.  As a result, customers could delay purchases until they determine
how our products will operate with these updated platforms or applications,
which could inhibit sales of our products and harm our business.  In addition, developing and maintaining
consistent software product performance across various technology platforms
could place a significant strain on our resources and software product release
schedules, which could adversely affect our results of
operations.  We must continually
evaluate new technologies and implement into our products advanced
technology.  For example, in 2001 and
2002, we modified our software products to work with Windows XP Embedded and
Linux open source operating systems and in 2003, we began investing in
developing versions of our products based on the Microsoft .Net platform.  
Many existing and potential customers have not yet acquired these
operating systems and we cannot assure you that these modifications will be
successful. Moreover, if we fail in our product development efforts to
accurately address in a timely manner, evolving industry standards, new technology advancements or
important third-party interfaces or product architectures, sales of our
products and services will suffer.

8

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

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

| | appeal to larger retailers who have
  multiple divisions requiring multiple implementation projects;                  
|- | ----------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                       
| | require the execution of implementation
  procedures in multiple layers of software;                                  
|  |                                                                                                                       
| | offer a retailer more deployment options
  and other configuration choices; and                                       
|  |                                                                                                                       
| | may involve third party integrators to
  change business processes concurrent with the implementation of the software.

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

Our failure to integrate businesses that we acquire could disrupt our
business, dilute your holdings in us and harm our financial condition and
operating results.

We
acquired OMI International, Inc. in January 2004 and we intend to make future
strategic acquisitions of complementary companies, products or technologies.
These acquisitions could disrupt our business. 
In addition, your holdings in our company would be diluted if we issue
equity securities in connection with any acquisition, as we did in the OMI International
transaction. 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.         

Further,
products that we acquire from third parties often require significant
expenditures of time and resources to upgrade and integrate with our existing
product suite.  Specifically, if we fail
to integrate OMI Internationals applications into our ReMA platform or develop
a web-based version of OMI Internationals applications in a timely manner, we
may be unable to fully realize the expected benefits of our acquisition of OMI
International.  We may not be able to
successfully integrate any business, technologies or personnel that we have acquired
or that we might acquire in the future, and this could harm our financial
condition and operating results.

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

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

| | rapid technological advances in hardware
  and software  development;                            
|- | -------------------------------------------------------------------------------------------------
|  |                                                                                                  
| | evolving standards in computer hardware,
  software technology and communications infrastructure;
|  |                                                                                                  
| | changing customer needs; and                                                                     
|  |                                                                                                  
| | frequent new product introductions and
  enhancements.                                           

9

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

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 information systems, and we are likely to compete with new
companies in the future.  With respect
to our e-marketplace initiatives, the barriers are relatively low and
competition from other established and emerging companies may develop in the
future.  Some of our existing or potential competitors have greater
financial, technical and marketing resources than we have.  As a result,
these competitors are able to devote greater resources than we can to the development,
promotion, sale and support of their products. 
We also expect to encounter potential customers that, because of
existing relationships with our competitors, are committed to the products
offered by these competitors.  As a
result, competitive pressures could cause us to lose market share and require
us to reduce our prices and profit margins.  This could cause a decline in
our revenues and adversely affect our operating results.

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

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

| | the potential cancellation of orders based
  on customers changing budgetary constraints;                                       
|- | ---------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                  
| | the shift in orders expected in one quarter
  to another quarter because of the timing of customers procurement decisions;
  and
|  |                                                                                                                                  
| | the unpredictability of internal acceptance
  reviews.                                                                           

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

Our ASP business model is in an early stage of development and, if
unsuccessful, our revenue growth could be adversely affected.

We
are in the early stages of rolling-out our ASP application services to small
chains and single store retailers through our two StoreNext joint ventures,
StoreNext Retail Technology LLC, which we refer to as StoreNext USA, and  Store Alliance.com Ltd., which we refer to
as StoreNext Israel.  These applications
have not been traditionally used by smaller retailers and if they do not accept
them, our ASP initiatives may not succeed. 
Our services include head-office and back-office applications delivered
via the Internet based on an ASP subscription fee pricing model.  We have only recently begun charging users
of our ASP services a subscription fee for reporting, analysis and merchandising
services.  In the future, we plan to
offer additional services for a fee.  We
cannot be assured that these users will accept our pricing model.  If we are unsuccessful in selling and
marketing our ASP services to these retailers, our revenue growth could be
adversely affected.

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

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.  Any of these factors could adversely affect
our revenue growth.

10

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If we are
unsuccessful in establishing an e-marketplace, our revenue growth could be
adversely affected.

In
order for us to establish an e-marketplace for our ASP initiatives, we will
need to generate a community of participating retailers sufficiently large to
support such a marketplace.  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 an e-marketplace, our revenue
growth could be adversely affected.

Our recent
undertaking of joint management for the indirect sales channel for our software
to Tier 3 and Tier 4 grocers in the U.S. market may prove less successful than
the previous management by Fujitsu USA, which could adversely affect our
revenues and operating results.

In
2002, We and Fujitsu USA established StoreNext USA, a joint venture to
sell our software and Fujitsu hardware to the Tier 3 and Tier 4 grocery
sector in the United States.  Sales to
grocery stores in this sector are primarily made indirectly through regional
dealers.  We previously targeted this
market segment by selling our software to Fujitsu USA, which then resold it to
regional dealers and managed the dealer channel.  As a result of the joint venture, we have jointly undertaken with
Fujitsu direct responsibility for managing the dealer channel for this market
segment.  If our direct involvement in
the management of the dealer channel proves less successful than the previous
sole management of this channel by Fujitsu USA, our revenues could be adversely
affected and our operating results may suffer.

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

Our
ASP infrastructure is vulnerable to security breaches, computer viruses or
similar disruptive problems.  Our ASP servers provide access to and distribution
of many of our enterprise software solutions, products and services to our ASP
customers.  Providing unimpeded access
to our ASP servers is critical to servicing our ASP customers and providing
superior customer service to them.  These systems are also subject to
telecommunications failures, power loss and various other system
failures.  Any of these occurrences, whether intentional or accidental,
could lead to interruptions, delays or cessation of operation of our ASP
servers.  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
e-marketplace and ASP customers, which could result in significant costs,
damage our reputation and decreased demand for our products.

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

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

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

Errors or defects in our software products could diminish demand for our
products, 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 errors will not be found in new products or
releases after shipment.  This could
result in diminished demand for our products, delays in market acceptance and
sales, diversion of development resources, injury to our reputation or
increased service and warranty costs. 
If any of these were to occur, our operating results could be adversely
affected.

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

Because
our products are generally used in systems with other vendors products, they
must integrate successfully with these existing systems.  As a result, when problems occur in a
system, it may be difficult to identify the product that caused the
problem.  System errors, whether caused
by our products or those of another vendor, could adversely affect the market
acceptance of our products, and any necessary revisions could cause us to incur
significant expenses.  Regardless of the
source of these errors or defects, we will need to divert the attention of
engineering personnel from our product development efforts to address the
detection of the errors or defects. These errors or defects could cause us to
incur warranty or repair costs, liability claims or lags or delays.  In addition, if software errors or design
defects in our products cause damage to our customers data, we could be
subject to liability based on product liability claims.  Our agreements with customers that attempt
to limit our exposure to product liability claims may not be enforceable in
jurisdictions where we operate. Our insurance policies may not provide
sufficient protection should a claim be asserted against us. Moreover, the
occurrence of errors or defects, whether caused by our products or the products
of another vendor, may significantly harm our relations with customers, or
result in the loss of customers, injure our reputation and impair market
acceptance of our products.

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

Our
rapid expansion has placed, and is likely to continue to place, a strain on our
senior management team and other resources, such as our management information
systems and operating, administrative, financial and accounting systems. We 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 659 employees
on December 31, 2003.  As a result of
the January 2004 acquisition of OMI International, we have added an additional
79employees.    Any failure to manage
growth effectively could disrupt our business and harm 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 officers or other key personnel could adversely affect our business.

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

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

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, which
may adversely affect our business.

12

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

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

| | potentially weak protection of intellectual
  property rights;                                                      
|- | --------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                     
| | economic and political instability;                                                                                 
|  |                                                                                                                     
| | import or export licensing requirements;                                                                            
|  |                                                                                                                     
| | trade restrictions;                                                                                                 
|  |                                                                                                                     
| | difficulties in collecting accounts
  receivable;                                                                   
|  |                                                                                                                     
| | longer payment cycles;                                                                                              
|  |                                                                                                                     
| | unexpected changes in regulatory
  requirements and tariffs;                                                        
|  |                                                                                                                     
| | seasonal reductions in business activities
  in some parts of the world, such as during the summer months in Europe;
|  |                                                                                                                     
| | fluctuations in exchange rates; and                                                                                 
|  |                                                                                                                     
| | potentially adverse tax consequences.                                                                               

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

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. 
We currently have no patents or patent applications pending.  We rely on a
combination of trademarks, copyrights, trade secret laws, confidentiality
procedures and licensing arrangements to protect our intellectual property
rights.  Our competitors could also independently develop technologies
that are substantially equivalent or superior to our technology.

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

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

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

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 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.

13

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

Our
operations could be disrupted by the absence for significant periods of one or
more of our executive officers, key employees or a significant number of other
employees because of military service.  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. 
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-dollar currencies
such as the New Israeli Shekel, the British Pound Sterling or the Euro, and
because our financial results are measured in dollars, our results of operations
could be harmed, as a result of strengthening or weakening of the dollar
compared to these other currencies.

We
generate a majority of our revenues in dollars or in dollar-linked currencies,
but some of our revenues are generated in other currencies such as the New
Israeli Shekel, the British Pound Sterling and the Euro.  As a result, some of our financial assets
are denominated in these currencies, and fluctuations in these currencies could
adversely affect our financial results. 
A considerable amount of our expenses are generated in dollars or in
dollar-linked currencies, but some of our expenses such as salaries or hardware
costs are generated in other currencies such as the New Israeli Shekel, the
British Pound Sterling or the Euro.  In
addition to our operations in Israel, we are expanding our international
operations.  Accordingly, we incur and expect to continue to incur
additional expenses in non-dollar currencies. 
As a result, some of our financial liabilities are denominated in these non-dollar
currencies.

In
addition, some of our bank credit is linked to these non-dollar
currencies.  Most of the time our
non-dollar assets are not totally offset by non-dollar liabilities.  Due to the fact that our financial results
are measured in dollars, our results could be harmed as a result of
strengthening or weakening of the 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 future currency fluctuations.

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

Since
a considerable portion of our expenses such as employees salaries are linked
to an extent to the rate of inflation in Israel, the dollar cost of our
operations is influenced by the extent to which any increase in the rate of
inflation in Israel is or is not offset by the devaluation of the NIS in
relation to the dollar.  As a result, we are exposed to the risk that the
NIS, after adjustment for inflation in Israel, will appreciate in relation to
the dollar.  In that event, the dollar
cost of our operations in Israel will increase and our dollar-measured results
of operations will be adversely affected. In 2001 and 2002, the inflation
adjusted NIS devalued against the dollar, which lowered the dollar cost of our
Israeli operations. During 2003, however, the inflation adjusted NIS
appreciated against the dollar, which raised the dollar cost of our Israeli
operations. We cannot predict whether in the future the NIS will appreciate
against the dollar or vice versa.  Any
increase in the rate of inflation in Israel, unless the increase is offset on a
timely basis by a devaluation of the NIS in relation to the dollar, will
increase labor and other costs, which will increase the dollar cost of our
operations in Israel and harm our results of operations.

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

We
receive tax benefits under the Israeli Law for Encouragement of Capital
Investments, 1959, in respect of our production facilities that are designated
as Approved Enterprises, the cessation of which could adversely affect our
results of operations.  Our cumulative tax benefits resulting from our
Approved Enterprises for the years 2001, 2002 and 2003, net of other tax
effects, were approximately $214,000, $443,000 and $365,000, respectively. For
more information on this law and our Approved Enterprises, see Item 10E 
Taxation of this annual report under the caption Israeli TaxationLaw for the
Encouragement of Capital Investments, 1959. 
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 and we could be required to
refund the amounts of the benefits received.  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. The Law for Encouragement
of Capital Investments, 1959, will expire on June 30, 2004, unless its terms
will be extended.  Accordingly, requests
for new programs or expansions that are not approved by June 30, 2004 will not confer any tax
benefits, unless the term of the law will be extended.  The termination or
reduction of these tax benefits could harm our results of operations.

14

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On
May 10, 2004, a bill was introduced in the Israeli parliament proposing changes
to the Law for Encouragement of Capital Investments, 1959. Among other things,
the bill proposes to extend the law indefinitely, to change both the criteria
and procedure for obtaining Approved Enterprise status for an investment
program and to make certain changes to the grants and tax benefits afforded in
certain circumstances to Approved Enterprises. The proposed amendment is
expected to apply to new investment programs and may apply to extensions of
existing programs, following the enactment of the bill into law. In order to
enact the bill as law, the bill must be approved by the Israeli parliament and
published. The bill might be modified prior to enactment or might not be
enacted at all. Accordingly, we cannot predict the consequences of the bill to
us.

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

We
have received royalty-bearing grants from the Office of the Chief Scientist of
the Ministry of Industry, Trade and Labor of the Government of Israel in an
aggregate amount of approximately $3.64 million through December 31,
2003.  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 300% of the grants we received and to repay such grants at a quicker
rate.  In addition, we are prohibited
from transferring to third parties in Israel the technology developed with
these grants without the prior approval of a governmental committee and we are
prohibited from transferring such technology to third parties outside
Israel.  Any non-Israeli who becomes a holder of 5% or more of our outstanding ordinary
shares will be required to notify the Office of the Chief Scientist and to
undertake to observe the law governing the grant programs of the Office of the
Chief Scientist, the principal restrictions of which are the transferability
limits described above in this paragraph.

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

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

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

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.

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

It
is not clear whether civil liabilities under the Securities Act of 1933 and the
Securities Exchange Act of 1934, or the Exchange Act, can be enforced in
original actions instituted in Israel. 
However, subject to specified time limitations, Israeli courts may
enforce a U.S. final executory judgment in a civil matter, including a monetary
or compensatory judgment in a non-civil matter, obtained after due process
before a court of competent jurisdiction according to the laws of the state in
which the judgment is given and the rules of private international law
currently prevailing in Israel.  The
rules of private international law currently prevailing in Israel do not
prohibit the enforcement of a judgment by Israeli courts provided that:

| |  | the judgment is enforceable in the state in
  which it was given;
| | - | -----------------------------------------------------------------

15

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| |  | adequate service of process has been
  effected and the defendant has had a reasonable opportunity to present his
  arguments and evidence;              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                          
| |  | the judgment and the enforcement of the
  judgment are not contrary to the law, public policy, security or sovereignty
  of the state of Israel;         
| |   |                                                                                                                                                          
| |  | the judgment was not obtained by fraud and
  does not conflict with any other valid judgment in the same matter between
  the same parties; and          
| |   |                                                                                                                                                          
| |  | an action between the same parties in the
  same matter is not pending in any Israeli court at the time the lawsuit is
  instituted in the foreign court.

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

Provisions
of Israeli corporate law may have the effect of delaying, preventing or making
more difficult a merger with, or acquisition of, us.  The Israeli Companies Law  1999 or the Companies Law, generally
provides that a merger be approved by the board of directors and a majority of
the shares present and voting on the proposed merger at a meeting called upon
at least 21 days notice.  A merger may
not be completed unless at least 70 days have passed since the filing of the
merger proposal with the Israeli Registrar of Companies.  The Companies Law also provides that an
acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would become a 25% or
greater shareholder of the company, unless there is already another 25% or
greater shareholder of the company. 
Similarly, an acquisition of shares must be made by means of a tender
offer if as a result of the acquisition the purchaser would become a 45% or
greater shareholder of the company, unless there is already a 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.  Finally, Israeli tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and
a foreign company, less favorably than U.S. tax laws. For example, Israeli tax
law may, under certain circumstances, subject a shareholder who exchanges his
ordinary shares for shares in another corporation to taxation prior to the sale
of the shares received in such stock-for-stock swap.

Risks Related to Our Ordinary Shares

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

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

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

In
addition, trading in shares of companies listed on The Nasdaq 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, 2002 and the first half of 2003.  These broad market and
industry factors may depress our share price, regardless of our actual
operating results.

16

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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 we or our shareholders may sell a substantial number of
our ordinary shares, the market price of our ordinary shares may fall.  In
April 2004, we registered on a shelf registration statement with the SEC
4,100,000 of our ordinary shares, of which we sold 3,450,000 in a public
offering  in May 2004.  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.

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

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

We may need
additional financing, which could be difficult to obtain on acceptable terms or
at all, and which if not obtained may have an adverse effect on our business.

In
addition to the proceeds of our May 2004 any offering of ordinary shares, we
may need to raise additional funds in the future and we cannot be certain that
we will be able to obtain additional financing on favorable terms, if at all.
From time to time, we may decide to raise additional funds through public or
private debt or equity financings to fund our activities. If we issue
additional equity securities, our stockholders will experience additional
dilution and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our ordinary shares. In
addition, if we raise funds through debt financings, we will have to pay
interest and may be subject to restrictive and other covenants, which could
adversely impact our business. If we cannot raise funds on acceptable terms, if
and when needed, we may not be able to develop or enhance our products, take
advantage of future opportunities, grow our business or respond to competitive
pressures or unanticipated industry changes, any of which could have a material
adverse effect on our business.

ITEM 4 -
INFORMATION ON THE COMPANY

A. History and
Development of the Company

Both
our legal and commercial name is Retalix Ltd. 
During 2000, we changed our name from Point of Sale Ltd. to our current
name. We were incorporated on March 5, 1982, under the laws of the State of
Israel.   We are domiciled in
Israel.  Our legal form is a company
limited by shares.  We operate under the
laws of the State of Israel.  Our
registered office is located at 10 Zarhin Street, Raanana 43000, Israel, and
our telephone number is +972-9-776-6677. 
Our agent in the United States is Retalix USA Inc. Its address
is 6200 Tennyson Parkway, Suite 150,
Plano, TX 75093.

We
have grown through a combination of internal expansion and strategic
acquisitions of companies with related businesses and technologies.  Our principal recent acquisitions are as
follows:

| |  | OMI International. In January 2004, we acquired OMI
  International, a provider of supply chain execution and warehouse management
  systems for the retail food industry. Warehouse management systems are
  designed to help food retailers manage the various order fulfillment
  processes that take place in their warehouses and distribution centers. OMI
  Internationals integrated applications provide end-to-end supply chain
  management enabling enterprise-wide procurement, merchandising, warehouse
  management and order management for multi-warehouse, multi-facility food
  retailers. OMI International has over 50 customers in the retail food industry,
  including such leading retailers as A&P (The Great Atlantic &
  Pacific Tea Company), Food Lion, Giant Eagle, Kroger and Winn Dixie. OMI
  International has 79 employees. We believe the acquisition of OMI
  International will enable us to enter into the supply chain execution and
  warehouse management systems markets for retailers, broaden our customer base
  and expand our suite of products.  In
  early 2004, we also acquired the independent operations of the distributors
  of OMI Internationals products in Israel and Europe.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | BASS. In September 2001, we acquired BASS Inc.,
  or BASS, a provider of POS and back-office systems designed to fit the needs
  of the small supermarket chains and single store, independent grocers. BASS,
  which is now operating as Retalix Dayton, employs approximately 80 employees
  and is headquartered in Dayton, Ohio. The acquisition of BASS complemented
  our earlier acquisition of Retail Control Systems described below, enabling
  us to further penetrate the Tier 3 and Tier 4 North American retail food
  market sectors.                                                                                
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Retail Control
  Systems. In
  September 2000, we acquired Retail Control Systems Inc., or RCS, a
  provider of POS and back-office systems designed to meet the needs of mid-
  and small-size independent supermarkets in the United States. RCS, which is
  now operating as Retalix Pittsburgh, employs approximately 90 people in
  Pennsylvania, Ohio and Washington, D.C. Its flagship product, ScanMaster, is
  distributed primarily through NCRs dealer channel. The acquisition of RCS
  enabled us to accelerate our penetration of the market for POS systems for
  Tier 3 and Tier 4 food retailers in North America.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | PalmPoint. Through a series of transactions from 1999
  through 2002, we acquired PalmPoint Ltd. or PalmPoint, which develops software
  solutions for hand-held devices, such as Palm and PC pocket computers. The
  PalmPoint products support in-store retail applications, such as ordering,
  receiving and inventory management and operate on the Microsoft Windows CE
  platform.                                                                                                                                                                                                                                           

Our
capital expenditures (consisting of the purchase of fixed assets) were
$1.0 million, $1.7 million and $2.2 million in 2003, 2002 and
2001, respectively. Development in our products are discussed below in Item 4B
 Business Overview and in Item 5  Updating and Financial Review and
Prospects.

B. Business
Overview

Overview

We
are an independent provider of integrated enterprise-wide software solutions
for the global retail food and fuel industries. Spanning the retail supply
chain from the warehouse to the point of sale, our suite of software solutions
integrates retail information flow across a retailers entire operations,
encompassing its stores, headquarters and warehouses. Our comprehensive
integrated solution suite enables food and fuel retailers to manage their
retail operations more efficiently, reduce infrastructure costs and closely
collaborate with suppliers. Our software solutions also enable retailers to
capture and analyze consumer behavior data, and to use that data to more effectively
devise and implement targeted promotions to stimulate demand. We believe that
our extensive knowledge and accumulated experience in developing software
solutions for the retail food and fuel industries enables us to provide
solutions to retailers that are better integrated and more tailored for our
target markets than competing solutions. Through our January 2004 acquisition
of OMI International, we have further extended the scope of our software suite
to include supply chain execution and warehouse management. With this enhanced
suite of software solutions, we are now able to provide retailers with the
ability to manage, track and report the movement of goods throughout the entire
scope of their operations, from the initial receipt of goods at the warehouse
to the final sale at the checkout counter.

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

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

We
market our solutions to Tier 1 and Tier 2 food retailers, large convenience
store chains and major fuel retailers through a direct sales force in the
United States and Europe, augmented by a combination of channel partners and
resellers. Sales to Tier 1 and Tier 2 food retailers, large convenience store
chains and major fuel retailers have historically represented a substantial
majority of our revenues. We target Tier 3 and Tier 4 food retailers through
our StoreNext joint ventures in the United States and Israel, which sell their
solutions through regional dealers. For larger supermarket and convenience
store chains and major fuel retailers, our professional services personnel
provide our customers with project management, implementation, application
training and technical services. We also provide development services to
customize our applications to meet specific requirements of our customers and
ongoing support and maintenance services.

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We
believe that we are unique within the retail food software industry as we offer
software solutions that can serve the needs of the entire range of food
retailers, from multi-national supermarket and major convenience store chains
to independent grocers. We are able to serve such a diverse customer base
because we have designed our applications to include multiple levels of
functionality that can be adapted to the various sizes and forms of retail
operations of our customers. To date, our software solutions have been
installed in more than 30,000 supermarkets and grocers, convenience stores and
major fuel retailers in 44 countries, serving more than 250,000 checkout lanes.
Our customers include leading supermarket and grocery chains such as
Albertsons, Hy-Vee and Publix in the United States, Delhaize, Sainsburys and
Tesco in Europe, and large convenience stores and major fuel retailers such as
Alon Fina, Caseys and Pilot Oil in the United States and Husky Oil in Canada.
We estimate that our current aggregate market share in 75 of the largest U.S.
supermarket chains, based on the number of checkout lanes, is approximately 9%,
which we believe is the largest market share among independent software
vendors. In addition, we estimate that our software is currently installed at
approximately 6,500 independent grocers out of the total U.S. market of
approximately 20,000 independent grocers. Our sales have grown from
$36.1 million in 2000 to $92.1 million in 2003.

On
January 2, 2004, we acquired OMI International, a provider of supply chain
execution and warehouse management systems for the retail food industry.
Warehouse management systems manage the various fulfillment processes that take
place in retailers warehouses and distribution centers. We believe the
acquisition of OMI International will enable us to enter the supply chain
execution and warehouse management systems market for retailers, broaden our
customer base and expand our suite of products. The addition of OMI
Internationals integrated applications to our suite of retail solutions
enables us to provide customers with end-to-end supply chain management,
facilitating enterprise-wide procurement, merchandising, warehouse management
and order management for multi-warehouse, multi-facility retailers. Moreover,
the integration of our in-store solutions with OMI Internationals warehouse
management solution will significantly improve the replenishment decisions made
at the warehouse. Warehouse management systems typically base replenishment
decisions upon the movement of goods from the warehouse to the store, without
direct knowledge of inventory and sales at the store. We believe that the
combination of our in-store solutions with OMI Internationals applications
will enable retailers to optimize their replenishment decisions based on point
of sale data, thereby reducing situations in which the store is out of an
inventory item, on the one hand, and, on the other hand, delaying replenishment
at the warehouse until the goods have been sold at the checkout counter.

Our Market Opportunity

The customer
retention battle

The
retail food and fuel industries today are characterized by intense competition,
resulting in increased pricing pressure and narrowing operating margins.
Retailers are losing customers to their larger competitors who offer aggressive
pricing as well as greater shopping convenience and superior customer service.
The largest retailers, such as WalMart, are increasingly using their size and
scale to realize cost savings and operating efficiencies from their supply
chain which they then pass on to the consumer in the form of lower prices. This
trend creates an industry dynamic whereby more and more consumers are attracted
to these price-cutting retailers, thus accelerating these retailers revenue
growth and allowing them to further increase their economies of scale.

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

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

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The information
system needs of food and fuel retailers

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

| |  | increase operating efficiencies through tighter integration of
  in-store, enterprise level and warehouse management systems, enabling
  visibility across the entire scope of their retail operations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                        
| |  | capture and analyze data to enable advanced forecasting capability
  within the ordering and inventory stocking process; and                                                                           
| |   |                                                                                                                                                                                                        
| |  | extend supply chain visibility to include suppliers, enabling
  retailers to share data and collaborate with suppliers in supply chain
  decisions.                                                    

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

| |  | effectively manage customer management initiatives which are designed
  to foster customer loyalty and promotion strategies;
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                             
| |  | integrate enterprise and in-store systems to enable rapid
  implementation of customer management initiatives;              
| |   |                                                                                                                             
| |  | efficiently manage their supply chain to facilitate optimal inventory
  stocking at each location;                          
| |   |                                                                                                                             
| |  | quickly and efficiently implement pricing, product and marketing
  decisions; and                                           
| |   |                                                                                                                             
| |  | support a wide variety of retail services to increase customer
  convenience and satisfaction.                              

The retail food and
fuel software opportunity

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

In
order to remain competitive and avoid the ongoing costs associated with
maintaining their legacy systems, many retailers are seeking to replace their
legacy systems with integrated retail information systems that can provide them
with visibility across the entire scope of their retail operations, support
collaboration with their suppliers, allow enterprise-wide information flow and
enable implementation of sophisticated customer loyalty and promotion
strategies. We believe that these replacement systems typically will be based
upon a modular, open-systems architecture, or non-proprietary software that can
be easily integrated into a retailers existing IT infrastructure. Systems
meeting such criteria provide retailers with the flexibility to modify their
information systems to respond to and manage their changing business
environment. Based on data compiled by IBM, North American retailers across all
industries continue to rely upon legacy POS systems that have an average age of
eight years, with some retailers using systems that are as much as 10 to
20 years old. Consequently, many retailers are considering replacing their
outdated legacy systems in the near to medium term. In a 2003 retail industry
IT spending survey conducted by IBM, 76% of the respondents stated that they
planned to deploy POS upgrades or replacements in the next five years. This
replacement cycle is expected to contribute to growth in retail IT spending,
including in the retail food sector. Recent industry data published by
International Data Corporation, or IDC, a market research firm, forecasts that
IT spending in the U.S. retail food industry will increase at a compound annual
growth rate of approximately 6.2%, with the market reaching approximately
$4.6 billion by 2007.

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Our Solutions

Our
software solutions provide a robust and comprehensive suite of applications for
the retail food and fuel industries addressing all three principal divisions of
a retailers operationsits retail stores, its headquarters, or enterprise
level, and its warehouses and distribution centers. We believe our solutions
differentiate us from other providers of software solutions to the retail food
and fuel industries because they combine the following attributes:

Our integrated
solutions span the retailers entire retail organization

Our
software solutions provide a robust and comprehensive suite of applications for
the retail food and fuel industries addressing all three principal divisions of
a retailers organizationits retail stores, its enterprise level and its
warehouses and distribution centers. We believe that our integrated suite of
software solutions is unique among retail food software solutions, in that it
combines all essential elements for an enterprise-wide retail information
systemstores, headquarters and warehousesin a single integrated suite of
solutions. Our ReMA solution tightly integrates our enterprise solution with
our in-store back-office solutions and synchronizes the flow of information
between the two. Such an integrated solution permits retailers to generate
substantial supply chain operating efficiencies and cost savings through
efficient management of inventory, purchasing and merchandising. We intend to
integrate our recently acquired warehouse management systems into the ReMA
suite in order to provide retailers with a fully integrated solution spanning
their entire retail organization.

Our solutions
provide for both retail operations management and customer management

While
retail enterprise solutions have traditionally focused exclusively on retail
operations managementprincipally supply chain and merchandising processesour
enterprise solutions also include sophisticated customer management tools. Our
customer management tools, ReMA Loyalty and ReMA 1-to-1, focus on influencing
consumer spending habits through the use of personalized promotions and other
loyalty card-based marketing techniques. Our in-store systems provide full
support for promotions and loyalty programs at the checkout lane and are
integrated with our enterprise applications. This feature enables retailers to
devise a wide variety of promotions that can easily be implemented at the store
level. Moreover, our integrated data mining capabilities enable retailers to
explore and analyze detailed customer transactions, allowing them to closely
monitor customer spending patterns and to target promotions to their loyalty
program members.

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

In
response to retailers increasing demand for software solutions that are easier
to use and cheaper to maintain, we have developed our ReMA solution based on a
thin client architecture, using the Microsoft .Net platform. Our thin client
solutions allow our applications to run on remote servers with the users
accessing the applications through a standard browser. These solutions reduce
the need for expensive, bulky hardware and software installations at each store
location, lower an enterprises IT maintenance costs and facilitate
enterprise-wide integration. In addition, thin client architecture makes it
easier and more cost-effective to upgrade software as and when required. In
addition to our ReMA solution, we are developing a next-generation version of
our existing StoreLine in-store solution, called StoreLine.net, which is based
on a thin client architecture using the Microsoft .Net platform.

Our robust solutions
provide system resiliency and data redundancy

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

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

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

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

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

Our solutions
provide retailers with the ability to collaborate on-line with their suppliers

As
the retail supply chain becomes increasingly more complex, with retailers
working with an increasing number of suppliers and partners and stocking an
increasing number of products, retailers require the ability to collaborate
across their supply chain in a swift and effective manner. Our applications
provide retailers with the ability to collaborate with their suppliers and
partners, either on a private network with our ReMA applications hosted on the
retailers internal servers or through our Connected Services. This
collaboration provides both retailers and suppliers with real time visibility
into work flow processes, new product introductions, price changes and
promotions in order to enhance coordination and eliminate inefficiencies.

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

Our
software solutions provide multi-lingual and multi-currency features and
multi-tax functionality, enabling multi-national Tier 1 food and major fuel
retailers to use the same version of our applications throughout their global
operations. We believe that these capabilities provide us with a competitive
advantage with retailers that have stores near national borders, as well as
multi-national retailers that prefer licensing software from a single vendor
for all their locations.

Our enterprise
solutions can be easily integrated with existing IT infrastructures

The
modular nature of our architecture and our tools for building open interfaces
to external systems, including software protocol standards such as XML and web
services, streamlines the introduction of our enterprise and in-store solutions
into existing IT environments. Retailers can purchase systems that fit their
current needs and budgets, and then add additional modules as their business
needs evolve over time. Our open architecture means that our solutions are
hardware neutral, capable of working with systems from most major hardware
vendors, including IBM, NCR, Fujitsu and Wincor-Nixdorf. This modular and open
architecture decreases the software integration risks associated with migrating
from a retailers existing systems to our enterprise and in-store solutions,
thereby increasing the probability that the new system will be installed on
time and within budget.

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Our Growth Strategy

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

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

We
offer our customers enterprise-wide software solutions that allow them to
collect, manage and analyze information across their entire retail enterprise,
from the warehouse to the checkout counter. With the introduction of ReMA in
2003, we extended our product offering from in-store solutions to include
integrated enterprise level and head office applications. Our in-store
back-office and enterprise systems are closely integrated, both sharing and
drawing upon the same central data repository in a similar way to a traditional
enterprise resource planning, or ERP, system. With our acquisition of OMI
International, we have further expanded our product offering to include supply
chain execution and warehouse management systems. We intend to integrate our
newly acquired supply chain execution and warehouse management systems into our
existing suite of solutions in order to create a cohesive integrated retail
information system. We believe that with our integrated solutions, we will be
well positioned to leverage our large customer base to become the leading
provider of retail information solutions to the retail food and fuel
industries.

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

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

| |  | based on open standards software architecture and are hardware
  neutral;                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                       
| |  | scalable, meaning they can easily support a significant number of users
  per server before a system upgrade or replacement is needed;
| |   |                                                                                                                                       
| |  | able to support in a single solution multiple retail formats such as
  grocery, fuel and QSRs; and                                    
| |   |                                                                                                                                       
| |  | able to support multi-national retailers who require multi-currency,
  multi-language and multi-tax functionality.                    

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

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

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

We
strive to develop innovative products and solutions that meet the needs of our
customers based on our extensive knowledge and accumulated experience in the
development of software solutions for the retail food and fuel industries. In
order to address a broader set of retailers needs, we continue to expand the
breadth and depth of our product lines by developing and introducing new
products and enhancing the functionality of our existing products. In 2003, we
introduced our ReMA platform and suite of applications and our thin client
StoreLine.net application. Our continuous technological development represents
an important part of our value proposition to our customers, as it provides
them with access to advanced solutions that meet their changing needs, as well
as with a road map for the development of products designed to meet their
anticipated future needs. As part of this strategy, we announced the first
installation of our new StoreLine.net thin-client POS software solution built
on the Microsoft .Net platform. In addition, we intend to upgrade our newly
acquired supply chain execution and warehouse management systems to a web-based
architecture that we plan to integrate with our ReMA platform.

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

In
the past, our sales to smaller chains and independent grocers were primarily
limited to POS applications. Leveraging the ability of ReMA to support multiple
enterprises from a single data center, we are now able to offer our ReMA
applications, such as pricebook, promotions, loyalty and information services,
to Tier 3 and Tier 4 retailers on an ASP basis. We provide these Connected
Services through our StoreNext joint ventures in return for a monthly
subscription fee. These Connected Services enable Tier 3 and Tier 4 retailers
to enjoy many of the benefits of enterprise and back-office applications that
were originally designed for Tier 1 and Tier 2 retailers, without the need to
make a significant upfront investment in the systems and personnel required to
run these applications in-house. To date, our StoreNext USA and StoreNext
Israel joint ventures have signed up over 750 retailers. We intend to continue
to market Connected Services to this retail sector in an effort to increase the
revenues we generate from our Tier 3 and Tier 4 customer base.

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

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

Continue broadening
market penetration through strategic acquisitions

Historically,
we have grown through a combination of internal expansion and strategic
acquisitions of companies with related businesses and technologies. Over the
past few years, we have made a number of strategic acquisitions to further
expand our product offerings and market position, including the acquisition of
PalmPoint Ltd., or PalmPoint, BASS and, most recently, OMI International.
We intend to continue to evaluate opportunities to acquire complementary
businesses and technologies in the retail information systems market in order
to better serve our customers, more rapidly develop product offerings, increase
market share, advance our technology, expand distribution capabilities or
penetrate other targeted markets.

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

Currently
our primary geographic markets are North America, Israel and Europe,
particularly the United Kingdom and Scandinavia. In the near future, we plan to
expand our presence in new geographic markets, both in Europe, particularly
France, Germany, Italy and Spain, and in emerging markets such as China, India
and Latin America. In addition, we are beginning to expand into other retail
markets, such as health and beauty and pharmacy, that have similar retail
characteristics to the food and fuel retail market sectors, in an effort to
broaden our addressable market.

Our Products

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

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

Enterprise
Solutions:  Suite of software
solutions that provide large supermarket and convenience store chains and major
fuel retailers with a comprehensive, modular solution which centralizes
operation and management of their enterprise-wide and back-office activities
such as pricebook, promotions, merchandising and reporting and analysis. Our
enterprise solutions also provide sophisticated customer management tools,
enabling a wider variety of personalized and targeted promotions and loyalty
card-based marketing techniques. Our enterprise solutions consist of ReMA and
Retalix Host. We introduced our ReMA suite of applications in 2003, and we
anticipate that it will account for a growing portion of our product sales in
future periods.

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Warehouse Management Solutions:  Suite of
supply chain execution and warehouse management software solutions that provide
supermarkets with a range of applications designed to help them manage complex,
multi-facility warehouses and distribution centers. These applications include
warehouse management and optimization, automated procurement, merchandising,
order management, invoice reconciliation and yard and dock management. Our
supply chain execution and warehouse management systems consist of TRICEPS
(Transportation, Receiving, Inventory Control and Productivity Systems) Warehouse
Management, BICEPS (Buyers Inventory Control Effecting Profits and Services),
Purchasing Management, PROMPT Invoice Matching, MDS Yard and Dock Management,
ABS (Advanced Billing System) Advanced Billing and Order Management and
DemandAnalytX. We added these solutions to our product suite in
January 2004 through our acquisition of OMI International.

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

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

|Product                            |  | Description                                                                                                                    |  | Key Features & Functionality                                                                                                                                                           |  | Target Markets                                              | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | 
|                                   |  |                                                                                                                                |  |                                                                                                                                                                                        |  |                                                             | 
|                                   |  |                                                                                                                                |  |                                                                                                                                                                                        |  |                                                             | 
|In-Store
  Solutions               |  |                                                                                                                                |  |                                                                                                                                                                                        |  |                                                             | 
|StoreLine                          |  |  POS solution
   Client server, Windows operating
  system                                                                   |  |  Highly configurable
   Multi-language, currency and tax High availability and resilience Hardware neutral Supports multiple types of POS
  formatsgrocery, fuel, QSRs           |  |  Supermarkets and grocersAll Tiers                        | 
|StoreLine.net(in development)      |  |  POS solution
   Web-based, open architecture Based on thin client architecture Developed on the Microsoft .Net platform |  |  Allows retailers to run POS applications remotely
   Reduces total cost of ownership
  of in-store IT infrastructure Highly scalable                                               |  |  Supermarkets and grocersAll Tiers                        | 
|StorePoint                         |  |  POS solution
   Client server, Windows operating system                                                                     |  |  Highly configurable
   Multi-language, currency and tax High availability and resilience Hardware neutral Supports multiple types of POS
  formatsconvenience store, fuel, QSRs |  |  Convenience store and fuel retailers                      | 
|RPO
  (Retalix Pocket
     Office) |  |  Mobile, hand-held suite of front-office and back-office
  applications
   Microsoft Windows CE platform                     |  |  Allows employees to perform front-office and back-office functions
  from their in-store location                                                                                    |  |  Supermarkets and grocersAll Tiers
   Convenience stores | 

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|                                   |  |                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                        | 
|---------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------- | 
|RBO (Retalix Back Office)          |  |  Client server, Windows operating system                                                                                                                                                                                                     |  |  Functionally rich back-office applications
   Interfaces to several types of
  POS formats Integrated with StoreLine                                                                                                                                                                                                                                              |  |  Supermarkets and grocersTier 2Tier 4                                               | 
|ScanMaster                         |  |  POS solution
   Client server, Windows operating
  system                                                                                                                                                                                  |  |  Highly configurable
   Multi-language and tax Broad set of customer loyalty
  functionality support Integrated with self-checkout systems                                                                                                                                                                                                                        |  |  Supermarkets and grocersTier 3 & Tier 4                                             | 
|Enterprise
  Solutions             |  |                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                        | 
|ReMA                               |  |  An enterprise system for central management of head-office and back-office
  applications
   Web-based, open architecture Based on thin client architecture Developed on the Microsoft .Net platform Some applications in development |  |  Broad functionalitypricing, promotions, loyalty, forecasting,
  ordering, receiving, analysis and reporting
   Provides for central location of
  the server hosting the software, with users throughout the enterprise
  accessing applications through browsers Single data repository Reduces the technology footprint and
  maintenance in the retail store |  |  Tier 1 & Tier 2 supermarkets
   Large chain convenience stores
  and fuel retailers | 
|Retalix Host                       |  |  An enterprise management system for head-office and back-office
  applications
   Client server, Windows operating
  system                                                                                                                |  |  Provides enterprise level price and promotion management and data
  analysis and reporting
   Enables consistent workflow
  operations and data synchronization between the enterprise and store                                                                                                                                                                   |  |  Convenience store and fuel retailers                                                 | 
|Warehouse
  Management   Solutions |  |                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                        | 
|TRICEPS Warehouse
     Management  |  |  Automated warehouse location and task management system
   Advanced Radio Frequency (RF)
  technology                                                                                                                                      |  |  Optimizes distribution of warehouse resources
   Provides real time warehouse data
  to warehouse managers                                                                                                                                                                                                                                                         |  |  Tier 1 & Tier 2 supermarkets                                                         | 
|BICEPS Purchasing
     Management  |  |  Automated procurement system                                                                                                                                                                                                                |  |  Just in time and forward buying procurement
   Invoice and purchase order
  reconciliation Vendor profiling Item inventory management                                                                                                                                                                                                                          |  |  Tier 1 & Tier 2 supermarkets                                                         | 
|PROMPT Invoice Matching            |  |  Automated invoice reconciliation system
   EDI and EFT technology                                                                                                                                                                          |  |  Tracks invoices and interfaces with general ledger systems
   Provides real time inventory
  levels Reduces time necessary to resolve cost
  discrepancies                                                                                                                                                                                                        |  |  Tier 1 & Tier 2 supermarkets                                                         | 
|MDS Yard and Dock
     Management  |  |  Automated yard and dock resource management system
   Advanced RF, EDI and Advanced
  Ship Notice (ASN) technology                                                                                                                         |  |  Real time management of yard / dock arrivals and departures
   Automatically directs arrivals to
  optimal storage location Manages trailer usage and reduces
  bottlenecks                                                                                                                                                                                       |  |  Tier 1 & Tier 2 supermarkets                                                         | 

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|                                               |  |                                                                                                                                |  |                                                                                                                                                                                                                       |  |                                                                   | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | 
|ABS Advanced Billing and
     Order Management |  |  Automated billing and pricing system                                                                                         |  |  Enables billing that reflects pre-determined margin objectives
   Provides custom pricing according to item
   Allows multiple order types and calculation methods                                                |  |  Tier 1 & Tier 2 supermarkets                                    | 
|DemandAnalytX                                  |  |  Forecasting and replenishment optimization                                                                                   |  |  Interprets store-level POS data, forecasts demand
   Determines and places optimal replenishment orders                                                                                                            |  |  Tier 1 & Tier 2 supermarkets
   Large chain convenience stores | 
|ASP
  and Supplier Solutions                   |  |                                                                                                                                |  |                                                                                                                                                                                                                       |  |                                                                   | 
|Connected Services                             |  |  ASP based ReMA for enterprise and back-office applications                                                                   |  |  Provides retailers access to ReMA applications in return for a
  monthly subscription fee
   Allows these retailers access to applications that would otherwise be too
  expensive or difficult to manage in-house |  |  Tier 3 & Tier 4 independent grocers                             | 
|Supplier Solutions                             |  |  Aggregated retail food industry data
   Collaborative supply chain functionality
   E-marketplace for retail food industry |  |  Enables supplier to better understand market trends and consumer
  demands
   Enables retailers and suppliers to exchange pricing, inventory and market
  information                                              |  |  Suppliers to all Tiers of supermarkets and grocers              | 

In-Store Solutions

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

| |  | robust point of sale functionality, providing a highly resilient
  touch-screen enabled cash register checkout system;                                          
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                 
| |  | multiple types of customer service points, such as self-scanning,
  self-weigh and self-checkout, and multiple retail formats, such as fuel and
  in-store QSRs;
| |   |                                                                                                                                                                 
| |  | front-office store management functions, such as cashier and cash
  office management and POS maintenance;                                                      
| |   |                                                                                                                                                                 
| |  | back-office store management functions, such as ordering, receiving,
  inventory management, labor scheduling, promotions and reporting and
  analysis; and     
| |   |                                                                                                                                                                 
| |  | mobile applications that enable in-store personnel to carry out
  back-office tasks using mobile computing devices at any location throughout
  the store.      

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

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StoreLine

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

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

| |  | Retalix Cafétouch-screen based POS application for in-store
  coffee shops and restaurants;                                                                                                                                                                                                   
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                
| |  | Retalix Fuelsystem that supports a variety of fuel payment
  modes including pre-pay, pay-at-pump, pay-in-store and payment by automatic
  vehicle identification, or AVI, devices;                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                
| |  | Retalix SelfCheckoutcustomer self-scanning checkout that requires
  little or no staff assistance and, through integration with the back-office,
  ensures up-to-date pricing and promotions;                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                
| |  | Retalix SelfScanhand-held, customer-driven, self-scanning
  system designed for interactive shopping and for alerting customers to
  specific promotions;                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                
| |  | Retalix U-Weigheasy to use, touch-screen customer-operated
  device for weighing fruit and vegetables that saves customers time at the
  checkout and allows retailers to make real-time price adjustments;                                                                                   
| |   |                                                                                                                                                                                                                                                                                                
| |  | Retalix Kioskmultimedia information and sales kiosk that,
  through integration with our enterprise solution, provides real-time,
  in-store information on merchandise, pricing and promotions;                                                                                              
| |   |                                                                                                                                                                                                                                                                                                
| |  | Retalix e-Shopinternet grocery shopping application that
  supports home shopping services as well as the logistical steps that follow
  the online purchasing process, such as item selection, temporary storage in
  store, truck loading, drop-off prioritization and money collection; and
| |   |                                                                                                                                                                                                                                                                                                
| |  | Retalix CallCentercall-center application for supermarket chains
  designed for quick data entry and processing of customer orders and, when
  integrated with our enterprise solution, supporting personalized promotions
  and providing up-to-date pricing and promotion information.      

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

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

StoreLine.net

StoreLine.net
is a thin client version of our StoreLine product developed based on the
Microsoft .Net platform. StoreLine.net allows retailers to access StoreLine
applications through a standard web browser on their in-store POS systems
located on back-office or centralized servers. This reduces the total cost of
ownership of retailers in-store IT infrastructure by enabling retailers to use
their existing POS hardware to access next-generation retail applications.
StoreLine.net was first installed in April 2003 at Partner Communications
(the Israeli franchisee of Orange plc, the international wireless
communications operator) and is currently being developed for deployment in the
grocery sector.

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StorePoint

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

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

| |  | Retalix POStouch-screen based POS application for in-store coffee
  shops and restaurants;                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                            
| |  | Retalix Fuelsystem that supports a variety of fuel payment
  modes including pre-pay, pay-at-pump, pay-in-store and payment by AVI
  devices;                                                                                             
| |   |                                                                                                                                                                                                                                            
| |  | RFSsoftware controller for the fuel pumping
  station, enabling fuel pump control as well as the sale of additional
  products and services at the pump;                                                                                  
| |   |                                                                                                                                                                                                                                            
| |  | Retalix QSRtouch-screen based application for selling fast
  food or made-to-order sandwiches, designed for the store employee to place
  the order;                                                                                      
| |   |                                                                                                                                                                                                                                            
| |  | Retalix Self-Orderfood service with self-order stations,
  interactive kitchen order screens, drive-thru operations support and order
  preparation planning; and                                                                         
| |   |                                                                                                                                                                                                                                            
| |  | Retalix Customer Loyaltyflexible suite of customer behavioral incentive
  programs, store value cards and automatic reward fulfillment at a variety of
  customer touch points, including at the fuel pump, the POS and on the
  internet.

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

Retalix PocketOffice (RPO)

RPO
is a mobile, hand-held suite of front-office and back-office applications that
is designed for use on mobile computing devices such as personal digital
assistants, or PDAs. RPO is designed to allow in-store employees to perform a
broad array of back-office functions, such as inventory control and price
management, without leaving the store floor. The RPO suite of applications
includes pricebook management, stock receiving and counting, ordering, item
maintenance and shelf audit. Operating on the Windows CE platform, RPO is
integrated with our ReMA, StoreLine and StorePoint solutions. While our initial
focus for RPO was in the convenience store sector, we have recently launched
RPO in the grocery sector as well.

Retalix BackOffice (RBO)

RBO
is an integrated in-store solution that provides item maintenance, inventory
and pricebook management, reporting and analysis and store receiving. RBO uses
an open architecture approach and is available as a suite of modular
components. In addition to providing item maintenance and reporting, RBO
interfaces with hand-held terminals for verification and receiving. RBO is sold
primarily to Tier 3 and Tier 4 food retailers through our StoreNext joint
venture, with some sales to Tier 2 retailers.

Enterprise Solutions

Retalix e-Market Applications, or ReMA

The
modern retail enterprise must rapidly collect, organize, distribute and analyze
information throughout its organization. We designed our ReMA enterprise
application to meet the enterprise-wide information collection and analysis
needs of modern retailers. ReMA is a web-based platform and suite of applications
that provides large supermarket and convenience store chains with a
comprehensive, modular solution addressing their retail headquarters needs,
including inventory and pricebook management, personalized and targeted
promotions and enterprise-wide reporting and analysis. Combining both
head-office and back-office applications, ReMAs comprehensive suite of
software solutions is integrated with our in-store solutions, allowing the
synchronized flow of information between the two. In addition, ReMA enables
retailers to manage all their enterprise level needs through the use of retail
operations management and customer management tools. Based on a thin-client
technology, our ReMA solution is remotely hosted at a retailers data center
and is accessible at all of a retailers locations through a standard browser.
Introduced in 2003, ReMA was first rolled out at Dierbergs, a St. Louis-based
grocery chain.

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ReMA
is an integrated set of applications addressing a retailers supply chain operations,
including:

| |  | store and enterprise level inventory management, including ordering,
  receiving and item returns;
| | - | --------------------------------------------------------------------------------------------------
| |   |                                                                                                   
| |  | price and promotion management; and                                                               
| |   |                                                                                                   
| |  | forecasting for product ordering.                                                                 

ReMAs
key modules include:

| |  | ReMA Inventoryprovides retailers with multiple inventory
  management solutions, including computer assisted ordering and item return;                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA Pricebookallows retailers to centrally manage their
  product pricing according to specific criteria and also enables collaboration
  with suppliers product and pricing data;                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA PriceLogicprovides retailers with rules-based pricing
  tools that increase the efficiency of product and price management by
  allocating items to product and pricing categories;                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA Analysisprovides retailers with a data warehouse
  solution that facilitates multiple views of sales, product and store data and
  provides for customized views of such data according to different users
  needs;                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA Electronic Journalacts as a central data repository that tracks
  and records all checkout transactions throughout the enterprise and provides
  for easy retrieval of transactions;                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA Promotionsprovides retailers with the ability to deliver
  a wide assortment of promotions that can be configured according to various
  criteria, such as types of purchase thresholds, duration, reward types and
  type of POS system. In addition, ReMA Promotions provides a synchronized,
  two-way flow of data between the enterprise and the POS that enables
  promotions to be transmitted and implemented at the store level and their
  results to be analyzed at the headquarters level;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA Loyaltyallows retailers, through the use of data
  mining tools, to manage sophisticated loyalty-card programs that enable them
  to run personalized promotions and other advanced marketing techniques in
  order to increase customer retention, influence customer spending habits and
  drive revenue growth;                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA 1-to-1as a complementary module to ReMA Loyalty, ReMA
  1-to-1 allows retailers to identify customers according to their shopping
  patterns and match them to a defined customer category with the aim of
  targeting the customer with promotions for relevant products that they have
  not previously purchased. This allows retailers to develop highly
  personalized promotions that can be triggered automatically when a targeted
  member arrives at the checkout counter; and              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ReMA Forecastingallows retailers to use historical levels of
  inventory and product movement, as well as other parameters such as
  logistical constraints, to determine forecasting for planning, restocking and
  promotions.                                                                                                                                                                                                                                                                           

Retalix Host

Retalix
Host is an integrated enterprise solution that manages the chain-wide
operations of convenience stores and fuel retailers. Retalix Host features
inventory and price book management, tracking, supplier management and
enterprise-wide reporting and analysis. Through the integration of Retalix Host
with our StorePoint solution, convenience store and fuel retailers benefit from
consistent workflow operations and synchronized databases from the point of
sale to the enterprise level.

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

Warehouse Management Solutions

With
our acquisition in January 2004 of OMI International, a provider of supply
chain execution and warehouse management systems for the retail food industry,
we are now able to offer a comprehensive set of warehouse management solutions
designed for complex, multi-facility warehouses and distribution centers. Our
suite of applications includes:

TRICEPS Warehouse Management

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

BICEPS Purchasing Management

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

PROMPT Invoice Matching

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

MDS Yard and Dock Management

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

ABS Billing and Order Management

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

DemandAnalytX

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

31

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ASP and Supplier Solutions

We
provide ASP and supplier solutions through two joint ventures, StoreNext USA
and StoreNext Israel.

ASP Solutions

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

Supplier Solutions

Through
the collection of sales and inventory data obtained in providing Connected
Services to Tier 3 and Tier 4 food retailers, we provide suppliers with
aggregated Tier 3 and Tier 4 retailer data, including visibility into retail
inventory movement, as well as aggregated market share information. We first
established a community, or e-marketplace, for suppliers in the retail food
industry in Israel, where the number of retailer subscribers to our Connected
Services through our StoreNext Israel joint venture has reached a critical
mass. As part of this e-marketplace, retailers and suppliers are able to
collaborate and exchange data through our centralized servers, enabling the
exchange of product information, pricing, ordering, inventory and other market
information. We intend to provide similar e-marketplace and collaboration
services through our StoreNext USA venture as the number of subscribers to our
Connected Services in the United States grows. In addition, we also offer EDI
messaging services that enable the exchange of data between retailers and
suppliers electronically using standard data format and protocols.

Services and Projects

Our
professional services personnel provide customers with expertise and assistance
in planning, designing and implementing our integrated information software
solutions. Professional services personnel assist retailers with initial system
planning, implementation, historical data conversion, training, education and
project management. Our personnel build interfaces for our in-store enterprise
and warehouse management systems. Actual implementation of our solutions is
generally provided to the customer by a third-party systems integrator, such as
Accenture, Electronic Data Systems or IBM Global Services.

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

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

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Customers

Our
software has been deployed in over 400 retail chains worldwide, including
supermarket and grocery stores, convenience stores, fuel retailers and quick
service restaurants. The following list is a representative sample of companies
that purchased an aggregate of at least $200,000 of our products and services
in 2002 and 2003 combined.

|Supermarkets                                  |  | Convenience Stores
  and Fuel Retailers
|--------------------------------------------- |  | ---------------------------------------
|                                              |  |                                        
|                                              |  |                                        
|Albertsons (US)                               |  | Alon Oil (US)                          
|Costco (US)                                   |  | Caseys (US)                           
|Hannaford Bros. (US)                          |  | Irving Oil (US)                        
|Hy-Vee (US)                                   |  | Husky Oil (Canada)                     
|K-VA-T (US)                                   |  | Pilot Corporation (US)                 
|Publix (US)                                   |  | Tesoro (US)                            
|DelHaize Group (Belgium)                      |  | Welcome Break (UK)                     
|Sainsburys (UK)                              |  | Narvesen (Norway)                      
|Tesco Stores (UK)                             |  | Pressbyran (Sweden)                    
|A.S. Watson (Europe)                          |  |                                        
|Metro Cash & Carry (South Africa & Australia) |  |                                        
|Shoprite Checkers (South Africa)              |  |                                        
|Foodstuffs (New Zealand)                      |  |                                        

Joint Ventures

StoreNext USA

Established
in 2002 as a joint venture with Fujitsu Transaction Solutions, StoreNext Retail
Technologies LLC, which we refer to as StoreNext USA, provides POS hardware and
software and Connected Services to the independent and small chain grocery
market sectors (Tier 3 and Tier 4 retailers). As part of this joint venture,
Retalix and Fujitsu jointly own and manage the regional dealer channels for the
Tier 3 and Tier 4 grocery market sectors. Retalix supplies the joint venture
with POS software and Fujitsu supplies the joint venture with POS hardware.
Retalix receives revenues from the sale of its software solutions to the joint
venture and shares proportionally in the joint ventures profits. StoreNext USA
has recently begun to offer Connected Services to these Tier 3 and Tier 4 food
retailers. As of March 31, 2004, we estimate that StoreNext USA had
approximately 6,500 customers, with a few hundred subscribing to Connected
Services. As of March 31, 2004, Retalix owned 50.01% of StoreNext USA.
Distributions by StoreNext USA to its shareholders require the consent of all
shareholders in certain circumstances.

StoreNext Israel

Established
in 1999, StoreAlliance.com Ltd., which we refer to as StoreNext Israel,
provides Connected Services to food retailers in Israel. In addition, StoreNext
Israel has established an e-marketplace across the Israeli retail supply chain
by building a subscriber base comprised of both retailers and suppliers. The
aim of this initiative is to provide its members with access to up-to-date
aggregated industry supply chain data. To date, StoreNext Israel subscribers
include approximately 500 retailers and 40 suppliers. StoreNext Israel is
currently running a collaborative supply chain pilot project with Supersol, one
of the largest, publicly traded supermarket chains in Israel, and five of its
key suppliers, Osem-Nestle, Procter & Gamble (Israel), Strauss-Elite,
Tnuva and Unilever-Bestfoods.

StoreNext
Israel is a joint venture of Retalix with three Israeli partners: Discount
Investment Corporation Ltd.; Isracard, a subsidiary of Bank Hapoalim, Israels
largest bank; and Central Botling Company Ltd., or Coca Cola Israel. As of
March 31, 2004, Retalix owned indirectly approximately 51.5% of the issued
share capital of StoreNext Israel. In addition, 360,000 ordinary shares of
StoreNext Israel, or approximately 10.3% of StoreNext Israels issued and
outstanding share capital, are reserved for issuance upon the exercise of
options granted to our and StoreNext Israels employees and to Coca Cola
Israel. As of March 31, 2004, options to purchase 290,166 of such ordinary
shares of StoreNext Israel were outstanding. 
Distributions by StoreNext USA to its shareholders require the consent
of all shareholders in certain circumstances.

33

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Sales
and Marketing

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

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

Direct Sales

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

Distributors

We
have a product distribution arrangement with NCR, which markets our products
through its reseller networks in the United States. NCR resells our ScanMaster
product in the United States under the name NCR ScanMaster. This arrangement
provides us access to a widespread network of business equipment dealers that
specialize in in-store systems for smaller retailers.

Marketing Alliances

In
2001, we joined IBM Corporations independent software vendor, or ISV, business
partner program designed to promote marketing partnerships between independent
software vendors and IBM. We work with IBM on several large accounts, primarily
in the U.S. convenience store market, and are evaluating possible collaborative
opportunities in Europe and in the Asia-Pacific region. We are included on IBMs
ISV partner list.

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, which allows our StorePoint product line to be
promoted by NCR in the worldwide convenience store sector.

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.

Technology

Our
software solutions are based upon a flexible, open architecture, which enables
our customers to easily integrate our software solutions with their existing IT
systems. The open architecture of our solutions offers our customers the choice
of directly deploying a pre-configured solution or customizing our product
offerings to conform to their specific business processes. Our solutions are
hardware neutral, which means that they are capable of working with systems
from most major hardware vendors, including IBM, NCR, Fujitsu and
Wincor-Nixdorf. In addition to supporting the Microsoft operating system, our
StoreLine solution is also capable of supporting the Linux operating system.

34

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Our
StoreLine and StorePoint POS software solutions are implemented using a common
three-tier architecture consisting of user interface, business logic and data
and services layers. 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
that can be customized through the use of parameters. The data and 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, fuel pumps and displays, as well as handle the redundancy and
resiliency abilities of the system.

This
three-tier architecture allows our products to be easily customized and
scalable and provides for resiliency and data redundancy. Additional users can
be added to our applications, 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. Our
software architecture is designed to be resilient and provide data redundancy.
Essential data are protected through duplication at the server level.
Furthermore, our system design allows each POS terminal to continue to operate
in situations where communications with the in-store server or central system
have been lost and, through a store and forward mechanism, allows for data
synchronization once communications are restored.

ReMA
is based on a web-based architecture, using the Microsoft .Net platform. At the
foundation of the ReMA architecture is a software platform that consists of all
basic services, such as security/accessibility management, access to warehouse
data and analysis services, and reporting and catalog services, used by each of
ReMAs application modules. ReMAs thin-client architecture allows users to
operate ReMA applications from any Internet Explorer application.

Competition

Our
principal competition in the supermarket and grocery market for in-store
solutions has traditionally come from integrated IT vendors such as IBM,
Fujitsu, NCR and Wincor-Nixdorf, as well as local or regional software
providers. On the enterprise level, our principal competitors in the
supermarket and grocery market are TCI and SoftTechniques, as well as in-house
developed solutions. Recently, we have experienced competition from independent
software vendors such as JDA and Retek. In addition, we anticipate future
competition from new market entrants that develop retail food software
solutions. In the convenience store and fuel market, our competition includes Radiant
Systems Inc., Pinnacle Systems, Gilbarco and VeriFone Inc. and more
recently Wincor-Nixdorf. In the supply chain execution and warehouse management
markets, our competition includes Manhattan Associates, Red Prairie and EXE
Technologies (recently acquired by SSA Global Technologies). Some competitors,
such as NCR, Wincor-Nixdorf and IBM, are also our marketing partners in other
market sectors or locations.

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

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

For
description of our revenues by geographic segments, see Note 14 to our
consolidated financial statements contained elseehere in this annual report.

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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                                                      
|OMI
  International, Inc. (1) (8)                   | United States          | 100                                                        
|C-StoreMatrix.com
  Inc. (3)                        | United States          | 25                                                         
|PalmPoint
  Ltd. (4)                                | Israel                 | 100                                                        
|Tamar
  Industries M. R. Electronic (1985) Ltd. (4) | Israel                 | 100                                                        
|StoreAlliance.com,
  Ltd. (5)                       | Israel                 | 51.5                                                       
|StoreNext
  Ltd. (6)                                | Israel                 | 51.5                                                       
|TradaNet
  Electronic Commerce Services Ltd. (6)    | Israel                 | 51.5                                                       
|IREX
   Israel Retail Exchange Ltd. (6)            | Israel                 | 51.5                                                       
|Cell-Time
  Ltd. (7)                                | Israel                 | 17.1                                                       
|DemandX
  Ltd. (6) (8)                              | Israel                 | 51.5                                                       
|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) | Holds 26.8%
  of the issued share capital of StoreAlliance.Com, Ltd.                                     
|(5) | Including
  holdings through our wholly-owned subsidiary, Tamar Industries M. R.
  Electronic (1985) Ltd.
|(6) | Wholly owned
  by our subsidiary, StoreAlliance.com Ltd.                                                 
|(7) | Established
  in 2003. 33% owned by our subsidiary, StoreAlliance.com Ltd.                               
|(8) | Acquired
  during the first quarter of 2004.                                                             

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 Israeli headquarters. Towards the end of 1999, we
acquired an additional approximately 1,200 square meters in the same building
to accommodate new activities and the main operations of newly acquired
subsidiaries.

In
addition to our corporate headquarters in Raanana, Israel, we currently lease
approximately 16,400 square feet of office space in Plano, Texas that serves as
our U.S. headquarters. We also lease offices in Texas, Pennsylvania, Ohio,
California and Idaho, as well as in London and in Petah-Tikva and Haifa in
Israel.

We
believe our facilities are adequate for our current and planned operations.

ITEM 5 - OPERATING AND FINANCIAL REVIEW AND
PROSPECTS

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

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A. Operating Results

Overview

General

We
are an independent provider of integrated enterprise-wide software solutions
for the global retail food and fuel industries. Our comprehensive integrated
solution suite enables food and fuel retailers to manage their retail
operations more efficiently, reduce infrastructure costs and closely
collaborate with suppliers. Our software solutions also enable retailers to
capture and analyze consumer behavior data, and to use that data to more
effectively devise and implement targeted promotions to stimulate demand.

Since
inception, we have significantly increased our revenues through a combination
of factors, including obtaining new customers, expanding existing customer
relationships, introducing new products, expanding the features and
functionality of our existing products and acquiring complementary businesses,
including most recently OMI International in January 2004.

We
generate revenues from the sale of licenses for our software solutions,
maintenance and related services, principally software modifications requested
by customers. We have derived the substantial majority of our historical
revenues from the sale of licenses and related services for our software
solutions to large (Tier 1 and Tier 2) supermarkets and convenience store
chains and major fuel retailers, primarily in the United States and Europe, and
we anticipate that revenues from such customers will continue to represent the
substantial majority of our revenues over the near term. Measured by
contribution of our software solutions by product line, we have historically
derived the substantial majority of our product sales from the sale of our
in-store solutions product line, specifically our StoreLine and StorePoint
solutions. In 2003, we introduced our ReMA applications as part of our enterprise
solutions product line, which we anticipate will account for a growing portion
of our product sales in future periods.

We
also generate revenues from sales of licenses for our software solutions,
maintenance and related services to Tier 3 and Tier 4 grocers in the United
States and to a lesser extent in Israel. In addition, leveraging on the ability
of ReMA to support multiple enterprises from a single data center, we recently
began to offer Tier 3 and Tier 4 grocers in the United States and Israel a variety
of ReMA applications, such as pricebook, promotions, loyalty and information
services, which we refer to as Connected Services. We receive monthly
subscription fees for these Connected Services. We anticipate that revenues
relating to these Connected Services will account for a growing portion of our
overall revenues in future periods. Though the overall impact on us in the near
term will be modest, we believe that revenues from these Connected Services
will be an important source of revenues to us in the longer term.

During
2003, we continued our strategy of focusing on Tier 1 and Tier 2 supermarkets,
large convenience store chains and major fuel retailers. In addition, we
expanded our focus on Tier 3 and Tier 4 food retailers, through our StoreNext USA
joint venture with Fujitsu Transaction Solutions, through which our products
are sold to such market sector. We also introduced our Connected Services for
these market sectors, for which we began to generate revenues in 2003.

Highlights
since the beginning of 2003 include:

| |  | We introduced our ReMA applications as part of our enterprise
  solutions product line, extending our product offering from in-store
  solutions to include integrated enterprise level and head office
  applications. ReMA is designed to meet the enterprise-wide information
  collection and analysis needs of Tier 1 and Tier 2 supermarkets and large
  convenience store chains. ReMA was first rolled out at Dierbergs, a
  St. Louis-based grocery chain.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | We began to offer Connected Services to Tier 3 and Tier 4 grocers in
  the United States through StoreNext USA. StoreNext USA is designed to be our
  primary channel for in-store solutions for Tier 3 and Tier 4 independent
  grocers throughout North America. In addition to providing point-of-sale hardware
  and software to these sectors of the U.S. market, StoreNext USA is our
  platform for providing Connected Servicesback-office and enterprise
  applications on an ASP basisto independent grocers, who cannot justify the
  investment required to support such applications in-house. We also continued
  to offer Connected Services in Israel through StoreNext Israel. In addition,
  in 2003, through our StoreNext Israel joint venture, we established an
  e-marketplace in Israel to enable collaboration between retailers and
  suppliers regarding inventory, pricing and other retail information.            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | We acquired OMI International, a provider of supply chain execution
  and warehouse management systems for the retail food industry, for aggregate
  consideration of approximately $19.1 million, including related
  transaction expenses. This acquisition was concluded on January 2, 2004.
  OMI International had revenues of approximately $13.9 million in 2003.
  As part of the acquisition, we retained OMI Internationals 79 employees. We
  believe that the acquisition of OMI International will enable us to enter the
  supply chain execution and warehouse management systems market for retailers,
  broaden our customer base and expand our suite of products. We expect to
  incur significant research and development expenses in developing a
  next-generation, web-based version of OMI Internationals applications and in
  integrating these applications with ReMA, our web-based enterprise
  application suite.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We increased our investment in research and development by 8% to
  $18.3 million for 2003, reflecting significant investments in developing
  next-generation applications and web-based architectures targeted to the
  needs of both large supermarket and convenience store chains and independent
  retailers as well as our development of new versions of our products and
  solutions based on the Microsoft .Net platform. We intend to continue to
  increase our investment in research and development as a percentage of
  revenues, including our anticipated investment in integrating our recently
  acquired warehouse management systems into the ReMA suite of applications.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | We announced numerous new customer agreements, including Hy-Vee and
  Publix in the United States, as well as A.S. Watson and The Tussauds Group in
  Europe. The new customers in Europe represent the realization of our strategy
  to expand our business beyond the food and fuel industries to other retail
  markets, such as health and beauty, that have similar retail characteristics
  to the retail food and fuel markets.                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | We continued to expand our sales in the United States, where revenues
  grew by 28% in 2003 as compared to 2002. International sales (all other
  countries, excluding Israel) were $17.9 million in 2003, as we added new
  customers and continued to penetrate the international market. International
  sales in 2003 did not grow relative to 2002, principally because of the
  contribution to our 2002 results of a relatively large sale to a European
  customer, which sale represented approximately 9.6% of our revenues in 2002.                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | We completed a public offering of 3,450,000 of our ordinary shares at
  a price to the public of $18.00 per share in May 2004. The proceeds of the
  offering, net of underwriting discount and other related expenses, amounted
  to approximately $58 million.                                                                                                                                                                                                                                                                                                                                                                                                                              

Sources of Revenue

We
derive our revenues primarily from the licensing of integrated software
products, which we classify as revenues from product sales, and maintenance and
other services, principally software changes requested by customers, which we classify
as revenues from services and projects. In addition, we provide communication
services between retailers and suppliers and data analysis and supply chain
information services (including our Connected Services), which are included in
revenues from services and projects. We do business through subsidiaries and
joint ventures formed in the United States, Israel, the United Kingdom, South
Africa and Australia.

Our
relationships with our Tier 1 and Tier 2 supermarket and convenience store
chains and major fuel retailers are long term in nature, as they involve the
supply of products that require considerable customer commitment, attention and
investment of financial and human resources. No single customer accounted for
10% or more of our revenues in 2003.

Product Sales

Product
sales primarily consist of the sale of software through license agreements with
direct customers, distributors and dealers. Sales to Tier 3 and Tier 4
retailers are occasionally bundled with hardware provided by third parties. We
recognize revenues from sales of our products when delivery has occurred, when
the sales price is fixed or determinable, when our ability to collect payment
is probable and when we have no material obligations remaining under the sales
agreements. We recognize revenues from transactions involving resellers
primarily when our software products are delivered to the end-users. In
addition, we recognize revenues under agreements for the sale of a specified
number of software licenses over the terms specified in such arrangements.

Services and Projects

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

Revenues
from projects consist primarily of fixed price arrangements for the development
of changes to the software code of our products at the request of a specific
customer. Revenues from such projects, which are primarily short term in
nature, are deferred and recognized upon completion of the development of the
software changes. Projects for changes to software code requested by customers
are not begun until after the software license is sold and generally take up to
twelve weeks to complete. Revenues from projects for rendering significant
customization, integration and development that are of a longer-term nature are
recognized based on a percentage of completion method, provided that the
necessary conditions are met: collection of the revenues is expected, revenues
and costs can be estimated reasonably, and there is a reasonable likelihood
that the project will be completed and that contractual obligations to
customers will be met. Revenue recognition based on the percentage of
completion method is determined by the ratio of actual labor incurred to total
labor estimated to be incurred over the duration of the contract.

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

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

Deferred
revenue primarily relates to software maintenance agreements billed to
customers for whom the services have not yet been provided and advances from
customers for services that have not been provided.

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

Cost of Revenues

Cost
of revenues is comprised of the cost of product sales and the cost of services
and projects. In addition, we are obligated to pay the Israeli government
royalties at a rate of 2% to 5% on revenues on specific products resulting from
grants, up to a total of 100% or 150% of the grants received. These royalties
are presented as part of our cost of revenues. Moreover, as a result of our
acquisition of OMI International, we are now obligated to pay the royalty
obligations of OMI International, which OMI International incurred in
connection with the purchase of two software programs. OMI International
recorded an aggregate of approximately $203,000 in royalty expense during 2003
and as of December 31, 2003 it had accrued royalty obligations of
approximately $105,000.

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

Cost of
Services and ProjectsCost of
services and projects consists of costs directly attributable to service and
project sales, including compensation, travel and overhead costs for personnel
providing software support, maintenance services, market information services,
messaging, Connected Services and other services. Because the cost of services
and projects is substantially higher, as a percentage of related revenues, than
the cost of products, our overall gross margins may vary from period to period
as a function of the mix of services and projects versus product revenues in
such periods. As compared to our historical results, OMI International has a
higher percentage of revenues from services and projects than product sales, as
well as lower gross margins for its service related revenues. As a result, we
expect our cost of services and projects to rise as a percentage of revenues in
the coming periods as a result of the inclusion of the results of OMI
International in our financial results.

Operating Expenses

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

Research
and Development Expenses, Net  Research and development expenses, net,
consist primarily of salaries, benefits and depreciation of equipment for
software developers. These expenses are net of the amount of grants received from
the Israeli government for research and development activities. Under Israeli
law, research and development programs that meet specified criteria and are
approved by the Office of the Chief Scientist are eligible for grants of up to
50% of certain approved expenditures of such programs.

Selling
and Marketing Expenses  Selling and marketing expenses consist
primarily of salaries, travel, trade shows, public relations and promotional
expenses. We compensate our sales force through salaries and incentives. As we
continue to focus our efforts on selling our products directly, we also pay
commissions to some of our sales personnel. Selling and marketing expenses have
increased significantly over the last few years as we have increased our
efforts to strengthen our marketing channels, particularly through direct
sales.

39

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General
and Administrative Expenses General and administrative expenses consist
primarily of compensation, professional fees, bad debt allowances and other
administrative expenses. These expenses have increased in recent years due to
the increase in our facilities requirements, expenses incurred as a result of
the growth of our business, recent acquisitions of companies and new joint
ventures. However, as a result of certain fixed costs associated with growth,
general and administrative expenses as a percentage of sales have decreased. In
addition, we 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 their entirety as of January 1, 2002 except with respect
to the acquisition of BASS which we completed as of September 2001, and
for which we applied the provisions of FAS 141 and FAS 142 as of the
acquisition date. As a result, goodwill that was previously amortized within
general and administrative expenses on a straight-line basis over periods of
four to seven years, is no longer being amortized to earnings, but instead is
subject to periodic testing for impairment.

An
additional factor which affected our general and administrative expenses in
recent years, and in 2002 in particular, was the worldwide economic recession,
which contributed to an increase in our bad debt write-offs and allowance for
doubtful accounts and to the expenses associated with such debts. Our allowance
for doubtful accounts increased from 2.6% of the gross amount of trade
receivables in 2001 to 7.1% in 2002. These increases were primarily attributable
to the global recession, especially the recession in Israel, where we had to
increase the allowance for doubtful accounts for a number of smaller Israeli
customers. In determining the allowance for doubtful accounts, we considered,
among other things, our past experience with such customers, the economic
environment, the industry in which such customers operate and financial
information available on such customers. In addition, in 2002, one of our
customers declared bankruptcy and we wrote off $650,000 in accounts receivable
attributable to that customer. In light of this write-off and the continuing
economic recession, we re-examined our trade receivables balances and increased
our allowance for doubtful accounts. In 2003, our allowance for doubtful accounts
increased by $1.4 million to 13.2% of the gross amount of trade
receivables, due in part to a decrease in our bad debt write-offs from $940,000
in 2002 to $411,000 in 2003. However, annual days sales outstanding declined
from 63 days in 2002 to 62 days in 2003.

Other General Income (Expenses), Net

In
2002, we sold a relatively small part of our dealership operations in the
Tennessee area because of conflicting interests with our new StoreNext USA
joint venture. Other general income (expenses), net consists primarily of the
gain we realized upon this sale in 2002, as well as gains or losses with
respect to ordinary course dispositions of fixed assets.

Financial Expenses, Net

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

Gain Arising from Issuance of Shares by a
Subsidiary

In
the fourth quarter of 2003, Isracard, a subsidiary of Bank Hapoalim, invested
$2.5 million in StoreNext Israel. Gain arising from issuance of shares by
a subsidiary in 2003 represents the capital gain realized as a result of that
investment. After giving effect to the investment, we owned indirectly
approximately 51.5% of the issued share capital of StoreNext Israel. Gain
arising from issuance of shares by a subsidiary in 2001 represents capital
gains realized as a result of the following during 2001:

| |  | The investment of $3.5 million by Coca-Cola Israel, in
  consideration of 900,000 shares (33.3%) of StoreNext Israel. As a result of
  this investment our share in StoreNext Israel decreased from 100% to 66.7%.                                                                                                                                                                                                                                                                                                           
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | The acquisition of TradaNet Electronic Commerce Services Ltd., a
  supplier of electronic commerce services in Israel, from Discount Investment
  Corporation Ltd., in consideration of the issuance of 342,254 shares of
  StoreNext Israel, which represented 11.25% of its outstanding share capital
  at the date of this transaction. The value of the shares issued was
  approximately $1.3 million ($3.89 per share). As a result of this
  transaction our share in StoreNext Israel decreased from 66.7% to 59.17%.

Share in Losses of an Associated Company

Share
in losses of an associated company represents our share in the losses of
Cell-Time Ltd. StoreNext Israel, our subsidiary, holds 33.3% of Cell-Times
shares. Cell-Time generates revenues from the sale of prepaid cellular air-time
at a variety of retailers sites across Israel.

40

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Minority
Interests in Losses of Subsidiaries

Minority
interests in losses of subsidiaries reflect the pro rata minority share
attributable to the minority shareholders in losses of our subsidiaries,
principally StoreNext USA and StoreNext Israel.

Operating Results

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

|                                                              |  | Year ended December 31, |      
|------------------------------------------------------------- |  | ----------------------- | -----
|                                                              |  |                         |      
|                                                              |  | 2001                    |      
|                                                              |  |                         |      
|Revenues:                                                     |  |                         |      
|Product
  sales                                               |  |                         | 57.9 
|Services
  and projects                                       |  |                         | 42.1 
|                                                              |  |                         |      
|Total
  revenues                                              |  |                         | 100.0
|Cost of
  revenues:                                           |  |                         |      
|Cost
  of product sales                                       |  |                         | 12.0 
|Cost
  of services and projects                               |  |                         | 14.8 
|                                                              |  |                         |      
|Total
  cost of revenues                                      |  |                         | 26.8 
|                                                              |  |                         |      
|Gross
  profit                                                |  |                         | 73.2 
|                                                              |  |                         |      
|Operating
  expenses:                                         |  |                         |      
|Research
  and development expenses, net                      |  |                         | (24.6
|Selling
  and marketing expenses                              |  |                         | (24.4
|General
  and administrative expenses                         |  |                         | (20.3
|Other
  general income (expenses)  net                       |  |                         | (0.0 
|                                                              |  |                         |      
|Total
  operating expenses                                    |  |                         | 69.3 
|                                                              |  |                         |      
|Income
  from operations                                      |  |                         | 3.9  
|Financial
  expenses, net                                     |  |                         | (0.6 
|Gain
  arising from issuance of shares by a
       subsidiary |  |                         | 4.8  
|Other
  expenses                                              |  |                         | (0.8 
|                                                              |  |                         |      
|Income
  before taxes on income                               |  |                         | 7.3  
|Taxes on
  income                                             |  |                         | (1.2 
|Share in
  losses of an associated company                    |  |                         |      
|Minority
  interests in losses of subsidiaries                |  |                         | 0.3  
|                                                              |  |                         |      
|Net
  income                                                  |  |                         | 6.4  
|                                                              |  |                         |      

Comparison of 2001, 2002 and 2003

Revenues

|                        |  | Year ended December 31, |      |                          |   |                          | 
|----------------------- |  | ----------------------- | ---- | ------------------------ | - | ------------------------ | 
|                        |  |                         |      | % Change
  2002 vs. 2001 |   | % Change
  2003 vs. 2002 | 
|2001                    |  | 2002                    |      | 2003                    
|                        |  |                         |      |                          |   |                          | 
|                        |  | (U.S. $ in millions)    |     
|                        |  |                         |      |                          |   |                          | 
|Product
  sales         |  | $                       | 34.3 |                          | $ | 47.3                     | 
|Services
  and projects |  |                         | 25.0 |                          |   | 29.2                     | 
|                        |  |                         |      |                          |   |                          | 
|Total
  revenues        |  | $                       | 59.3 |                          | $ | 76.5                     | 

During
2003, our revenue increase resulted primarily from an increase in sales to
customers in the United States in both the supermarket and convenience store
sectors, where revenues increased from $48.8 million in 2002 to
$62.6 million in 2003, an increase of approximately 28%. Revenues from
international customers, including those in Europe, South Africa, Canada,
Australia and the Far East, amounted to $18.0 million in both 2002 and
2003. International sales in 2002 consisted, in significant part, of several
large sales. We expect our international revenues to fluctuate from period to
period for the near term, as these sales are still affected to a large extent
by a small number of relatively large customers.

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

41

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Cost of Revenues

|                                |  | Year ended December 31, |      |                          |   |                          |  |   |     
|------------------------------- |  | ----------------------- | ---- | ------------------------ | - | ------------------------ |  | - | ----
|                                |  |                         |      | % Change
  2002 vs. 2001 |   | % Change
  2003 vs. 2002 | 
|2001                            |  | 2002                    |      | 2003                    
|                                |  |                         |      |                          |   |                          |  |   |     
|                                |  | (U.S. $ in millions)    |     
|                                |  |                         |      |                          |   |                          |  |   |     
|Cost of
  product sales         |  | $                       | 7.1  |                          | $ | 12.0                     |  | $ | 16.6
|Cost of
  services and projects |  |                         | 8.8  |                          |   | 10.1                     |  |   | 12.4
|                                |  |                         |      |                          |   |                          |  |   |     
|Total
  cost of revenues        |  | $                       | 15.9 |                          | $ | 22.1                     |  | $ | 29.0

The
increase in cost of product sales in 2003 and 2002 as well as the increase in
this item as a percentage of product sales in those periods, resulted primarily
from an increase in hardware associated sales attributable to our StoreNext USA
initiative. In July of 2002, we began to consolidate the results of StoreNext
USA into our financial statements. Although historically we generated revenues
primarily from the sale of software and related services, StoreNext USA also
generates revenues from the sale of third party POS hardware, which generally
has a higher associated cost of revenues and lower gross margins. As a result,
our gross margins in 2003, which included four quarters of results of StoreNext
USA, were lower than our gross margins in 2002, which included only two
quarters of results of StoreNext USA. We expect our gross margins for future
periods to be lower than our historical gross margins as a result of both the consolidation
of the StoreNext USA results and our acquisition of OMI International, which
generates a larger portion of revenues from services, which have a lower
associated gross margin.

Operating Expenses

|                                |  | Year ended December 31, |      |                          |   |                          |   |   |     
|------------------------------- |  | ----------------------- | ---- | ------------------------ | - | ------------------------ | - | - | ----
|                                |  |                         |      | % Change
  2002 vs. 2001 |   | % Change
  2003 vs. 2002 |  
|2001                            |  | 2002                    |      | 2003                    
|                                |  |                         |      |                          |   |                          |   |   |     
|                                |  | (U.S. $ in millions)    |     
|                                |  |                         |      |                          |   |                          |   |   |     
|Research
  and development, net |  | $                       | 14.6 |                          | $ | 17.0                     |   | $ | 18.3
|Selling
  and marketing         |  |                         | 14.5 |                          |   | 18.1                     |   |   | 21.6
|General
  and administrative    |  |                         | 12.0 |                          |   | 12.5                     |   |   | 13.4
|                                |  |                         |      |                          |   |                          |   |   |     
|Total
  operating expenses      |  | $                       | 41.1 |                          | $ | 46.6                     | * | $ | 53.3
|                                |  |                         |      |                          |   |                          |   |   |     

---

*        Including
$1.0 million in other general income

Research
and Development Expenses, Net.  We believe
that our research and development efforts are essential to our ability to
successfully develop innovative products that address the needs of our
customers as the market for enterprise-wide retail software solutions evolves.
To that end, we increased our research and development staff in both 2002 and
2003. Measured on a weighted average basis, our research and development staff
consisted of 35 more employees in 2002 than in 2001, and 15 more employees in
2003 than in 2002. The addition of these employees was the primary cause for
the increase in our research and development expenses in 2002 and 2003. We
recruited these employees to support our growing efforts in developing new and
enhanced solutions and in modifying existing and new products to new technology
environments, new combinations of retail formats and market requirements as
defined by leading retail chains. In particular, we continue to invest
significant development resources in developing new ReMA applications, in
upgrading our existing applications to be web-browser enabled and in developing
new versions of our products based on the Microsoft .Net platform. We plan to
continue to devote a significant portion of our personnel and financial
resources to research and development, particularly in connection with our ASP
and e-marketplace initiatives and our anticipated investment in integrating our
warehouse management systems into the ReMA suite of applications.

Selling
and Marketing Expenses.  During 2002 and
2003, we strengthened our sales and marketing force in the United States by
recruiting highly experienced industry personnel, including key sales
executives with extensive background and experience in the U.S. market, in
order to better target the U.S. grocery sector. We also significantly expanded
our efforts to increase global awareness of our products by participating in
additional tradeshows and considerably raising the profile of our presence at
industry events. Approximately 65% of the increase in selling and marketing
expenses in 2003, as compared to 75% in 2002, resulted from our intensified
efforts in our new ASP and e-marketplace initiatives and new browser based
products. The remainder of the increase each year in selling and marketing expenses
was primarily attributable to strengthened sales and marketing infrastructure
in new geographic markets. We anticipate that selling and marketing expenses
will continue to increase in absolute dollars as we expand our operations.

42

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General
and Administrative Expenses.  In 2002 and
2003, our general and administrative expenses decreased as a percentage of
sales, largely because we were able to rely on our existing infrastructure to
support our growth in revenues.

Financial Expenses, Net

Financial expenses, net,
totaled $95,000 for 2003, $499,000 for 2002 and $365,000 for 2001. The net
expense resulted primarily from financial expenses incurred on bank loans used
to finance acquisitions of fixed assets, and in 2001 and 2002 in particular,
from the devaluation of net financial non-dollar assets as a result of the
strengthening of the U.S. dollar compared to the NIS and the British Pound
Sterling.

Corporate Tax Rate

The general corporate tax
rate in Israel is 36%. Our effective tax rate, however, was 24.6% in 2003,
28.9% in 2002 and 16.4% in 2001. We enjoy these lower effective tax rates
primarily because of tax reductions to which we are entitled under Israels Law
for Encouragement of Capital Investments, 1959, with respect to our investment
programs that were granted the status of approved enterprise under this law.
Under our approved enterprise investment programs, we are entitled to
reductions in the tax rate normally applicable to Israeli companies with
respect to income generated from our approved enterprise investment programs.
We expect to continue to derive a portion of our income from our approved
enterprise investment programs. We are also entitled to certain tax exemptions
in connection with our approved enterprise investment programs. We cannot
assure you that such tax benefits will be available to us in the future at
their current levels or at all.

On June 2, 2004, the
Israeli government introduced a bill to the Israeli parliament proposing, among
others things, changes to the corporate tax rate. The bill proposes to reduce
the corporate tax rate from 36% to 35% for the 2004 tax year, 34% for the 2005
tax year, 32% for the 2006 tax year and 30% for the 2007 tax year and
thereafter. In order to enact the bill as law, the bill must be approved by the
Israeli parliament and published. The bill might be modified prior to enactment
or might not be enacted at all. Accordingly, we cannot predict the consequences
of the bill to us.

B. Liquidity and Capital Resources

We had cash and cash
equivalents of approximately $46.1 million, $28.4 million and
$9.2 million as of December 31, 2003, 2002 and 2001, respectively.
Our total cash and cash equivalents, short-term bank deposits and short- and
long-term marketable securities amounted to approximately $54.6 million as
of December 31, 2003, compared to $34.0 million as of
December 31, 2002 and $27.4 million as of December 31, 2001. In
January 2004, we acquired OMI International for approximately
$19.1 million, including related transaction expenses, of which
approximately $13.7 million was paid in cash and approximately
$5.4 million was paid with 226,040 of our ordinary shares. Half of these
shares are held in escrow, to be released to the selling shareholders in
several installments over the next year. We expect to incur significant
research and development expenses in developing a next generation, web-based
version of OMI Internationals applications and in integrating the applications
with ReMA. Through our StoreNext Israel joint venture, we also acquired
DemandX Ltd., the distributor of OMI Internationals products in Israel,
for $150,000 in cash, plus the net annual income of DemandX Ltd. for the
year ended December 31, 2003 which amounted approximately $81,000. In
addition, our U.K. subsidiary acquired the operations of OMI Internationals
European distributor for $277,000 in cash and 28,188 of our ordinary shares.
These shares will be held in escrow for a period of one year.

Net
Cash Provided by Operating Activities.  Net cash
provided by operating activities was approximately $11.7 million in 2003,
primarily the result of net income of $8.3 million and an increase of
$5.0 million in accounts payable and accruals, offset by a
$2.9 million increase in accounts receivable due to growing sales and a
$2.4 million decrease in deferred income taxes. Net cash provided by
operating activities was approximately $10.1 million in 2002, primarily
the result of net income of $5.7 million and an increase of $4.5 million
in accounts payable and accruals. Net cash provided by operating activities in
2001 was approximately $5.6 million, primarily the result of a
$2.1 million net decrease in trading securities held, offset in part by a
$1.0 million net increase in accounts receivable and a decrease of
$2.8 million in our accounts payable and accruals. Our accounts receivable
balance fluctuates from period to period, which impacts our cash flow from
operating activities. Fluctuations vary depending on the timing of sales and
billing activity, cash collections and changes to our provision for doubtful
accounts.

Net
Cash Provided by/Used in Investing Activities.  Net cash used in investing activities was approximately
$3.2 million in 2003, primarily attributable to investments in marketable
securities and acquisitions of fixed assets. Net cash provided by investing
activities was approximately $11.1 million in 2002, primarily attributable
to the maturity of short-term bank deposits and proceeds from the sale of a
portion of the dealership activity of one of our subsidiaries in the United
States, net of investments in marketable securities and acquisitions of fixed
assets. Net cash used in investing activities in 2001 was approximately
$15.5 million, primarily due to investments in short term deposits of
additional financial resources provided by financing activities.

Net
Cash Provided by/Used in Financing Activities.  Net cash provided by financing activities in 2003 was
approximately $9.2 million, primarily attributable to the issuance of
share capital with regard to options exercised by employees, long-term bank
loans and short-term bank credit received and proceeds from the investment of
Isracard in StoreNext Israel, net of the repayment of long-term bank loans. Net
cash used in financing activities in 2002 was approximately $1.9 million,
primarily attributable to the repayment of long-term bank loans net of proceeds
from the issuance of share capital with regard to options exercised by
employees. In 2001, net cash provided by financing activities was approximately
$4.6 million, primarily attributable to a long-term bank loan received and
proceeds from the issuance of shares of a subsidiary to a third party,
partially offset by the repayment of $4.4 million in long-term bank loans.

43

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Our capital expenditures
(consisting of the purchase of fixed assets) were $1.0 million,
$1.7 million and $2.2 million in 2003, 2002 and 2001, respectively.

Public Offering in May
2004

We completed a public offering of 3,450,000 of our
ordinary shares at a price to the public of $18.00 per share in May 2004. The
proceeds of the offering, net of underwriting discount and other related
expenses, amounted to approximately $58 million.  To date, these proceeds have been invested in short-term bank deposits and
investment-grade, interest-bearing securities.

Bank Debt

As of December 31,
2003, we had the following outstanding bank debt obligations, most of the
proceeds of which were incurred to finance acquisitions:

|Lender              |  | Currency             |  | Date of Loan |                | Original
  Loan
  Amount |  | Outstanding
  Principal
  Amount |      | Maturity Date |  | Interest Rate |  
|------------------- |  | -------------------- |  | ------------ | -------------- | ------------------------ |  | -------------------------------- | ---- | ------------- |  | ------------- | -
|                    |  |                      |  |              |                |                          |  |                                  |      |               |  |               |  
|                    |  | (U.S. $ in millions) | 
|                    |  |                      |  |              |                |                          |  |                                  |      |               |  |               |  
|Bank
  Leumi*       |  | USD                  |  |              | January 2000   |                          |  | $                                | 1.7  |               |  |               | $
|Bank
  Leumi**      |  | USD                  |  |              | August 2000    |                          |  |                                  | 10.0 |               |  |               |  
|United Mizrahi Bank |  | USD                  |  |              | September 2000 |                          |  |                                  | 5.0  |               |  |               |  
|Bank
  Hapoalim     |  | NIS                  |  |              | December 2003  |                          |  |                                  | 2.3  |               |  |               |  
|                    |  |                      |  |              |                |                          |  |                                  |      |               |  |               |  
|                    |  |                      |  |              |                |                          |  |                                  |      |               |  |               |  
|Total               |  |                      |  |              |                |                          |  | $                                | 19.0 |               |  |               | $

---

|*  | The loan
  was assigned to Retalix USA, Inc., one of our wholly-owned subsidiaries,
  on December 29, 2003 and was subsequently repaid in full at maturity in
  January 2004.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                              
|** | This
  loan was assigned to Retalix USA on December 29, 2003. To secure the
  loan, we pledged securities that we hold in one of our bank accounts with
  Bank Leumi.        

Subsidiaries
Short-Term Bank Credit.  As of
December 31, 2003, two of our subsidiaries in the United States had
unsecured lines of credit totaling $5.0 million from which, at that date,
they had drawn down $3.5 million. The funds borrowed under these lines of
credit bear interest at the prime rate.

Credit Risk

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

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

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

We
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.

44

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During
2002, we entered into one foreign currency forward contract for conversion of
British Pounds Sterling into a notional amount of U.S. dollars of approximately
$2.3 million. The fair value of that contract as of December 31, 2002
reflects a liability in the amount of $89,700, which was charged to financial
expenses. During 2003, we entered into one foreign currency forward contract
for conversion of British Pounds Sterling into a notional amount of U.S.
dollars of approximately $2.5 million. We renewed this contract three
times during 2003. The fair value of those contracts as of December 31,
2003 reflects a liability in the amount of $90,000, which was charged to
financial expenses.

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

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

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

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

|Year EndedDecember 31, |  | Israeli
  InflationRate% |      | NIS Devaluation
  Rate against the
  U.S. dollar% |  | Israel Inflation
  Adjusted for the
  Devaluation of the
  NIS againt the U.S.
  dollar% |     
|---------------------- |  | ------------------------ | ---- | ------------------------------------------------- |  | ---------------------------------------------------------------------------------------- | ----
|                       |  |                          |      |                                                   |  |                                                                                          |     
|                       |  |                          |      |                                                   |  |                                                                                          |     
|1999                   |  |                          | 1.3  |                                                   |  |                                                                                          | (0.2
|2000                   |  |                          | 0.0  |                                                   |  |                                                                                          | (2.7
|2001                   |  |                          | 1.4  |                                                   |  |                                                                                          | 9.3 
|2002                   |  |                          | 6.5  |                                                   |  |                                                                                          | 7.3 
|2003                   |  |                          | (1.9 | )                                                 |  |                                                                                          | (7.6

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, in particular, larger periodic devaluations may have an
impact on our profitability and period-to-period comparisons of our results. We
believe that inflation in Israel and exchange rate fluctuations between the NIS
and the dollar have not had a material effect on our results of operations.

Application of Critical
Accounting Policies and Use of Estimates

Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.

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

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Revenue recognition

Our
revenue recognition policy is critical because our revenue is a key component
of our results of operations. In addition, our revenue recognition policy
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 recognition 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
period could be adversely affected (see Note 1.k to our consolidated
financial statements included elsewhere in 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. We regularly evaluate the adequacy of our
allowance for doubtful accounts by taking into account variables such as past
experience, age of the receivable balance and current economic conditions of
the party owing the receivable balance. If the financial conditions of certain
of our customers were to deteriorate, resulting in an impairment in their
ability to make payments, additional allowance for doubtful accounts may be
required.

Tax provision

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

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 generate
revenues in dollars or in NIS linked to the dollar. Our financing is also comprised
primarily of dollar denominated 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: (1) for transactionsexchange
rates at transaction dates or average rates of the period reported and
(2) for other items (derived from non-monetary balance sheet items such as
depreciation and amortization, changes in inventories, etc.)historical
exchange rates. Currency transaction gains or losses are carried to financial
income or expenses, as appropriate.

The functional currency
of an associated company is its local currency, NIS. The financial statements
of this company are included in our financial statements under the equity
method, based on translation into dollars in accordance with FAS 52, Foreign
Currency Translation of the FASB; the resulting translation adjustments are
presented under shareholders equity, in the item Accumulated other comprehensive
income.

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

Research and
Development

We believe that our research and development efforts
are essential to our ability to successfully develop innovative products that
address the needs of our customers as the market for enterprise-wide software
solutions evolves. In particular, we intend to continue to invest significant
resources in developing new ReMA applications for use in our enterprise
solution as well as our growing ASP and e-marketplace initiatives, in upgrading
our existing applications to be web-browser enabled based on a thin client
architecture, similar to our StoreLine.Net solution, and in developing a next
generation, web-based version of OMI Internationals warehouse management
applications and integrating these applications with ReMA. As of March 31,
2004, our research and development staff consisted of 320 employees, of whom
211 were located in Israel and 109 in the United States.

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Proprietary Rights

We have no patents or patent applications pending.
Our success and ability to compete are dependent in part on our proprietary
technology. We rely on a combination of copyright, trademark and trade secret
laws and non-disclosure agreements to establish and protect our proprietary
rights. To date, we have relied primarily on proprietary processes and know-how
to protect our intellectual property.

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

Grants from the Office of the Chief
Scientist

From
time to time we receive grants under programs of the Office of the Chief
Scientist of the Ministry of Industry, Trade and Labor of the Government of
Israel.  The amount of grants of the Office of the Chief
Scientist recognized in our statement of operations for the year ended
December 31, 2003 was approximately $1.1 million. This governmental support
is conditioned upon our ability to comply with certain applicable requirements
and conditions specified in the Chief Scientists program and with the
provisions of the Law for the Encouragement of Research and Development in the
Industry, 1984, and the regulations promulgated thereunder, or the Research and
Development Law.

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

In
exchange, the recipient of such grants is required to pay the Office of the Chief
Scientist royalties from the revenues derived from products incorporating
know-how developed within the framework of each such program or derived
therefrom (including ancillary services in connection therewith), up to an
aggregate of 100% of the dollar-linked value of the total grants received in
respect of such program, plus interest, or up to 150% thereof in the case of
some of our earliest programs.  The
royalty rates applicable to our programs range from 3% to 5%.

The
Research and Development Law generally requires that the product developed
under a program be manufactured in Israel. However, upon the approval of the
Chief Scientist, some of the manufacturing volume may be performed outside of
Israel, provided that the grant recipient pays royalties at an increased rate,
which may be substantial, and the aggregate repayment amount is increased to
120%, 150% or 300% of the grant, depending on the portion of the total
manufacturing volume that is performed outside of Israel. Effective April 1, 2003,
the Research and Development Law also allows for the approval of grants in
cases in which the applicant declares that part of the manufacturing will be
performed outside of Israel or by non-Israeli residents and the research
committee is convinced that doing so is essential for the execution of the
program.  This declaration will be a
significant factor in the determination of the Office of Chief Scientist
whether to approve a program and the amount and other terms of benefits to be
granted.  For example, the increased
royalty rate and repayment amount will be required in such cases.

The
Research and Development Law also provides that know-how developed under an
approved research and development program may not be transferred to third
parties in Israel without the approval of the research committee.  Such approval is not required for the export
of any products resulting from such research or development. The Research and
Development Law further provides that the know-how developed under an approved
research and development program may not be transferred to any third parties
outside Israel.

The
Research and Development Law imposes reporting requirements with respect to
certain changes in the ownership of a grant recipient.  The law requires the grant recipient and its
controlling shareholders and interested parties to notify the Office of the
Chief Scientist of any change in control of the recipient or a change in the
holdings of the means of control of the recipient that results in a non-Israeli
becoming an interested party directly in the recipient and requires the new
interested party to undertake to the Office of the Chief Scientist to comply
with the Research and Development Law. 
In addition, the rules of the Office of the Chief Scientist require
prior approval (and not only notification) in respect of certain of such
events. For this purpose, control is defined as the ability to direct the
activities of a company other than any ability arising solely from serving as
an officer or director of the company. 
A person is presumed to have control if such person holds 50% or more of
the means of control of a company. 
Means of control refers to voting rights or the right to appoint
directors or the chief executive officer. 
An interested party of a company includes a holder of 5% or more of
its outstanding share capital or voting rights, its chief executive officer and
directors, someone who has the right to appoint its chief executive officer or
at least one director, and a company with respect to which any of the foregoing
interested parties owns 25% or more of the outstanding share capital or voting
rights or has the right to appoint 25% or more of the directors.  Accordingly, any non-Israeli who acquires 5%
or more of our ordinary shares will be required to notify the Office of the
Chief Scientist that it has become an interested party and to sign an
undertaking to comply with the Research and Development Law.

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

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D. Trend Information

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

E. Off Balance Sheet Arrangements

None.

F. Tabular Disclosure of Contractual
Obligations

The
following table presents further information relating to our liquidity as of
December 31, 2003:

|Contractual Obligations (U.S. $ in millions)*                                                      |  | Total |   | Less than
  1 year |  | 2-3 years |  | 4-6 years |    
|-------------------------------------------------------------------------------------------------- |  | ----- | - | ------------------ |  | --------- |  | --------- | ---
|                                                                                                   |  |       |   |                    |  |           |  |           |    
|                                                                                                   |  |       |   |                    |  |           |  |           |    
|Long-term
  debt (including current maturities)                                                    |  |       | $ | 8.1                |  |           |  | $         | 3.4
|Liabilities
  with regard to unfavorable executory contracts (including
       current maturities) |  |       |   | 3.6                |  |           |  |           | 2.4
|Capital
  lease obligations with regard to offices and facilities                                  |  |       |   | 4.9                |  |           |  |           | 1.2

---

|*  | See also
  the notes to our consolidated financial statements included elsewhere in this
  annual report, and in particular, Notes 5, 6 and 8 thereto.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                       
|** | Consists
  of loans from shareholders of a subsidiary to the subsidiary.                                                                              

ITEM 6 
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Set forth below is information concerning our executive
officers and directors as of March 31, 2004.

|Name                    |  | Age |  | Position                                                      
|----------------------- |  | --- |  | --------------------------------------------------------------
|                        |  |     |  |                                                               
|                        |  |     |  |                                                               
|Barry
  Shaked          |  | 47  |  | President,
  Chief Executive Officer and Chairman of the Board
|Danny
  Moshaioff       |  | 57  |  | Executive
  Vice President, Chief Financial Officer           
|Avinoam
  Bloch         |  | 47  |  | Executive
  Vice President, Products                          
|Yoni
  Stutzen          |  | 52  |  | Executive
  Vice President, International Sales               
|Saul
  Simon            |  | 51  |  | Vice
  President, Business Development and CRM Products       
|Jeff
  Yelton           |  | 45  |  | Chief
  Executive Officer, Retalix USA                        
|Elhanan
  (Elli) Streit |  | 64  |  | External
  Director                                           
|Ilan
  Horesh           |  | 52  |  | External
  Director                                           
|Sigal
  Hoffman         |  | 47  |  | Director                                                      
|Brian
  Cooper          |  | 48  |  | Director                                                      
|Ian
  OReilly          |  | 55  |  | Director                                                      
|Amnon
  Lipkin-Shahak   |  | 60  |  | 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.

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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 Manager of
Mashbir Mazon. Mr. Moshaioff has served as a director in Neviot Ltd.
since January 2004. 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. From January 2000 until January 2002,
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 Executive Vice President, International Sales since
January 2004, and served as our Vice President, International Sales from
December 1998 until December 2003. He served as our Vice President,
Marketing from August 1994 through December 1998. Mr. Stutzen
served as a Marketing Manager for Manof Communications from January 1985
to July 1994 and as international SWIFT systems manager for Bank Hapoalim
from January 1980 until December 1984. Mr. Stutzen received a
B.Sc. in Industrial and Management Engineering from the Technion, Israel
Institute of Technology in 1974.

Saul
Simon has served as our Vice President, Business Development and CRM Products
since January 2004, and served as our Vice President, Business Development
from November 1997 until December 2003. 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.

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.

Elhanan
(Elli) Streit has 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. Mr. Streit served as an
independent director in Advantech Ltd. from April 2000 to
December 2002 and has served as a director of Primode Ltd. since
September 2000. 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 Chief Executive
Officer 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.

Sigal
Hoffman has served as a director since May 2004. Ms. Hoffman has worked
as an attorney in private practice 
since 1995.   Ms. Hoffman has a
B.A. degree in Social Work, an M.B.A. in Educational Consulting and an LL.B. in
law from Tel-Aviv University.

Brian
Cooper has served as a director since August 1984. From December 1999
to June 2001, Mr. Cooper served as our Vice President, Israeli
operations. Mr. Cooper also served as our Chief Financial Officer from
August 1984 until December 1999. From 1979 to 1984, Mr. Cooper
served as an officer in the Israeli Defense Forces as an economist and
programmer. Mr. Cooper has been a director of YCD Multimedia Ltd.
since June 2003. Mr. Cooper received a B.A. in Economics from Haifa
University in 1977.

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

Amnon
Lipkin-Shahak has served as a director since April 2002. Since
May 2001, Mr. Lipkin-Shahak has served as the chairman of the board
in the TAHAL Group, and as a director in the Kardan Group, 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.

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B. Compensation

The aggregate accrued
compensation of all 12 persons as a group who served in the capacity of a
director or an executive officer during the year ended December 31, 2003,
was approximately $1.8 million. This amount includes pension, retirement
and similar benefits in the aggregate amount of $57,000. This also includes
amounts paid to Orly Eshkar, who was one of our directors until May, 2004.  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.

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

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

As compensation for his
services to us, Mr. Shaked is entitled to receive, at the beginning of
each calendar year, options to purchase a number of our ordinary shares equal
to 1.0% of our then outstanding ordinary shares. One-third of these options
will become exercisable on each of the first three anniversaries of the date of grant. According to this arrangement, in
January of 2003 and January 2004, Mr. Shaked was granted options to
purchase a total of up to 119,999 and 129,767 of our ordinary shares,
respectively, at exercise prices of $9.01 and $23.19 per share. One-third of
the options granted in 2003 became exercisable on January 1, 2004, and the
remaining two-thirds will be exercisable in two equal portions from
January 1st of each of the years 2005 and 2006. Similarly,
one-third of the options granted in 2004 will be exercisable from
January 1st of each of the years of 2005, 2006 and 2007. The
expiration dates of these options are December 31, 2006 and 2007.

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

In October 2002, 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 most of our employees located in Israel, including executive officers and
those that are also members of our board of directors, provide for standard
Israeli benefits, such as managers insurance and an educational fund. We make
payments under these programs as follows: pension5.0% of gross salary;
severance pay8.33% of gross salary; disability insuranceup to 2.5% of gross
salary (all of which are considered part of managers insurance); and
educational fund7.5% of gross salary. The total amount we expensed in 2003
under these arrangements for all executive officers as a group was
approximately $129,471.

During the year 2003, all
our directors and executive officers as a group, were granted options to
purchase an aggregate of 189,999 shares under our stock option plans. The
exercise prices of these options range from $8.75 to $9.01, and their
expiration dates range from December 31, 2006 to April 30, 2008. Of
these options, 23,333 became exercisable prior to December 31, 2003,
40,000 became exercisable on January 1, 2004, 23,333 will become
exercisable on August 1, 2004, 40,000 will become exercisable on
January 1, 2005, 23,334 will become exercisable on August 1, 2005 and
39,999 will become exercisable on January 1, 2006.

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, subject to
the provisions of the Companies Law, hold office for one or two three-year
terms. In addition, any vacancy on the board of directors, however occurring,
including a vacancy resulting from an enlargement of the board, may be filled
by a vote of a simple majority of the directors then in office. A director elected
thereby may serve on the board of directors until the next annual general
meeting. Our officers serve at the discretion of the board of directors. There
are no family relationships among our directors and executive officers.

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According to the Companies
Law, a companys chairman of the board may not serve as its chief executive
officer, unless otherwise approved by the shareholders for periods of up to
three years. The required shareholder approval is a majority of the shares
voted on the matter, including at least two-thirds of the shares of
non-controlling shareholders voted on the matter. Barry Shaked, one of our
founders, has served as our president, chief executive officer and chairman of
the board since our inception in 1982. His most recently approved three-year
period expired in 2003, and we plan to request our shareholders to approve
another three-year period at our next annual general meeting.

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

Alternate Directors

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

External Directors

Under the 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 individuals
as external directors. Any individual who is eligible to be appointed as a
director may be appointed as an external director, provided that such person,
or the persons relative, partner, employer or any entity under the persons
control does not have at the date of appointment, or has not had during the two
years preceding the date of appointment, any affiliation with:

| |                                     | the
  company;                                                                                                                                   
| | ------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------
| |                                      |                                                                                                                                                  
| |                                     | any
  person or entity controlling the company at the time of appointment; or                                                                    
| |                                      |                                                                                                                                                  
| |                                     | any
  entity controlled by the company or by its controlling entity on the date of
  the appointment or during the two years preceding such date.
| |                                      |                                                                                                                                                  
| | The term
  affiliation means any of:
| |                                     
| |                                     | an
  employment relationship;                                                                                                                    
| |                                      |                                                                                                                                                  
| |                                     | a
  business or professional relationship maintained on a regular basis;                                                                         
| |                                      |                                                                                                                                                  
| |                                     | control;
  and                                                                                                                                   
| |                                      |                                                                                                                                                  
| |                                     | service
  as an office holder.                                                                                                                   

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

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

| |  | the
  majority of shares voted on the matter, including at least one-third of the
  shares of non-controlling shareholders voted on the matter, vote in favor of
  election; or            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                            
| |  | the
  total number of shares of non-controlling shareholders that voted against the
  election of the director does not exceed one percent of the aggregate voting
  rights in the company.

The
initial term of an external director is three years and such director may be
reappointed for an additional three years. Each committee of a companys board
of directors that is authorized to carry out a power of the board of directors
is required to include at least one external director. Pursuant to the
provisions of the Companies Law, we elected two external directors, Elli Streit
and Ilan Horesh.

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

51

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Audit Committee

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

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

Under
Nasdaq rules, our audit committee assists the board in fulfilling its
responsibility for oversight of the quality and integrity of our accounting,
auditing and financial reporting practices and financial statements and the independence
qualifications and performance of our independent auditors.  Our audit committee also has the authority
and responsibility to oversee our independent auditors, to recommend for
shareholder approval the appointment and, where appropriate, replacement of our
independent auditors and to pre-approve audit engagement fees and all permitted
non-audit services and fees.

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

Investment Committee

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

Internal Auditor

Under
the Companies Law, our board of directors must appoint an internal auditor
proposed by the audit committee. The role of the internal auditor is to examine
whether the companys actions comply with the law, integrity and orderly
business procedure. The internal auditor has the right to request that the
chairman of the audit committee convene an audit committee meeting, and the latter
shall convene such a meeting if he believes that there are grounds to do so.
The internal auditor may participate in all audit committee meetings. Under the
Companies Law, the internal auditor may not be an interested party, an office
holder, or a relative of either, nor may the internal auditor be the companys
independent accountant or its representative. The internal auditor may not be
dismissed without the approval of the board of directors after it has received
the position of the audit committee and after the internal auditor has been
given a reasonable opportunity to be heard by the board of directors and the
audit committee.  Our internal auditor
since June 2004 is Pahn Kanne Management and Control Ltd. (Grant Thornton),
which replaced Moshe Avraham, our former internal auditor since 1994.

D. Employees

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

|                           |  | As of March 31, |     | As of December 31, | 
|-------------------------- |  | --------------- | --- | ------------------ | 
|                           |  |                 |     |                    | 
|Category of Activity       |  | 2004            |     | 2003               | 
|                           |  |                 |     |                    | 
|Research and Development   |  |                 | 320 |                    | 
|Operations                 |  |                 | 265 |                    | 
|Marketing                  |  |                 | 109 |                    | 
|Finance and Administration |  |                 | 62  |                    | 
|                           |  |                 |     |                    | 
|Total                      |  |                 | 756 |                    | 
|                           |  |                 |     |                    | 
|                           |  |                 |     |                    | 
|                           |  | As of March 31, |     | As of December 31, | 
|                           |  |                 |     |                    | 
|Geographical Location      |  | 2004            |     | 2003               | 
|                           |  |                 |     |                    | 
|United States              |  |                 | 349 |                    | 
|Israel                     |  |                 | 388 |                    | 
|Europe                     |  |                 | 16  |                    | 
|Rest of The World          |  |                 | 3   |                    | 
|                           |  |                 |     |                    | 
|Total                      |  |                 | 756 |                    | 
|                           |  |                 |     |                    | 

52

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---

None
of our employees are represented by unions. We consider our relationship with
our employees to be good and have not experienced any interruptions due to
labor disputes.

E. Share Ownership

Mr. Barry Shaked, our
President, Chief Executive Officer and Chairman of our board of directors,
holds, as of May 31, 2004, 1,062,173 of our ordinary shares, which equals
approximately 6.3% of our issued share capital.

Mr. Brian Cooper, a
director and our former Vice President, holds, as of May 31, 2004, 1,058,035 of
our ordinary shares, which equals approximately 6.3% of our issued share
capital.

No other director or
executive officer beneficially owns 1% or more of our issued share capital.

Other of our directors and
executive officers hold as of May 31, 2004, a total of 41,874 of our ordinary
shares, which equals approximately 0.2% of our issued share capital.

In addition, as of May 31, 2004, Mr. Shaked held
options to purchase a total of up to 480,008 of our ordinary shares granted to
him on January 1, 2001, January 1, 2002, January 1, 2003 and January 1, 2004
pursuant to a shareholders resolution dated May 28, 1998, authorizing the grant
to him, on January 1 of each year,of options to purchase one percent of our
issued capital. The exercise price for each share according to this resolution
is the Nasdaq closing price on December 31 of the year ending just before the
date of grant.  These options are
exercisable as follows: 33% - starting one year following the date of grant;
33% - starting two years following the date of grant; and 34% - starting three
years following the date of grant.

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

|Amount of Shares for
  which the Options are
  Exercisable |  | Exercise Price
  in U.S. dollars |       | Expiration Date | 
|---------------------------------------------------------- |  | -------------------------------- | ----- | --------------- | 
|                                                           |  |                                  |       |                 | 
|113,130                                                    |  |                                  | 12.00 |                 | 
|117,112                                                    |  |                                  | 16.43 |                 | 
|119,999                                                    |  |                                  | 9.01  |                 | 
|129,767                                                    |  |                                  | 23.19 |                 | 

| | As
  of May 31, 2004, other directors and executive officers had options to
  purchase a total of up to 685,256 of our ordinary shares under our Second
  1998 Share Option Plan (which is described below), as follows:                                                                                                                                                                                                 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Options
  to purchase 94,000 of our ordinary shares, which are fully vested, at an
  exercise price of $10 per share. The expiration date of these options is
  April 30, 2008.                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Options
  to purchase 200,000 of our ordinary shares, which are fully vested, at an
  exercise price of $14.875 per share. The expiration date of these options is
  April 30, 2008.                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Options
  to purchase 35,500 of our ordinary shares, which are fully vested, at an
  exercise price of $8.25 per share. The expiration date of these options is
  December 31, 2004.                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Options
  to purchase 147,084 of our ordinary shares, which are fully vested, at an
  exercise price of $11.01 per share. The expiration date of these options is
  September 30, 2005.                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Options
  to purchase 30,000 of our ordinary shares, which are fully vested, were
  granted at an exercise price of $17.113 per share. The expiration date of
  these options is October 1, 2004.                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Options
  to purchase 30,000 of our ordinary shares at an exercise price of $11.53 per
  share. Two thirds of these options are fully vested, and the remaining third
  will vest on April 1, 2005.  These
  options will expire on April 1, 2006.                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Options
  to purchase 48,672 of our ordinary shares at an exercise price of $8.75 per
  share. Of these options, options to purchase 2,005 of our ordinary shares are
  fully vested. Options to purchase 23,333 of our ordinary shares will vest on
  August 1, 2004 and the remaining options to purchase 23,334  of our ordinary shares will vest on August
  1, 2005.  These options will expire on
  April 30, 2008.
| | Options to purchase 100,000 of our
ordinary shares at an exercise price of $18.56 per share. Of these options, options to
purchase 33,333 of our ordinary shares will vest on December 31, 2004. The rest of the
options will vest in three equal options on December 31, 2005, December 31, 2006 and
December 31,2007. These options will expire on June 30, 2008.                                                      

53

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Our Share Option Plans

Second 1998 Share Option Plan

Our Second 1998 Share
Option Plan , or Second 1998 Plan, provides for the granting of incentive share
options to employees, and for the granting of non-statutory options to
employees, directors and consultants. Unless terminated sooner, the Second 1998
Plan will terminate automatically in May 2008. As of May 31, 2004,
options to purchase 4,792,496 ordinary shares had been granted under the Second
1998 Plan, out of which options to purchase 2,595,611 (excluding options
already exercised) ordinary shares were exercisable, and 207,504 ordinary
shares remained available for future grant. These figures include options to
purchase 400,000 ordinary shares granted under our Second 1998 Plan in May
2004, at an exercise price of $18.56 of which one third shell vest on December
31, 2004, and  the remaining  two thirds shell vest in three equal
portions on December 31, 2005,  December
31, 2006 and  December 31, 2007. These
options will expire on June 30, 2008. As of May 31, 2004, 1,445,081
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 will, in the case of options intended to qualify as
performance-based compensation within the meaning of Section 162(m) of
the U.S. Internal Revenue Code, 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. Our
board of directors has the authority to amend, suspend or terminate the Second
1998 Plan, provided that no such action may affect any ordinary share
previously issued and sold or any option previously granted under the Second
1998 Plan.

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

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

2004 Israeli Share Option Plan

Our 2004 Israeli Share
Option Plan provides for the granting of options to employees, directors and
consultants under either Section 102 or Section 3(9) of the Israeli Income Tax
Ordinance. As of May 31, 2004, options to purchase 600,000 ordinary shares
had been granted under the 2004 Israeli Share Option Plan at an exercise price of
$18.56, of which one-third will vest on December 31, 2004 and the
remaining  two-thirds will vest in three
equal portions on December 31, 2005, 
December 31, 2006 and  December
31, 2007. These options will expire on June 30, 2008.

The 2004 Israeli Share
Option Plan is administered by our board of directors or by a share incentive
committee or other committee of the board, subject to applicable law. 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 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 the event of a merger
or sale of substantially all of our assets or stock, our board or a committee
administrating the plan has discretion as to whether to cause outstanding
options to be assumed by the successor company, substituted for successor
company options or automatically vested in full. Subject to applicable law and
regulations, our board of directors has the authority to amend, suspend or
terminate the 2004 Israeli Share Option Plan, provided that no such action may
affect any ordinary share previously issued and sold or any option previously
granted under the plan.

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

54

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Stock Option Plan of a Subsidiary

On December 4, 2000,
the board of directors of one of our subsidiaries, StoreAlliance.com Ltd.,
approved an employee stock option plan. Pursuant to this subsidiary plan, to
date, 270,000 ordinary shares, or approximately 7.7% of the issued and
outstanding share capital of the subsidiary as of such date, are reserved for
issuance upon the exercise of options granted to some of our and the
subsidiarys employees. The options vest as follows: 33.33% after the first
year after their grant, another 33.33% after the second year and another 33.33%
after the third year, but only during the period the employee is employed
either by us or by the subsidiary. In addition, the options are not exercisable
prior to the earliest of the following events: (1) the consummation of a
public offering of the subsidiarys securities, (2) a merger of the
subsidiary and (3) seven years from the date of grant. Any vested options
not exercised within the later of 90 days of (a) the end of the
optionees status as our or the subsidiarys employee, or (b) the first to
occur of such exerciseability events, will expire. The rights of ordinary
shares obtained upon exercise of the options will be identical to those of the
other ordinary shares of the subsidiary. Any option not exercised within
10 years of the grant date thereof will expire. Some of the options under
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. As of May 31, 2004, options to purchase 200,166 ordinary
shares of the subsidiary were outstanding under the subsidiary plan, at
exercise prices ranging from NIS0.01 per share to $5.55 per share.

ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTION

A. Major Shareholders

The
following table sets forth, as of May 31, 2004, certain information known to us
with respect to beneficial ownership of our ordinary shares by (1) each
shareholder known by us to be the beneficial owner of five percent or more of
our ordinary shares and (2) all of our executive officers and directors as
a group. As of May 31, 2004, 16,857,188 of our ordinary shares were
outstanding.

|Name                                                 |  | Number of ordinary
  shares held |           | Percentage of
  outstanding ordinary
  shares  (1)(2) | 
|---------------------------------------------------- |  | -------------------------------- | --------- | ----------------------------------------------------- | 
|                                                     |  |                                  |           |                                                       | 
|                                                     |  |                                  |           |                                                       | 
|Barry
  Shaked (3)                                   |  |                                  | 1,293,378 |                                                       | 
|Brian
  Cooper                                       |  |                                  | 1,058,035 |                                                       | 
|Bank
  Leumi Funds (4)                               |  |                                  | 1,323,314 |                                                       | 
|Bank
  Hapoalim Funds (5)                            |  |                                  | 1,131,022 |                                                       | 
|All
  directors and executive officers as agroup (6) |  |                                  | 2,921,875 |                                                       | 
|                                                     |  |                                  |           |                                                       | 

---

|(1) | Unless
  otherwise indicated, each person named or included in the group has sole
  power to vote and sole power to direct the disposition of all shares listed
  as beneficially owned.                                                                                                                                                                                                                                                                                                                                             
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(2) | Amounts
  include shares that are not currently outstanding but are deemed beneficially
  owned because of the right to purchase them pursuant to options exercisable
  on May 31, 2004 or within 60 days thereafter. Pursuant to SEC
  rules, shares deemed beneficially owned by virtue of an individuals right to
  purchase them are also treated as outstanding when calculating the percent of
  the class owned by such individual and when determining the percent owned by
  any group in which the individual is included.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(3) | Includes
  options to purchase up to 231,205 shares held by Mr. Shaked, directly or
  indirectly, that are exercisable on May 31, 2004  or within 60 days thereafter.                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(4) | This
  information is based solely on information provided to us by Bank Leumi
  pursuant to Israeli law with respect to the aggregate holdings of various of
  its affiliated mutual funds and provident funds.  The method used to compute holdings under Israeli law does not
  necessarily bear the same result as the method used to compute beneficial
  ownership under SEC rules and regulations.                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(5) | This
  information is based solely on information provided to us by Bank Hapoalim
  pursuant to Israeli law with respect to the aggregate holdings of various of
  its affiliated mutual funds and provident funds. The method used to compute
  holdings under Israeli law does not necessarily bear the same result as the
  method used to compute beneficial ownership under SEC rules and regulations.                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(6) | Includes
  options to purchase 758,794 shares that are exercisable currently or within
  60 days after May 31, 2004 at exercise prices that range from $8.75
  to $16.43.                                                                                                                                                                                                                                                                                                                                                            

55

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As of May 31, 2004, 5,930,305
of our ordinary shares were held in the United States, by 10 record
holders with mailing addresses in the United States, owning an aggregate of
approximately 35.2% of our outstanding ordinary shares. The number of record
holders in the United States is not representative of the number of beneficial
holders nor is it representative of where such beneficial holders are resident
since many of these ordinary shares were held of record by brokers or other
nominees.

B. Related Party Transactions

None.

C. Interests of Expert and Counsel

Not
Applicable.

ITEM 8  FINANCIAL INFORMATION

See
Item 18.

Legal Proceedings

In
August 2000, we, together with our subsidiary P.O.S. (Restaurant
Solutions) Ltd., or PRS, filed a claim in the Tel-Aviv District Court for
injunctions, accounting records and damages (evaluated, for the purpose of
computing court fees, at NIS 3,000,000, or approximately $660,000) against two
former employees and directors of PRS who currently own the minority interest
in PRS. This claim alleges that the defendants caused us severe damages due to
the manner of their conduct as employees and directors of PRS and by developing
software that infringes on our rights. In January 2003, upon motion of the
defendants, the District Court transferred the case to the Labor Court. We have
filed an appeal with the Supreme Court of Israel, which is currently pending.

In
April 2001, these minority shareholders of PRS filed a claim in the
Tel-Aviv District Court against PRS and against us, for the amount of
approximately $500,000 in respect of sums they claim they are entitled to as
shareholders of PRS. In addition, they filed a motion that the claim be
recognized as a derivative claim of PRS against us, for payment of an alleged
debt in the amount of approximately $3,500,000. In March 2003, we filed an
amended statement of defense as well as a counterclaim. In July 2003,
directors of PRS appointed by these minority shareholders filed a motion in the
Tel-Aviv District Court against PRS and its other directors, requesting a court
order to disclose certain information relating to the basis for the debt
claimed by us from PRS.

We
believe that we have meritorious defenses against these claims and that the claims
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 RCS, a legal claim was filed in the Court of
Common Pleas of Allegheny County, Pennsylvania against RCS 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 RCS breached its contract
with the customer and fraudulently misrepresented facts about the product sold
to the customer.

An
additional claim was filed against RCS in Circuit Court of the Seventeenth
Judicial Circuit, County of Winnebago, State of Illinois, prior to our
acquisition of the company, by a dealer who sold one of RCS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 RCS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 RCS 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.

In
December 2003, a legal claim for an amount in excess of $150,000 was filed
in the US District Court of the Eastern District of Pennsylvania against our
subsidiary, Retalix Inc., by a local customer. The claim is for damages
allegedly caused by system and network software not operating as warranted by
BASS in 1998 (prior to our acquisition of BASS). We believe that
Retalix Inc. 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.

In addition to the matters discussed above, we are
involved in litigation from time to time in the ordinary course of business with
a portion of the defense and/or settlement costs being covered by various
commercial liability insurance policies purchased by us. In the opinion of
management, no other material legal proceedings are pending to which we, or any
of our properties, are subject.

56

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Dividend
Policy

Since 1995, we have not paid cash dividends on our
ordinary shares, and we do not intend to pay cash dividends in the foreseeable
future.  Our board of directors is
authorized to declare dividends, subject to applicable law. Dividends may be
paid only out of profits and other surplus, as defined in the Companies Law, as
of the end of the most recent financial statements or as accrued over a period
of two years, whichever is higher. Alternatively, if we do not have sufficient
profits or other surplus, then permission to effect a distribution can be
granted by order of an Israeli court. 
In any event, a distribution is permitted only if there is no reasonable
concern that the dividend will prevent us from satisfying our existing and
foreseeable obligations as they become due. 
Under current Israeli regulations, any cash dividend in Israeli currency
paid in respect of ordinary shares purchased by non-residents of Israel with
non-Israeli currency may be freely repatriated in such non-Israeli currency.

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 1998. Our ordinary shares have also been quoted on the Tel
Aviv Stock Exchange since November 1994.

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

|                        |  | High |       | Low |  
|----------------------- |  | ---- | ----- | --- | -
|                        |  |      |       |     |  
|                        |  |      |       |     |  
|1999                    |  | $    | 15.13 |     | $
|2000                    |  |      | 30.63 |     |  
|2001                    |  |      | 17.20 |     |  
|2002                    |  |      | 17.00 |     |  
|2003                    |  |      | 23.19 |     |  
|2002:                   |  |      |       |     |  
|First
  Quarter         |  | $    | 17.00 |     | $
|Second
  Quarter        |  |      | 13.35 |     |  
|Third
  Quarter         |  |      | 12.49 |     |  
|Fourth
  Quarter        |  |      | 11.70 |     |  
|2003:                   |  |      |       |     |  
|First
  Quarter         |  | $    | 11.45 |     | $
|Second
  Quarter        |  |      | 16.27 |     |  
|Third
  Quarter         |  |      | 17.70 |     |  
|Fourth
  Quarter        |  |      | 23.19 |     |  
|Most recent six months: |  |      |       |     |  
|December
  2003         |  | $    | 23.19 |     | $
|January
  2004          |  |      | 24.74 |     |  
|February
  2004         |  |      | 22.50 |     |  
|March
  2004            |  |      | 21.26 |     |  
|April
  2004            |  |      | 22.48 |     |  
|May 2004                |  |      | 20.06 |     |  

57

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

|                        |  | High |           | Low | 
|----------------------- |  | ---- | --------- | --- | 
|                        |  |      |           |     | 
|                        |  |      |           |     | 
|1999                    |  |      | NIS 61.90 |     | 
|2000                    |  |      | 125.70    |     | 
|2001                    |  |      | 72.00     |     | 
|2002                    |  |      | 77.20     |     | 
|2003                    |  |      | 101.40    |     | 
|2002:                   |  |      |           |     | 
|First
  Quarter         |  |      | NIS 77.20 |     | 
|Second
  Quarter        |  |      | 64.60     |     | 
|Third
  Quarter         |  |      | 58.10     |     | 
|Fourth
  Quarter        |  |      | 53.40     |     | 
|2003:                   |  |      |           |     | 
|First
  Quarter         |  |      | NIS 53.60 |     | 
|Second
  Quarter        |  |      | 72.40     |     | 
|Third
  Quarter         |  |      | 77.00     |     | 
|Fourth
  Quarter        |  |      | 101.40    |     | 
|Most recent six months: |  |      |           |     | 
|December
  2003         |  |      | 101.40    |     | 
|January
  2004          |  |      | 110.00    |     | 
|February
  2004         |  |      | 102.10    |     | 
|March
  2004            |  |      | 96.30     |     | 
|April
  2004            |  |      | 102.40    |     | 
|May 2004                |  |      | 92.30     |     | 
|                        |  |      |           |     | 

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.

58

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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 16,857,188
ordinary shares were outstanding as of May 31, 2004.

Directors

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

Election of
Directors

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

Remuneration of
Directors

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

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 or a chairman.

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

Dividend and
Liquidation Rights

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

59

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

Redeemable Shares

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

Fiduciary Duties
of Office Holders

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

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

| | information
  on the advisability of a given action brought for his approval or performed
  by him by virtue of his position; and
|- | ---------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                  
| | all
  other important information pertaining to these actions.                                                                   

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

| | refrain
  from any conflict of interest between the performance of his duties in the
  company and the performance of  his
  other duties or his personal affairs;    
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                       
| | refrain
  from any activity that is competitive with the company;                                                                                                     
|  |                                                                                                                                                                       
| | refrain
  from exploiting any business opportunity of the company to receive a personal
  gain for himself or others; and                                             
|  |                                                                                                                                                                       
| | disclose
  to the company any information or documents relating to a companys affairs
  which the office holder has received due to his position as an office holder.

Under
the Companies Law, the approval of the board of directors is required for all
compensation arrangements of office holders who are not directors.  Under the Companies Law, directors
compensation arrangements require the approval of the audit committee, the
board of directors and the shareholders, in that order.

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.

60

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

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

Changing
the Rights Attached to Shares

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

Shareholders
Meetings

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

We
have received an exemption from the Nasdaq listing requirement to send proxy
statements to shareholders in connection with our shareholders meetings, based
on the common practice in Israel not to send proxy statements.  Instead, pursuant to Israeli law, we publish
a notice of each shareholders meeting in two newspapers in Israel at least 21
days prior to the meeting.  The notice
sets forth, among other information, the time and place of the meeting, the
record date, the agenda items and the requisite voting threshold for each.

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

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

Duties
of Shareholders

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

| | at least one-third of the shares of shareholders who have no personal
  interest in the transaction and are present and voting, in person, by proxy
  or by written ballot, at the meeting, vote in favor; or
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                              
| | the votes of shareholders who have no personal interest in the
  transaction that are voted against the transaction do not represent more than
  one percent of the voting rights in the company.            

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

61

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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 provided that the total amount of
  indemnification for all persons we have agreed to indemnify in such
  circumstances does not exceed, in the aggregate twenty-five percent (25%) of
  our shareholders equity at the time of the actual indemnification; and
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | authorizing us to retroactively indemnify an office holder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Limitations
on Exculpation, Insurance and Indemnification

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

| | a breach by the office holder of his duty of loyalty, unless, with
  respect to insurance coverage, the office holder acted in good faith and had
  a reasonable basis to believe that the act would not prejudice the company;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                
| | a breach by the office holder of his duty of care if the breach was
  done intentionally or recklessly;                                                                                                                        
|  |                                                                                                                                                                                                                                
| | any act or omission done with the intent to derive an illegal
  personal benefit; or                                                                                                                                           
|  |                                                                                                                                                                                                                                
| | any fine levied against the office holder.                                                                                                                                                                                     

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

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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
or other types of transactions, including mergers. These provisions generally
require that the transaction be approved by a majority of the participating
shareholders holding at least 75% of the shares voted on the matter.  In addition to shareholder approval, court
approval of the transaction is required, which entails further delay.

The
Companies Law also provides that an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 25% shareholder of the company, unless there is
already another 25% shareholder of the company.  Similarly, the Companies Law provides that an acquisition of
shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 45% shareholder of the
company, unless there is already a majority shareholder of the company.  These requirements do not apply if the acquisition
is made in a private placement.  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.
However, the remaining minority shareholders may seek to alter the
consideration by court order.

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

C. Material Contracts

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

D. Exchange Controls

Exchange
Controls and Other Limitations Affecting Security Holders

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

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

# E. Taxation

The
following is a general summary only and should not be considered as income tax advice or
relied upon for tax planning purposes. Holders of our ordinary shares should consult their
own tax advisors as to the U.S., 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 U.S. federal income tax consequences to a U.S. holder arising from the purchase,
ownership and disposition of our ordinary shares. A U.S. holder is a holder of ordinary
shares that is: (1) an individual citizen or resident of the United States,
(2) a corporation (or other entity treated as a corporation for U.S. federal income
tax purposes) created or organized under the laws of the United States or any political
subdivision thereof, (3) an estate, the income of which is includable in gross income
for U.S. federal income tax purposes regardless of its source, (4) a trust if a court
within the United States is able to exercise primary supervision over the administration
of the trust, and one or more U.S. persons have the authority to control all substantial
decisions of the trust, or (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 U.S. 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
U.S. 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.

63

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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 U.S. 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 a U.S. holder who is:
(1) a bank, life insurance company, regulated investment company, or other financial
institution or financial services entity; (2) a broker or dealer in
securities or foreign currency; (3) a person who acquires our ordinary shares in
connection with employment or other performance of services; (4) a U.S. holder that
is subject to the alternative minimum tax; (5) a U.S. holder that holds the ordinary
shares as a hedge or as part of a hedging, straddle, conversion or constructive sale
transaction; and (6) a tax-exempt entity. This discussion does not address the tax
treatment of a U.S. holder that owns, directly or constructively, at any time, shares
representing 10% or more of our voting power. Additionally, the 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 U.S. federal gift or estate taxes or any
aspect of state, local or non-U.S. tax laws. Each prospective investor is advised to
consult such persons own tax advisor with respect to the specific U.S. federal
income tax consequences to such person of purchasing, holding or disposing of the ordinary
shares.

Distributions on
Ordinary Shares

Since
1995, we have not paid cash dividends on our ordinary shares, 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.
Corporate holders generally will not be allowed a deduction for dividends received. In
general, preferential tax rates not exceeding 15% for qualified dividend
income and long-term capital gains are applicable for U.S. holders that are
individuals, estates or trusts. For this purpose, qualified dividend income
means, inter alia, dividends received from a qualified foreign corporation. A
qualified foreign corporation is a corporation that is entitled to the
benefits of a comprehensive tax treaty with the United States which includes an exchange
of information program. The U.S. Internal Revenue Service, or IRS, has stated that the
Israel/U.S. Tax Treaty satisfies this requirement and we believe we are eligible for the
benefits of that treaty.

The
amount of a distribution with respect to our ordinary shares will be measured by the
amount of fair market value of any property distributed, and for U.S. federal income tax
purposes, the amount of any Israeli taxes withheld therefrom. (See discussion below under
Israeli Taxation  Taxation of Non-Residents on Receipt of Dividends.)
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.

In
addition, our dividends will be qualified dividend income if our shares are readily
tradable on Nasdaq or another established securities market in the United States.
Dividends will not qualify for the preferential rate if we are treated, in the year the
dividend is paid or in the prior year, as a foreign investment company, foreign personal
holding company, or FPHC, or a passive foreign investment company, or PFIC. Due to the
nature of our operations, we do not believe we are a foreign investment company; we also
do not believe we are a PFIC or a FPHC; see the discussions below at  Passive
Foreign Investment Companies and Foreign Personal Holding Company
concerning our status as a PFIC or FPHC. If our beliefs concerning our PFIC and FPHC
status are correct, dividend distributions with respect to our shares should be treated as
qualified dividend income, subject to the U.S. holder satisfying holding period and other
requirements described below. A U.S. holder will not be entitled to the preferential rate:
(a) if the U.S. holder has not held the ordinary shares or ADRs for at least
61 days of the 120 day period beginning on the date which is 60 days before
the ex-dividend date, or (b) to the extent the U.S. holder is under an obligation to
make related payments on substantially similar property. Any days during which the U.S.
holder has diminished its risk of loss on our shares are not counted towards meeting the
61-day holding period. Based on IRS News Release 4004-22, the IRS intends to give current
effect to proposed legislation changing the aforementioned 120 day period to a
121 day period. Finally, U.S. holders who elect to treat the dividend income as
investment income pursuant to Section 163(d)(4) of the Internal Revenue
Code will not be eligible for the preferential rate of taxation.

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

Disposition of Shares

Except
as provided under the passive foreign investment company or foreign personal 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.

In
general, gain realized by a U.S. holder on a sale, exchange or other disposition of
ordinary shares generally will be treated as U.S. source income for U.S. foreign tax
credit purposes (see discussion below under Israeli Taxation-Application of the
Israel/U.S. Tax Treaty to Capital Gains Tax.). A loss realized by a U.S. holder on
the sale, exchange or other disposition of ordinary shares is generally allocated to U.S.
source income. However, 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, U.S. or foreign, in which we are considered to own 25% or more of the
shares by value,  in a taxable year is passive income; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | at least 50% of the 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

We
believe that we were not a PFIC for 2003 and do not anticipate being a PFIC in 2004. The
tests for determining PFIC status, however, are applied annually, and it is difficult to
make accurate predictions of future income and assets which are relevant to this
determination. Accordingly, there can be no assurance that we will not become a PFIC. U.S.
holders who hold ordinary shares during a period when we are a PFIC will be subject to the
foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S.
holders who made a QEF or mark-to-market election. U.S. holders are strongly urged to
consult their tax advisors about the PFIC rules, including the eligibility, manner and
consequences to them of making a QEF or mark-to-market election with respect to our
ordinary shares in the event that we qualify as a PFIC.

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

Non-U.S. Holders of
Ordinary Shares

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

A
non-U.S. holder may be subject to U.S. federal income or withholding tax on a dividend
paid on an ordinary share or the proceeds from the disposition of an ordinary share if
(1) such item is effectively connected with the conduct by the non-U.S. holder of a
trade or business in the 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) in the case of a disposition of an
ordinary share, the individual non-U.S. holder is present in the United States for
183 days or more in the taxable year of the sale and certain other conditions are
met; or (3) the non-U.S. holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to U.S. expatriates.

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

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

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

Taxation of our U.S.
Subsidiaries

The
following summary describes our organizational structure in the United States and the
applicable income taxes. We operate in the United States through several corporations.
Retalix Holdings, Inc., or Retalix USA Holdings, is the U.S. parent, which is
wholly-owned by Retalix Ltd. Retalix USA Holdings owns 100% of the stock of several
U.S. corporationsRetalix USA Inc., RCS and BASS (BASSthrough Retalix
USA Inc.) and 50.01% of a U.S. limited liability companyStoreNext USA.
StoreNext USA is treated as a partnership for U.S. federal tax purposes. As such, 50.01%
of StoreNext USAs results are included in the Retalixs U.S. federal income tax
return. Retalix USA Holdings and its wholly-owned subsidiaries have elected to
file U.S. income tax returns on a consolidated company basis. U.S. federal income
taxes are imposed on the taxable income of the U.S. consolidated group at progressive
income tax rates ranging from 15% to 35%. The corporation is subject to the same U.S.
income tax rates on capital gain income. The U.S. companies are subject to state
income/franchise taxes in the states in which they do business. Depending on each
states requirements, taxes may be imposed on a consolidated, combined or separate
company basis.

# Israeli Taxation

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

Tax Reform

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

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

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

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

| |  | Imposition of capital gain tax on capital gains, realized by individuals beginning
January 1, 2003, from  the sale of shares of publicly traded companies in the Tel
Aviv Stock Exchange (such gain was  previously exempt from capital gains tax in
Israel) and from the sale of shares of publicly  traded Israeli Companies on other
stock exchanges. 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Effectuation
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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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General Corporate Tax
Structure in Israel

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

On
June 2, 2004, the Israeli government introduced a bill to the Israeli parliament
proposing, among other things, changes to the corporate tax rate. The bill proposes to
reduce the corporate tax rate from 36% to 35% for the 2004 tax year, 34% for the 2005 tax
year, 32% for the 2006 tax year and 30% for the 2007 tax year and thereafter. In order to
enact the bill as law, the bill mast be approved by the Israeli parliament and published.
The bill might be modified prier to enactment or might not be enacted at all. Accordingly,
we cannot predict the consequences of the bill to us.

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. The features that are material to us can be described as follows:

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

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

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

Law for the
Encouragement of Capital Investments, 1959

The
Law for Encouragement of Capital Investments, 1959 (the Investment Law) provides that
capital investments in a production facility (or other eligible assets) may, upon approval
by the Investment Center of the Israel Ministry of Industry and Trade (the Investment
Center), be designated as an Approved Enterprise. The Investment Law will expire on June
30, 2004. Accordingly, requests for new programs or expansions that are not approved on or
before June 30, 2004, will not confer any tax benefits, unless the term of the law will be
extended. 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 described below is subject to a reduced
corporate tax rate of 25% rather than the usual corporate tax 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 June 30,
2004.

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

Dividends
paid by a company that owns an Approved Enterprise and that are attributable to income
derived from that Approved Enterprise during the applicable benefits period, are taxed at
a reduced rate of 15% which will be withheld at source, 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 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%. In
addition, the company would be required to withhold at source, for the account of the
dividend recipient, 15% of the amount actually distributed as a dividend, as described
above.

The
Investment Law also provides that an Approved Enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program.

Our
production facilities have been granted Approved Enterprise status under the Investment
Law. In respect of income derived from each of our Approved Enterprises, we are entitled
to reduced tax rates during a period of seven years from the year in which such
enterprises first earn taxable income (limited to 12 years from commencement of production
or 14 years from the date of approval, whichever is earlier). We have seven Approved
Enterprises. One of our Israeli subsidiaries has two Approved Enterprises. 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%
(depending on our foreign investment level, as defined above) during the remaining years
of benefits. The periods of benefits relating to four of our Approved Enterprises have
already expired. The periods of benefits relating to two of our Approved Enterprises will
expire in 2003 and 2005 and it is anticipated that the last Approved Enterprise will
expire in 2010. The period of benefits for our Israeli subsidiary with Approved
Enterprises has not yet commenced and, once commenced, may not continue beyond 2010.

Since
we participate in the Alternative Benefits Program, in the event we distribute a dividend
from income that is tax exempt, as described above, we would have to pay a tax of up to
25% (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; and
| | - | --------------------------------------------------------------

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

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

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# Taxation of
Shareholders

Capital Gains Tax in
Israel

Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents
of Israel, as defined for Israeli tax purposes, and on the sale of 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 (1) 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 (2) we qualified as an Industrial Company within the definition of
the Law for the Encouragement of Industry (Taxes), 5729-1969. We believe that we currently
qualify as an Industrial Company, but no assurance can be given that we will continue to
qualify as an Industrial Company.

Pursuant
to the Tax Reform, generally, capital gains tax is imposed on Israeli residents at a rate
of 15% on real gains derived on or after January 1, 2003 from the sale of shares in:
(1) companies publicly traded on the Tel Aviv Stock Exchange; or (2) Nasdaq or a
recognized stock exchange or a regulated market outside of Israel as defined in income tax
order (definition stock exchange), 2004;; or (3) companies dually traded on both the Tel
Aviv Stock Exchange 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: (1) dealers in securities;
or (2) shareholders that report in accordance with the Inflationary Adjustments Law. (3)
shareholders who acquired their shares prior to an initial public offering (that are
subject to a different tax arrangement). (4) a sale to a related party.

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 Tel Aviv Stock Exchange, 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 as defined in income tax order (definition stock exchange), 2004, 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 and provided that section 101 of the Ordinance and the provisions
of the income tax law (Inflationary Adjustments), 1985 do not apply to such gain. However,
non-Israeli corporations will not be entitled to such exemption if an Israeli resident (1)
has a controlling interest of 25% or more in such non-Israeli corporation, or (2) 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
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
Israel/U.S. Tax Treaty to Capital Gains Tax

Subject
to the Israel/U.S. 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 referred to as a Treaty U.S. Resident, will not be subject
to Israeli capital gains tax unless (1) 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 (2) 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
Israel/U.S. 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 our
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 Israel/U.S. Tax Treaty, the maximum tax
on dividends paid to a holder of our 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 the Investment Law, 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.

70

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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 Exchange Act applicable to
foreign private issuers and fulfill the obligations with respect to such
requirements by filing reports with the SEC. 
You may read and copy any document we file with the SEC without charge
at the SECs public reference room at 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 SEC at such address,
at prescribed rates.  Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room.
Certain of our SEC filings are also available to the public at the SECs
website at http://www.sec.gov.

As
a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act.  In addition, we are not required
under the Exchange Act to file periodic reports and financial statements with
the SEC as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act.

I. Subsidiary Information

Not applicable.

71

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ITEM 11 - QUANTATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Market
risks relating to our operations may result primarily from weak economic
conditions in the markets in which we sell our products and from changes in
exchange rates or in interest rates. We have only limited involvement with
derivative financial instruments. From time to time we carry out transactions
involving foreign exchange derivative financial instruments (forward exchange
contracts). These transactions do not qualify for hedge accounting under FAS
133. During 2003, we entered into one foreign currency forward contract for
conversion of British Pounds Sterling into a notional amount of dollars of
approximately $2.5 million. The contract was rolled over three times during
2003. The fair value of that contract as of December 31, 2003 reflects a
liability in the amount of $90,000, which was charged to financial expenses.
Other than foreign exchange derivative financial instruments as described
above, we do not use derivative financial instruments in our investment
portfolio.

The
table below presents principal amounts and related weighted average rates by
periods of maturity for our investments in deposits (primarily included in cash
and cash equivalents in our consolidated financial reports) and marketable
securities held as of December 31, 2003.

(In thousands,
except percentages)

|                                                                        |        |              |  | Maturity |        |        |      |        | 
|----------------------------------------------------------------------- | ------ | ------------ |  | -------- | ------ | ------ | ---- | ------ | 
|                                                                        |        |              |  |          |        |        |      |        | 
|                                                                        |        |              |  | 2004-5   |        | 2006-7 |      | 2008-9 | 
|                                                                        |        |              |  |          |        |        |      |        | 
|Corporate securities
  held to maturity
  bearing fixed
  interest rate |        | Book
  value |  | $        | 4,476  |        | $    | 1,844  | 
|                                                                        | WAYM * |              |  | 3.10     | %      |        | 4.70 | %      | 
|                                                                        |        |              |  |          |        |        |      |        | 
|Dollar linked
  money market
  funds and
  deposits                     |        | Book
  value |  | $        | 26,035 |        |      | -      | 
|                                                                        | WAIR** |              |  | 0.92     | %      |        | -    |        | 
|                                                                        |        |              |  |          |        |        |      |        | 
|New Israeli
  Shekels linked
  deposits                                 |        | Book
  value |  | $        | 3,294  |        |      | -      | 
|                                                                        | WAIR** |              |  | 4.54     | %      |        | -    |        | 
|                                                                        |        |              |  |          |        |        |      |        | 
|British Pounds
  Sterling linked
  deposits                             |        | Book
  value |  | $        | 5,208  |        |      | -      | 
|                                                                        | WAIR** |              |  | 3.39     | %      |        | -    |        | 
|                                                                        |        |              |  |          |        |        |      |        | 
|Total                                                                   |        | Book
  value |  | $        | 39,013 |        | $    | 1,844  | 
|                                                                        | WAI*** |              |  | 1.81     | %      |        | 4.70 | %      | 

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

72

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---

Foreign
Currency Risk

The majority of our revenues is denominated
in U.S. dollars and or linked to the U.S. dollar, and our financing is mostly
in U.S. dollars, and thus the U.S. dollar is our functional currency. In
addition, part of our revenues is denominated in British Pounds Sterling or the
Euro, and some of our expenses are denominated in New Israeli Shekels. This
situation exposes us from time to time, to fluctuations between the exchange
rates of the dollar and the NIS, the British Pound Sterling 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 British Pounds
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, 2003:
(in thousands)

|Currency    |  | Israeli
  Currency |   | Other
  non-dollar currency | 
|----------- |  | ------------------ | - | --------------------------- | 
|            |  |                    |   |                             | 
|Assets      |  |                    | $ | 13,184                      | 
|Liabilities |  |                    | $ | 11,521                      | 

Interest Rate Risk

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

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

ITEM 12 - DESCRIPTION OF SECURITIES OTHER
THEN EQUITY SECURITIES

Not
applicable.

PART II

ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES

Not
applicable.

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

The
net proceeds of our public offering of ordinary shares under the Securities Act
of 1933, 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.

73

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PART III

ITEM 15  CONTROLS AND PROCEDURES

As
of the end of the period covered by this annual report, we performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a  15(e) and 15d  15(e) of the
Exchange Act). The evaluation was performed with the participation and under
supervision of key corporate senior members of our management including our
chief executive officer and our chief financial officer. Based on this
evaluation, our chief executive officer and our chief financial officer have
concluded that our disclosure controls and procedures are effective.

There
were no significant changes in our internal control over financial reporting or
in other factors that materially affected, or are reasonably likely to
materially affect our internal control over financial reporting during the
period covered by this annual report, including any corrective actions with
regard to significant deficiencies and material weaknesses.

ITEM 16  RESERVED

A. Audit Committee Financial Expert

Our
board of directors determined that Mr. Brian Cooper is an audit committee
financial expert, as defined in Item 16A of Form 20-F.

B. Code of Ethics

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

C. Principal Accountant Fees and Services

Kesselman
& Kesselman, a member of PricewaterhouseCoopers International Limited, has
served as our principal independent public accountants since 1997. The
following table presents the aggregate fees for professional audit services and
other services rendered by Kesselman & Kesselman in 2002 and 2003:

|                   |  | Year Ended
  December 31,
  (U.S. $ in thousands) |     
|------------------ |  | ------------------------------------------------- | ----
|                   |  |                                                   |     
|                   |  |                                                   | 2002
|                   |  |                                                   |     
|Audit Fees         |  |                                                   | 91  
|Audit Related Fees |  |                                                   | 39  
|Tax Fees           |  |                                                   | 49  
|                   |  |                                                   |     
|                   |  |                                                   | 179 
|                   |  |                                                   |     

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

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

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

74

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D. Exemptions from Listing Standards for
Audit Committees

None.

E. Purchases of Equity Securities by the
Issuer and Affiliated Purchasers

Not
Applicable.

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.

75

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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                       
| |                                                                      
| | 7.  Exhibit  Details of subsidiaries and associated
  company       
| |                                                                      
| | 8.  Reports of Independent Auditors of Certain Associated
  Companies

(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.                
| | 4.3         |  | 2004 Israeli Share Option Plan                                                                                                          
| | 8.1         |  | Principal Subsidiaries of Retalix Ltd.                                                                                                  
| | 10.1        |  | Consent of Kesselman & Kesselman, a member of
  PricewaterhouseCoopers International Limited.                                           
| | 10.2        |  | Consents of Nation Smith Hermes Diamond, an independent member of BDO
  Seidman Alliance.                                               
| | 10.3        |  | Consent of Flagel, Huber, Flagel & Co.                                                                                                  
| | 10.4        |  | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst &
  Young Global.                                                            
| | 10.5        |  | Consent of Grossman, Yanak & Ford LLP.                                                                                                  
| | 12.1        |  | Certification required by Rule 13a-14(a) under the Exchange Act, as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 12.2        |  | Certification required by Rule 13a-14(a) under the Exchange Act, as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 13.1        |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
  to Section 906 of the Sarbanes-Oxley Act of 2002.                
| | 13.2        |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
  to Section 906 of the Sarbanes-Oxley Act of 2002.                

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

76

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SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form 20-F and has duly caused and authorized the
undersigned to sign this annual report on its behalf.

|                     | RETALIX LTD.                                                                             
|-------------------- | -----------------------------------------------------------------------------------------
|                     |                                                                                          
|                     | By: /s/ Barry Shaked                                                                     
|                     |                                                                                          
|Date: June 29, 2004  | Barry Shaked, President, Chief Executive Officer
  and Chairman of the Board of Directors
|                     |                                                                                          
|                     |                                                                                          
|                     |                                                                                          
|                     | By: /s/ Danny Moshaioff                                                                  
|                     |                                                                                          
|Date: June 29 , 2004 | Danny Moshaioff, Chief Financial Officer                                                 

77

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RETALIX LTD.

CONSOLIDATED
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003

TABLE OF CONTENTS

|                                                           | Page     
|---------------------------------------------------------- | ---------
|REPORT OF INDEPENDENT AUDITORS                             | F-2      
|CONSOLIDATED FINANCIAL STATEMENTS:                         |          
|Balance sheets                                             | F-3-F-4  
|Statements of income                                       | F-5      
|Statements of changes in
  shareholders equity            | F-6      
|Statements of cash
  flows                                 | F-7-F-9  
|Notes to financial
  statements                            | F-10-F-42
|EXHIBIT - DETAILS OF SUBSIDIARIES AND
  ASSOCIATED COMPANY | F-43     

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

|
|
|
|

---

---

REPORT OF INDEPENDENT AUDITORS

To the
shareholders ofRETALIX LTD.

We have audited the consolidated balance
sheets of Retalix Ltd. (the Company) and its subsidiaries as of
December 31, 2003 and 2002 and the related consolidated statements of
income, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements
are the responsibility of the Companys 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 24.1%
and 26.2% of total consolidated assets as of December 31, 2003 and 2002,
respectively, and whose revenues constitute approximately 31.7%, 35.2% and
36.2% of total consolidated revenues for the years ended December 31,
2003, 2002 and 2001, respectively. We did not audit the financial statements of
a certain associated company, the Companys interest in which, as reflected in
the balance sheet as of December 31, 2003, is $ 53,000 and the Companys
share in excess of losses over profits of which is a net amount of $ 90,000
in 2003. The financial statements of the above subsidiaries and associated company
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 and associated company, is based solely on the reports of the
other independent auditors.

We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States), and
auditing standards generally accepted in  Israel, 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, 2003 and
2002 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, 2003, in conformity with accounting principles generally
accepted in the United States of America.

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

/s/ Kesselman & Kesselman   Tel-Aviv, Israel
          March 31,
2004

F - 2

---

---

RETALIX LTD.CONSOLIDATED BALANCE
SHEETS

|                                                                                      |  | December 31         | 
|------------------------------------------------------------------------------------- |  | ------------------- | 
|                                                                                      |  |                     | 
|                                                                                      |  | 2003                | 
|                                                                                      |  |                     | 
|                                                                                      |  | U.S. $ in thousands | 
|                                                                                      |  |                     | 
|                                                                                      |  |                     | 
|ASSETS                                                                                |  |                     | 
|CURRENT ASSETS(note 11):                                                              |  |                     | 
|Cash and cash equivalents                                                             |  | 46,093              | 
|Marketable securities (note 8c; 12c)                                                  |  | 5,035               | 
|Accounts receivable (note 12a):                                                       |  |                     | 
|Trade                                                                                 |  | 20,976              | 
|Other                                                                                 |  | 1,813               | 
|Inventories (note 12b)                                                                |  | 1,053               | 
|Deferred income taxes (note 10g)                                                      |  | 2,402               | 
|                                                                                      |  |                     | 
|T
  o t a l  current assets                                                           |  | 77,372              | 
|                                                                                      |  |                     | 
|NON-CURRENT ASSETS(note 11):                                                          |  |                     | 
|Marketable securities - bonds (note
  12c)                                            |  | 3,519               | 
|Deferred income taxes (note 10g)                                                      |  | 1,286               | 
|Long-term receivables (note 12e)                                                      |  | 998                 | 
|Amounts funded in respect of employee
  rights upon
            retirement (note
  7) |  | 3,733               | 
|Other                                                                                 |  | 432                 | 
|                                                                                      |  |                     | 
|                                                                                      |  | 9,968               | 
|                                                                                      |  |                     | 
|PROPERTY, PLANT AND EQUIPMENT,net (note 3)                                            |  | 10,129              | 
|                                                                                      |  |                     | 
|GOODWILL(note 4)                                                                      |  | 19,055              | 
|                                                                                      |  |                     | 
|OTHER INTANGIBLE ASSETS, net of accumulated
       amortization (note 4)              |  | 4,079               | 
|                                                                                      |  |                     | 
|                                                                                      |  | 120,603             | 
|                                                                                      |  |                     | 

F-3

---

---

|                                                           |  | December 31         | 
|---------------------------------------------------------- |  | ------------------- | 
|                                                           |  |                     | 
|                                                           |  | 2003                | 
|                                                           |  |                     | 
|                                                           |  | U.S. $ in thousands | 
|                                                           |  |                     | 
|                                                           |  |                     | 
|LIABILITIES AND
  SHAREHOLDERS EQUITY                     |  |                     | 
|CURRENT LIABILITIES(note 11):                              |  |                     | 
|Short-term bank credit                                     |  | 5,677               | 
|Current maturities of long-term bank
  loans (note 5)      |  | 3,368               | 
|Accounts payable and accruals:                             |  |                     | 
|Trade                                                      |  | 5,138               | 
|Employees
  and employee institutions                      |  | 4,882               | 
|Current
  maturities of other liabilities (note 6)         |  | 2,439               | 
|Other                                                      |  | 6,510               | 
|Deferred revenues                                          |  | 3,572               | 
|                                                           |  |                     | 
|T
  o t a l  current liabilities                           |  | 31,586              | 
|                                                           |  |                     | 
|LONG-TERM LIABILITIES (note 11):                           |  |                     | 
|Long-term bank loans, net of current
  maturities (note 5) |  | 4,700               | 
|Employee rights upon retirement (note
  7)                 |  | 5,405               | 
|Other liabilities, net of current
  maturities (note 6)    |  | 1,149               | 
|                                                           |  |                     | 
|T
  o t a l  long-term liabilities                         |  | 11,254              | 
|                                                           |  |                     | 
|COMMITMENTS AND CONTINGENT LIABILITIES(note 8)             |  |                     | 
|                                                           |  |                     | 
|T
  o t a l  liabilities                                   |  | 42,840              | 
|                                                           |  |                     | 
|MINORITY INTERESTS                                         |  | 2,117               | 
|                                                           |  |                     | 
|SHAREHOLDERS EQUITY(note 9):                              |  |                     | 
|Share capital - ordinary shares of
  NIS 1.00              |  |                     | 
|par value
  (authorized: 25,000,000                        |  |                     | 
|Shares;
  issued and outstanding:                          |  |                     | 
|December
  31, 2003 -12,976,695 shares;                    |  |                     | 
|December
  31, 2002 - 11,993,404 shares)                   |  | 3,704               | 
|Additional paid in capital                                 |  | 41,864              | 
|Retained earnings                                          |  | 30,073              | 
|Accumulated other comprehensive income                     |  | 5                   | 
|                                                           |  |                     | 
|T
  o t a l  shareholders equity                          |  | 75,646              | 
|                                                           |  |                     | 
|                                                           |  | 120,603             | 
|                                                           |  |                     | 

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

F-4

---

---

RETALIX LTD.
CONSOLIDATED STATEMENTS OF INCOME

|                                                                       |  | Year ended December 31                        |  
|---------------------------------------------------------------------- |  | --------------------------------------------- | -
|                                                                       |  |                                               |  
|                                                                       |  | 2003                                          |  
|                                                                       |  |                                               |  
|                                                                       |  | U.S. $ in thousands
  (except per share data) |  
|                                                                       |  |                                               |  
|                                                                       |  |                                               |  
|REVENUES(note 14a):                                                    |  |                                               |  
|Product sales                                                          |  | 58,432                                        |  
|Services and projects                                                  |  | 33,625                                        |  
|                                                                       |  |                                               |  
|T
  o t a l  revenues                                                  |  | 92,057                                        |  
|                                                                       |  |                                               |  
|COST OF REVENUES:                                                      |  |                                               |  
|Cost of product sales                                                  |  | 16,576                                        |  
|Cost of services and projects                                          |  | 12,440                                        |  
|                                                                       |  |                                               |  
|T
  o t a l  cost of revenues                                          |  | 29,016                                        |  
|                                                                       |  |                                               |  
|GROSS PROFIT                                                           |  | 63,041                                        |  
|                                                                       |  |                                               |  
|OPERATING INCOME (EXPENSES):                                           |  |                                               |  
|Research and development expenses - net                                |  | (18,344                                       | )
|Selling and marketing expenses                                         |  | (21,542                                       | )
|General and administrative expenses
  (note 15a)                       |  | (13,345                                       | )
|Other general income (expenses) - net
  (note 15c)                     |  | (62                                           | )
|                                                                       |  |                                               |  
|T
  o t a l  operating expenses                                        |  | (53,293                                       | )
|                                                                       |  |                                               |  
|INCOME FROM OPERATIONS                                                 |  | 9,748                                         |  
|                                                                       |  |                                               |  
|FINANCIAL EXPENSES - net (note 15b)                                    |  | (95                                           | )
|                                                                       |  |                                               |  
|GAIN ARISING FROM ISSUANCE OF SHARES BY
       A SUBSIDIARY(note
  2b) |  | 1,068                                         |  
|                                                                       |  |                                               |  
|OTHER EXPENSES                                                         |  |                                               |  
|                                                                       |  |                                               |  
|INCOME BEFORE TAXES ON INCOME                                          |  | 10,721                                        |  
|                                                                       |  |                                               |  
|TAXES ON INCOME(note 10)                                               |  | 2,639                                         |  
|                                                                       |  |                                               |  
|INCOME AFTER TAXES ON INCOME                                           |  | 8,082                                         |  
|                                                                       |  |                                               |  
|SHARE IN LOSSES OF AN ASSOCIATED COMPANY                               |  | 90                                            |  
|                                                                       |  |                                               |  
|MINORITY INTERESTS IN LOSSES OF                                        |  |                                               |  
|SUBSIDIARIES                                                           |  | 288                                           |  
|                                                                       |  |                                               |  
|NET INCOME                                                             |  | 8,280                                         |  
|                                                                       |  |                                               |  
|EARNINGS PER SHARE(note 15d):                                          |  |                                               |  
|                                                                       |  |                                               |  
|Basic                                                                  |  | 0.67                                          |  
|                                                                       |  |                                               |  
|Diluted                                                                |  | 0.63                                          |  
|                                                                       |  |                                               |  
|WEIGHTED AVERAGE NUMBER OF SHARES USED                                 |  |                                               |  
|IN
  COMPUTATION OF EARNINGS PER                                       |  |                                               |  
|SHARE - in
  thousands(note 15d):                                      |  |                                               |  
|                                                                       |  |                                               |  
|Basic                                                                  |  | 12,323                                        |  
|                                                                       |  |                                               |  
|Diluted                                                                |  | 13,083                                        |  
|                                                                       |  |                                               |  

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

F-5

---

---

RETALIX LTD.STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY

|                                                                                                                  |  | Share capital                            |  |        |  |                                |  |                                              |  |  |      
|----------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- |  | ------ |  | ------------------------------ |  | -------------------------------------------- |  |  | -----
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      
|                                                                                                                  |  | Ordinary shares                          |  |        |  |                                |  |                                              |  |  |      
|                                                                                                                  |  |                                          |  |        |  |                                |  | Accumulated
  other
  comprehensive
  income |  |  |      
|                                                                                                                  |  | Number of
  shares in
  thousands        |  | Amount |  | Additional
  paid-in
  capital |  | retained
  earnings                          |  |  | Total
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      
|                                                                                                                  |  | U . S .    $    i n    t h o u s a n d s | 
|                                                                                                                  |  |                                          | 
|BALANCE AT JANUARY 1, 2001                                                                                        |  | 11,313                                   |  | 3,331  |  | 26,174                         |  | 12,324                                       |  |  |      
|CHANGES DURING 2001:                                                                                              |  |                                          |  |        |  |                                |  |                                              |  |  |      
|Net
  income                                                                                                      |  |                                          |  |        |  |                                |  | 3,764                                        |  |  |      
|Issuance
  of share capital in respect of acquisition of a subsidiary                                             |  | 153                                      |  | 36     |  | *1,907                         |  |                                              |  |  |      
|Issuance
  of share capital to employees resulting from
            exercise of
  options                         |  | 255                                      |  | 60     |  | *1,145                         |  |                                              |  |  |      
|Surplus
  arising from issuance of options                                                                        |  |                                          |  |        |  | 9                              |  |                                              |  |  |      
|Deferred
  compensation related to employee stock option plan                                                     |  |                                          |  |        |  | 29                             |  |                                              |  |  |      
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      
|BALANCE AT DECEMBER 31, 2001                                                                                      |  | 11,721                                   |  | 3,427  |  | 29,264                         |  | 16,088                                       |  |  |      
|CHANGES DURING 2002:                                                                                              |  |                                          |  |        |  |                                |  |                                              |  |  |      
|Net
  income                                                                                                      |  |                                          |  |        |  |                                |  | 5,705                                        |  |  |      
|Issuance
  of share capital in respect of acquisition of minority
            interest in a
  subsidiary          |  | 5                                        |  | 1      |  | *65                            |  |                                              |  |  |      
|Issuance
  of share capital to employees resulting from exercise of options                                       |  | 267                                      |  | 55     |  | *1,923                         |  |                                              |  |  |      
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      
|BALANCE AT DECEMBER 31, 2002                                                                                      |  | 11,993                                   |  | 3,483  |  | 31,252                         |  | 21,793                                       |  |  |      
|CHANGES DURING 2003:                                                                                              |  |                                          |  |        |  |                                |  |                                              |  |  |      
|Net
  income                                                                                                      |  |                                          |  |        |  |                                |  | 8,280                                        |  |  |      
|Differences
  from translation of non dollar currency
            financial
  statements of an associated company |  |                                          |  |        |  |                                |  |                                              |  |  | 5    
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      
|Comprehensive
  income                                                                                            |  |                                          |  |        |  |                                |  |                                              |  |  |      
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      
|Surplus
  arising from issuance of options granted to non-employee                                                |  |                                          |  |        |  | 368                            |  |                                              |  |  |      
|Gain
  on issuance of share capital of a newly formed associated
            company to a
  third party           |  |                                          |  |        |  | 69                             |  |                                              |  |  |      
|Issuance
  of share capital in respect of acquisition of minority
            interest in a
  subsidiary          |  | 13                                       |  | 3      |  | *135                           |  |                                              |  |  |      
|Issuance
  of share capital to employees resulting from exercise of options                                       |  | 971                                      |  | 218    |  | *8,939                         |  |                                              |  |  |      
|Tax
  benefits relating to employees and other option grants                                                      |  |                                          |  |        |  | 1,101                          |  |                                              |  |  |      
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      
|BALANCE AT DECEMBER 31, 2003                                                                                      |  | 12,977                                   |  | 3,704  |  | 41,864                         |  | 30,073                                       |  |  | 5    
|                                                                                                                  |  |                                          |  |        |  |                                |  |                                              |  |  |      

* Net of share issuance expenses.

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

F-6

---

---

(Continued) - 1

RETALIX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                    |  | Year ended
  December 31 |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -
|                                                                                                                    |  |                          |  
|                                                                                                                    |  | 2003                     |  
|                                                                                                                    |  |                          |  
|                                                                                                                    |  | U.S. $ in
  thousands    |  
|                                                                                                                    |  |                          |  
|                                                                                                                    |  |                          |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                               |  |                          |  
|Net income                                                                                                          |  | 8,280                    |  
|Adjustments required to reconcile net
  income to
            net cash provided
  by operating activities:          |  |                          |  
|Minority
  interests in losses of subsidiaries                                                                      |  | (288                     | )
|Depreciation
  and amortization, net                                                                                |  | 2,323                    |  
|Gain
  arising from issuance of shares by a subsidiary                                                              |  | (1,068                   | )
|Share in
  losses of an associated company                                                                          |  | 90                       |  
|Capital
  gain from sale of dealership activity                                                                     |  |                          |  
|Write-off
  of a loan to associated company                                                                         |  |                          |  
|Tax
  benefits relating to employee and other option grants                                                         |  | 1,101                    |  
|Compensation
  expenses resulting from shares and
                 options
  granted to employees and non employees |  | 307                      |  
|Changes
  in accrued liability for employee
                 rights
  upon retirement                               |  | 934                      |  
|Losses
  (gains) on amounts funded in respect of employee
                 rights
  upon retirement                 |  | (311                     | )
|Deferred
  income taxes - net                                                                                       |  | (2,358                   | )
|Net
  decrease (increase) in marketable securities                                                                  |  | (536                     | )
|Amortization
  of premium (discount) on debt securities                                                             |  | (42                      | )
|Other                                                                                                               |  | 149                      |  
|Changes in operating assets and
  liabilities:                                                                      |  |                          |  
|Decrease
  (increase) in accounts receivable:                                                                       |  |                          |  
|Trade
  (in 2003 including the non-current portion)                                                                 |  | (2,540                   | )
|Other                                                                                                               |  | (387                     | )
|Increase
  (decrease) in accounts payable and accruals:                                                             |  |                          |  
|Trade                                                                                                               |  | (309                     | )
|Employees,
  employee institutions and other                                                                        |  | 5,323                    |  
|Decrease
  (increase) in inventories                                                                                |  | 810                      |  
|Increase
  (decrease) in deferred revenues                                                                          |  | 260                      |  
|                                                                                                                    |  |                          |  
|Net cash provided by operating
  activities - forward                                                               |  | 11,738                   |  
|                                                                                                                    |  |                          |  

F-7

---

---

(Continued) - 2

RETALIX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                           |  | Year ended
  December 31 |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -
|                                                                                                                           |  |                          |  
|                                                                                                                           |  | 2003                     |  
|                                                                                                                           |  |                          |  
|                                                                                                                           |  | U.S. $ in
  thousands    |  
|                                                                                                                           |  |                          |  
|                                                                                                                           |  |                          |  
|Net cash provided by operating
  activities - brought forward                                                              |  | 11,738                   |  
|                                                                                                                           |  |                          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                      |  |                          |  
|Investment in long-term deposit                                                                                            |  |                          |  
|Proceeds from disposal of an investment
  in long-term bank
            deposit                                            |  |                          |  
|Short-term deposits - net                                                                                                  |  | (5                       | )
|Investment in marketable securities
  held to maturity                                                                     |  | (2,364                   | )
|Acquisition of subsidiaries
  consolidated for
            the first time
  (a)                                            |  |                          |  
|Purchase of property, equipment and
  other assets                                                                         |  | (1,008                   | )
|Proceeds from sale of property and
  equipment (in 2002
            including
  proceeds from sale of dealership activity) |  | 150                      |  
|Amounts funded in respect of employee
  rights
            upon retirement,
  net of amounts withdrawn                     |  | (290                     | )
|Long-term loans granted to employees                                                                                       |  | (27                      | )
|Collection of long-term loans to
  employees                                                                               |  | 297                      |  
|                                                                                                                           |  |                          |  
|Net cash provided by (used in)
  investing activities                                                                      |  | (3,247                   | )
|                                                                                                                           |  |                          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                      |  |                          |  
|Long-term bank loans received                                                                                              |  | 2,278                    |  
|Proceeds from issuance of shares of a
  subsidiary
            to a third party                                            |  | 2,458                    |  
|Repayment of long-term bank loans                                                                                          |  | (10,257                  | )
|Issuance of share capital to employees                                                                                     |  | 9,157                    |  
|Short-term bank credit - net                                                                                               |  | 5,556                    |  
|                                                                                                                           |  |                          |  
|Net cash provided by (used in)
  financing activities                                                                      |  | 9,192                    |  
|                                                                                                                           |  |                          |  
|NET INCREASE (DECREASE) IN CASH AND
       CASH EQUIVALENTS                                                                |  | 17,683                   |  
|                                                                                                                           |  |                          |  
|BALANCE OF CASH AND CASH EQUIVALENTS
       AT BEGINNING OF YEAR                                                           |  | 28,410                   |  
|                                                                                                                           |  |                          |  
|BALANCE OF CASH AND
  CASH EQUIVALENTS
       AT END OF YEAR                                                               |  | 46,093                   |  
|                                                                                                                           |  |                          |  

F-8

---

---

(Concluded) - 3

RETALIX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:

|                                                                                     |  | Year ended
  December 31 | 
|------------------------------------------------------------------------------------ |  | ------------------------ | 
|                                                                                     |  |                          | 
|                                                                                     |  | 2003                     | 
|                                                                                     |  |                          | 
|                                                                                     |  | 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)                              |  |                          | 
|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 subsidiary                                                   |  |                          | 
|Goodwill
  and other intangible assets arising on acquisition                        |  |                          | 
|Issuance
  of the Companys share capital                                            |  |                          | 
|                                                                                     |  |                          | 
|                                                                                     |  |                          | 
|                                                                                     |  |                          | 
|                                                                                     |  |                          | 
|(b)     Supplemental
  disclosure of cash flow information -                         |  |                          | 
|cash paid during the year for:                                                       |  |                          | 
|Interest                                                                             |  | 1,123                    | 
|                                                                                     |  |                          | 
|Income tax                                                                           |  | 1,328                    | 
|                                                                                     |  |                          | 

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

|1) | In the years ended December 31, 2003 and 2002, the Company acquired
  shares from minority shareholders of a subsidiary in consideration for the
  issuance of share capital of the Company in the total amount of approximately
  $ 138,000 and $ 66,000, respectively.  See note 2d.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                       
|2) | In the year ended December 31, 2003, the Company recorded $ 79,000
  as capital surplus resulting from issuance of share capital of a newly formed
  associated company to a third party. 
  See note 2b.                                                                             
|   |                                                                                                                                                                                                                                                                                       
|3) | In the year ended December 31, 2001, the Company acquired shares of a
  subsidiary and a loan from its shareholders in consideration for the issuance
  of share capital of the Company in the total amount of approximately $ 1,943,000.  See note 2e.                               

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

F-9

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANTACCOUNTINGPOLICIES

| | a. | General:
| | -- | --------
| |    |         
| |    | 1)      
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    | 2)      
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    | 3)      
| |    |         
| |    |         
| |    |         
| |    |         

F-10

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 1 - SIGNIFICANTACCOUNTINGPOLICIES (continued):
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   

F-11

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 1 - SIGNIFICANTACCOUNTINGPOLICIES (continued):
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   

|                                   |  | %    | 
|---------------------------------- |  | ---- | 
|                                   |  |      | 
|                                   |  |      | 
|Computers and peripheral equipment |  | 33   | 
|Vehicles                           |  | 15   | 
|Office furniture and equipment     |  | 6-10 | 
|Building                           |  | 4    | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Leasehold improvements are amortized by the straight line method over
  the term of the lease, which is shorter than the estimated useful life of the
  improvements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                      
| | h. | Goodwill and other intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Other intangible assets are amortized over a period of five to seven
  years.  As for software development
  costs see l. below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Goodwill is the excess of the purchase price over the fair value of
  identifiable net assets acquired in business combinations accounted for as
  purchases. The Group adopted FAS No. 142, Goodwill and other Intangible
  Assets and FAS No. 141, Business Combinations in their entirety as of
  January 1, 2002 except in respect to an acquisition completed by the Group in
  September 2001 to 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, is no longer being
  amortized to earnings, but instead is subject to periodic testing for
  impairment.

F-12

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANTACCOUNTINGPOLICIES (continued):

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

F-13

---

---

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 1 - SIGNIFICANTACCOUNTINGPOLICIES(continued):
|--------------------------------------------------
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  

F-14

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| |    | The Group recognizes revenues related to the delivered products and
  services only if: (1) the revenue recognition criteria are met, as above; (2)
  any undelivered products or services are not essential to the functionality
  of the delivered products or services; (3) payment for the delivered products
  or services is not contingent upon delivery of the remaining products or
  services; (4) the Group has an enforceable claim to receive the amount due in
  the event it does not deliver the undelivered products or services; and (5)
  there is evidence of the fair value for each of the undelivered products or
  services.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | With respect to multiple element arrangements, the Group generally
  uses the residual method to recognize revenues when evidence of the fair
  value of all undelivered elements exists. Under the residual method, the fair
  value of the undelivered elements (the service elements, such as customer
  software change requests and maintenance) based on vendor-specific objective
  evidence (VSOE) is deferred and the remaining portion of the arrangement
  fee is allocated to the delivered elements (i.e., software license).                                                                                                      
| |    | The Group determines VSOE of the fair value of the service elements
  revenues based upon its recent pricing for those services when sold
  separately. VSOE of the fair value of maintenance services may also be
  determined based on a substantive maintenance renewal clause, if any, within
  a customer contract.                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Whenever the Groups payment terms in a certain transaction exceed
  the Groups normal and customary payment terms, revenue is recognized when
  payments come due.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Group does not grant a right of return on products sold to
  customers and resellers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Deferred revenue primarily relates to software maintenance agreements
  billed to customers for which the services have not yet been provided and
  advances from customers for services that have not yet been provided.                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | l. | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-15

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| | m. | Issuance of shares by a subsidiary and an
  investee company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Capital gains arising from the issuance of shares by investee
  companies to third parties are carried to income on a current basis. Capital
  gains arising from the issuance of shares by an associated company to the
  extent that the issuing company is a newly formed company are carried to
  additional paid in capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | n. | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The allowance for doubtful accounts is determined for specific debts
  doubtful of collection. In determining the allowance for doubtful accounts,
  the Group considers, among other things, its past experience with such
  customers, the economic environment, the industry in which such customers
  operates, financial information available on such customers, etc.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | o. | Earnings per share (EPS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Basic EPS is computed by dividing net income 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. The options of a subsidiary have no effect on the
  Companys diluted EPS since their effect on the subsidiarys EPS is
  anti-dilutive. As to the data used in the per share computation, see note
  15d.                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | p. | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Comprehensive income, presented in shareholders equity, includes, in
  addition to net income, currency translation adjustments of non-dollar
  currency financial statements of an associated company (accumulated balance
  at December 31, 2003 of $ 5,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | q. | Stock based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Group accounts for employee stock-based compensation in
  accordance with Accounting Principles Board Opinion (APB) No. 25,
  Accounting for Stock Issued to Employees and related interpretations. In
  accordance with FAS 123, Accounting for Stock-Based Compensation (FAS
  123), the Group discloses pro-forma information on the net income and earning
  (loss) per share assuming the Group had accounted for employee stock option
  grants using the fair value-based method defined in FAS 123. The Company
  accounts for equity awards issued to non-employees in accordance with the
  provision of FAS 123, and EITF No 96-18, Accounting for Equity Instruments
  that are Issued to other than Employee for Acquiring or in Conjunction with
  Selling Goods or Services and related interpretations.

F-16

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| |  | The following table illustrates the effect on net income and earnings
  (loss) per share assuming the Group had applied the fair value recognition
  provisions of FAS 123 to its stock-based employee compensation:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                       |  | Year ended December 31                     |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | -
|                                                                                                                       |  |                                            |  
|                                                                                                                       |  | 2003                                       |  
|                                                                                                                       |  |                                            |  
|                                                                                                                       |  | U.S. $ in thousands, except per share data |  
|                                                                                                                       |  |                                            |  
|                                                                                                                       |  |                                            |  
|Net income, as reported                                                                                                |  | 8,280                                      |  
|                                                                                                                       |  |                                            |  
|Add - stock based employee compensation
       expense (income), included in reported
       net income                |  | (63                                        | )
|Deduct - stock based employee compensation
       expense determined under the fair value
       method for all awards |  | (1,911                                     | )
|                                                                                                                       |  |                                            |  
|Pro forma net income (loss)                                                                                            |  | 6,306                                      |  
|                                                                                                                       |  |                                            |  
|                                                                                                                       |  |                                            |  
|Earnings (loss) per share:                                                                                             |  |                                            |  
|                                                                                                                       |  |                                            |  
|Basic - as
  reported                                                                                                  |  | 0.67                                       |  
|                                                                                                                       |  |                                            |  
|Basic - pro
  forma                                                                                                    |  | 0.51                                       |  
|                                                                                                                       |  |                                            |  
|Diluted - as
  reported                                                                                                |  | 0.63                                       |  
|                                                                                                                       |  |                                            |  
|Diluted - pro
  forma                                                                                                  |  | 0.48                                       |  
|                                                                                                                       |  |                                            |  

| | r. | Advertising expenses                                                                                                                                                                                                                                                                                                                             
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                  
| |    | Advertising expenses are charged to selling and marketing expenses as
  incurred. Advertising expenses totaled $ 938,000, $ 456,000 and
  $ 430,000 in the years ended December 31, 2003, 2002, and 2001,
  respectively.                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                  
| | s. | Derivative financial instruments                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                  
| |    | The Company has only limited involvement with foreign exchange
  derivative financial instruments (forward exchange contracts). These
  contracts do not qualify for hedge accounting under U.S. GAAP. Being so,
  changes in the fair value of derivatives are carried to the statements of
  income and included in financial expenses - net.

F-17

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| | u. | Sale of receivables                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The Company
  factors some of its trade receivables. The factoring is effected through
  banks, on a non-recourse basis. The transfer of a trade receivable is
  recorded by the Company as a sales transaction under the provisions of FAS No.140, Accounting for Transfers and Servicing of Financial Assets and
  Extinguishments of Liabilities. The resulting costs are charged to
  financial expenses - net, as incurred. The expenses resulting from these sales
  in the year ended December 31, 2003 amounted to $887,000 and were charged as
  financial expenses.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | u. | Recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

1)          FIN
46 and FIN 46 (revised)

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 (VIEs) 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.

Since issuing FIN 46, the FASB has proposed
various amendments to the Interpretation and has deferred its effective dates.
Most recently, in December 2003, the FASB issued a revised version of FIN 46 (FIN
46-R), which also provides for a partial deferral of FIN 46. This partial
deferral established the effective dates for public entities to apply FIN 46
and FIN 46-R based on the nature of the VIE and the date upon which the public
company became involved with the VIE. In general, the deferral provides that
(1) for VIE created before February 1, 2003, a public entity must apply FIN
46-R at the end of the first interim or annual period ending after March 15,
2004, and may be required to apply FIN 46 at the end of the first interim or
annual period ending after December 15, 2003, if the VIE is a special purpose
entity, and (2) for VIEs created after January 31, 2003, a public company must
apply FIN 46 at the end of the first interim or annual period ending after
December 15, 2003, as previously required, and then apply FIN 46-R at the end
of the first interim or annual reporting period ending after March 15, 2004. 
To date, the Company has no variable interests in any VIE. Accordingly, the
Company believes that the adoption of FIN 46 and FIN 46-R will not have a
material impact on its financial position, results of operations or cash flows.
In addition, the Company expects that the adoption of the remaining provisions
of FIN 46 in 2004 would not have a material effect on its consolidated results,
financial position or cash flows.

FAS 132 (revised)

In December 2003, the FASB issued FAS No. 132
(revised 2003), Employers Disclosures about Pensions and Other Postretirement
Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of
FASB Statement No. 132 (FAS 132 (revised 2003)). FAS 132 (revised 2003)
revises employers disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. The new rules require additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other postretirement benefit plans.
Part of the new disclosure provisions are effective for 2003 calendar year-end
financial statements, and accordingly have been applied by the Company in these
consolidated financial statements. The rest of the provisions of this
statement, which have a later effective date, are currently being evaluated by
the Company.

F-18

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 2 -
ACQUISITIONS:

| | a. | Pursuant to an agreement signed in 2001 between the Company and a
  minority shareholder of Net Point Ltd. (Net Point), the Company received
  additional shares of Net Point which were held by the minority shareholder in
  consideration for options of the Company valued at $ 9,000. As a result,
  the Company holds 95% of the issued and outstanding share capital of Net
  Point.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | b. | In March 2003 the Company, through its subsidiary Store Alliance.com
  Ltd. (StoreAlliance), together with Lipman Electronic Engineering Ltd. and
  Dai Telecom Ltd. (Dai) established Cell-Time Ltd. (Cell-Time). Cell-Time
  is a provider of on-line services that enables retailers and cellular
  communication providers in Israel, to sell on-line pre-paid cellular air-time
  at retail points of sale. Each of the three parties holds an equal share in
  Cell-Time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | According to the agreement between the parties, Dai has committed to
  invest $ 1.25 million in consideration for its share in Cell-Time and
  the other parties have committed to grant Cell-Time rights to use certain of
  their technologies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The amount to be invested by Dai will be transferred to Cell-Time
  according to terms specified in the agreement. As of December 31, 2003, an
  amount of $400,000 was transferred by Dai to Cell-Time. Since Cell-Time is a
  newly formed entity the gain arising from Dais investment in Cell-Time was
  carried to additional paid in capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The balance of the investment in Cell-Time as of December 31, 2003
  (after taking into account the Groups share in its losses) is approximately
  $53,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | c. | In April 2001, the Company signed an investment agreement with
  Discount Investment Corporation Ltd., establishing the principles governing
  the purchase of 100% of the shares of TradaNet Electronic Commerce Services
  Ltd. (Tradanet), a supplier of electronic commerce services in Israel, by StoreAlliance, in consideration for the
  issuance of 342,254 (11.25%) of the shares of StoreAlliance to Discount
  Investment Corporation Ltd. The value of the shares issued was approximately
  $ 1,331,000 ($3.89 per share). As a result of this investment the
  Companys share in Store Alliance decreased from 66.7% to 59.17%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The excess of cost of investment, in the amount of approximately
  $635,000 was attributed to property and equipment and identified intangible
  assets to be amortized over its useful life (seven years).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | On October 23, 2003, the Company and StoreAlliance, signed an
  agreement with Isracard Ltd. (Isracard). According to the agreement,
  StoreAlliance issued Isracard 454,590 of its shares representing 13% of its
  issued and outstanding share capital in consideration of $2,525,000 ($5.56 per
  share). Under the agreement StoreAlliance issued to Isracard warrants to
  purchase up to 305,973 shares representing following issuance of such shares
  8% of its issued and outstanding share capital and bearing an exercise price
  as stipulated in the agreement. These warrants will expire after 12 months
  from the closing date of the agreement. The number of shares into which the
  warrant can be exercised is subject to the dilution of the Companys share in
  StoreAlliance, which cannot be diluted to less than 50.01%. In case of a
  limited exercise due to the above dilution restrictions, Isracard would have
  an additional 12 months to exercise that part of the warrant that was not
  exercised, under the same terms. In case the Companys share in StoreAlliance is diluted to less than
  50.01% as a result of the issuance of shares to a third party, Isracard would
  be able to exercise the warrant in full.

F-19

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 2 - ACQUISITIONS (continued):

| |    | As a result of the Isracard investment, the Groups
  ownership in StoreAlliance decreased from 59.17% to 51.47% and the Company
  recorded a gain in the amount of $1,068,000 in the statement of income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | As to the employee stock option plan of
  StoreAlliance, see note 9b(2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | d. | In April 2001, the Company converted an inter-company account of
  $450,000 into share capital for an additional 4.34% of the shares of
  PalmPoint Ltd. (PalmPoint). 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 an additional 2.16% of the shares of
  PalmPoint. As a result, the Company 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 the Company and a minority shareholder of PalmPoint, the Company
  received additional shares of PalmPoint which were held by the shareholder.
  As a result, the Company held 93.18% of the shares of PalmPoint.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In 2002, the Company acquired shares from minority shareholders in
  PalmPoint in consideration for the issuance of share capital of the Company
  at a total value of approximately $ 66,000. As a result, the Company held
  96.18% of the shares of PalmPoint.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In February 2003, the Company acquired all the remaining minority
  shareholders shares in PalmPoint in consideration for the issuance of 13,339
  shares of the Company at a total value of approximately $ 138,000 (based
  on the fair market value of the Companys shares). The excess of cost of
  investment in the amount of approximately $ 89,000 was attributed to
  goodwill.                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | e. | In September
  2001, Retalix U.S.A Inc., a subsidiary of the Company acquired 100% of the shares
  of BASS Inc. (BASS) for consideration consisting of  the issuance of share capital of the
  Company at a total value of $ 1,393,000. As part of the acquisition, the Company
  assumed a Bass shareholders loan (to BASS) in the amount of $ 550,000 by issuing
  additional shares in the same amount. The excess of cost of investment in the
  amount of approximately $5,484,000 was attributed to goodwill, identified
  intangible assets to be amortized over their estimated useful lives (three to
  five years) and unfavorable executory contracts to be amortized over the
  contracts terms.

F-20

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 3 - PROPERTY,
PLANT AND EQUIPMENT:

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

|                                                        |  | December 31         | 
|------------------------------------------------------- |  | ------------------- | 
|                                                        |  |                     | 
|                                                        |  | 2003                | 
|                                                        |  |                     | 
|                                                        |  | U.S. $ in thousands | 
|                                                        |  |                     | 
|Computers and peripheral equipment                      |  | 10,747              | 
|Vehicles                                                |  | 448                 | 
|Office furniture and equipment                          |  | 3,845               | 
|Leasehold improvements                                  |  | 1,266               | 
|Land and building                                       |  | 7,096               | 
|                                                        |  |                     | 
|                                                        |  | 23,402              | 
|Less - accumulated depreciation and
       amortization |  | 13,273              | 
|                                                        |  |                     | 
|                                                        |  | 10,129              | 
|                                                        |  |                     | 

|                                                 | b. | As to geographical locations, see note 14b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------ | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                 | c. | Depreciation and amortization expenses totaled $ 1,966,000,
  $ 2,244,000 and $ 2,056,000, in the years ended December 31, 2003,
  2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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 assets, reassessed the useful lives previously assigned to other
  intangible assets and discontinued amortization of goodwill. The Company also
  tested goodwill for impairment by comparing the fair values of the Companys
  reporting units (see below) to their carrying values as of January 1, 2002
  and determined that there was no goodwill impairment at that time. Based on
  this review, as of December 31, 2001, the Company classified $ 23.3
  million as goodwill $ 6.2 million as intangible assets and $ 6.9
  million as liabilities. 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 uses 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 the adoption of FAS 142.                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                 |    | The Company
  conducts the required annual impairment review at December 31 of each year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                 |    | As to
  unfavorable executory contracts assumed in the purchase of certain
  subsidiaries, see note 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-21

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

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

| | b. | Goodwill                                                                                                         
| | -- | -----------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                  
| |    | The changes in
  the carrying amount of goodwill for the years ended December 31, 2003 and
  2002 are as follows:

| |                                                                                                                                                       |  | U.S.                |   | Israel |   | Total  |  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | - | ------ | - | ------ | -
| |                                                                                                                                                       |  |                     |   |        |   |        |  
| |                                                                                                                                                       |  | U.S. $ in thousands |  
| |                                                                                                                                                       |  |                     |  
| |                                                                                                                                                       |  |                     |   |        |   |        |  
| | Balance as of January 1, 2002                                                                                                                         |  | 15,661              |   | 3,410  |   | 19,071 |  
| | Goodwill attributed to business unit
       sold during 2002                                                                                          |  | (35                 | ) |        |   | (35    | )
| |                                                                                                                                                       |  |                     |   |        |   |        |  
| | Balance as of December 31, 2002                                                                                                                       |  | 15,626              |   | 3,410  |   | 19,036 |  
| | Goodwill attributed to business unit
       acquired during 2003                                                                                      |  |                     |   | 89     |   | 89     |  
| | Goodwill attributed to business
       unit of which the Companys
       investment in one of its
       subsidiaries was diluted during
       2003 |  |                     |   | (70    | ) | (70    | )
| |                                                                                                                                                       |  |                     |   |        |   |        |  
| | Balance as of December 31, 2003                                                                                                                       |  | 15,626              |   | 3,429  |   | 19,055 |  
| |                                                                                                                                                       |  |                     |   |        |   |        |  

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

|                                                      |  | Weighted
  average
  amortization
  period
  Years |                     | Original amount |             | Amortized balance |     
|----------------------------------------------------- |  | -------------------------------------------------- | ------------------- | --------------- | ----------- | ----------------- | ----
|                                                      |  |                                                    |                     |                 |             |                  
|                                                      |  |                                                    | December 31         |                 | December 31 |                  
|                                                      |  |                                                    |                     |                 |             |                  
|                                                      |  |                                                    | 2003                |                 | 2002        |                   | 2003
|                                                      |  |                                                    |                     |                 |             |                   |     
|                                                      |  |                                                    | U.S. $ in thousands |                
|                                                      |  |                                                    |                     |                 |            
|                                                      |  |                                                    |                     |                 |            
|Software development costs                            |  |                                                    | 3.0                 |                 |             | 411               |     
|Software rights and web site
       development costs |  |                                                    | 3.0                 |                 |             | 2,139             |     
|Customer base                                         |  |                                                    | 5.6                 |                 |             | 3,838             |     
|Maintenance agreements                                |  |                                                    | 6.0                 |                 |             | 2,360             |     
|Acquired technology                                   |  |                                                    | 4.5                 |                 |             | 1,702             |     
|Distribution rights                                   |  |                                                    | 7.0                 |                 |             | 960               |     
|Other identified intangible
       assets             |  |                                                    | 3.0                 |                 |             | 352               |     
|                                                      |  |                                                    |                     |                 |             |                   |     
|Total                                                 |  |                                                    | 4.9                 |                 |             | 11,762            |     
|                                                      |  |                                                    |                     |                 |             |                   |     

| |  | 2) | Intangible
  assets amortization expenses totaled $ 2,148,000, $ 1,972,000 and $
  1,565,000 in 2003, 2002 and 2001, respectively.  Projected annual amortization expenses are
  approximately $ 1,801,000, $ 1,288,000, $ 668,000,$ 278,000 and $ 44,000 in 2004, 2005, 2006, 2007 and 2008,
  respectively.
| |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

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

| |  | 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, 2001.
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  |  | Year ended
  December 31                        | 
| | -------------------------------- |  | ----------------------------------------------- | 
| |                                  |  |                                                 | 
| |                                  |  | 2003                                            | 
| |                                  |  |                                                 | 
| |                                  |  | U.S. $ In
  thousands
  (except per share data) | 
| |                                  |  |                                                 | 
| |                                  |  |                                                 | 
| | Reported income*                 |  | 8,280                                           | 
| | Add back - goodwill amortization |  |                                                 | 
| |                                  |  |                                                 | 
| |                                  |  |                                                 | 
| | Adjusted net income              |  | 8,280                                           | 
| |                                  |  |                                                 | 
| | Earnings per share:              |  |                                                 | 
| | Basic:                           |  |                                                 | 
| | Reported
  income                |  | 0.67                                            | 
| |                                  |  |                                                 | 
| | Adjusted
  net income            |  | 0.67                                            | 
| |                                  |  |                                                 | 
| | Diluted:                         |  |                                                 | 
| |                                  |  |                                                 | 
| | Reported
  income                |  | 0.63                                            | 
| |                                  |  |                                                 | 
| | Adjusted
  net income            |  | 0.63                                            | 
| |                                  |  |                                                 | 

| |  |  | * | The reported income for 2003 and 2001 includes gains arising from
  issuance of shares by a subsidiary of $ 1,068,000 and $ 2,877,000,
  respectively.
| |  |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 5 - LONG-TERM BANK LOANS:

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

| |                                                           |  | Interest rate as of
  December 31, 2003 |  | December 31         | 
| | --------------------------------------------------------- |  | --------------------------------------- |  | ------------------- | 
| |                                                           |  |                                         |  |                     | 
| |                                                           |  | %                                       |  | 2003                | 
| |                                                           |  |                                         |  |                     | 
| |                                                           |  |                                         |  | U.S. $ in thousands | 
| |                                                           |  |                                         |  |                     | 
| |                                                           |  |                                         |  |                     | 
| | U.S Dollars                                               |  | LIBOR* + 0.45 to 0.75                   |  | 5,618               | 
| | Pounds Sterling                                           |  |                                         |  |                     | 
| | Israeli currency                                          |  | Prime** 0.6
     or annual of 6.9      |  | 2,284               | 
| | Loan from shareholders of a subsidiary                    |  | LIBOR*                                  |  | 166                 | 
| |                                                           |  |                                         |  |                     | 
| |                                                           |  |                                         |  |                     | 
| |                                                           |  |                                         |  | 8,068               | 
| | Less - current maturities                                 |  |                                         |  | 3,368               | 
| |                                                           |  |                                         |  |                     | 
| |                                                           |  |                                         |  | 4,700               | 
| |                                                           |  |                                         |  |                     | 
| |                                                           |  |                                         |  |                     | 
| | *     The $ LIBOR rate as of  December 31, 2003 - 1.14 %. | 
| | **   The Prime rate as of December 31, 2003- 6.7 %        | 

F-23

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 5 - LONG-TERM
BANK LOANS
(continued):

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

| |                       |  | 2003                  | 
| | --------------------- |  | --------------------- | 
| |                       |  |                       | 
| |                       |  | U.S. $ in
  thousands | 
| |                       |  |                       | 
| |                       |  |                       | 
| | Second year           |  | 4,534                 | 
| | Third year            |  |                       | 
| | No maturity specified |  | 166                   | 
| |                       |  |                       | 
| |                       |  | 4,700                 | 
| |                       |  |                       | 

NOTE 6 - OTHER LIABILITIES

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

| |                                 |  | 2003                  | 
| | ------------------------------- |  | --------------------- | 
| |                                 |  |                       | 
| |                                 |  | U.S. $ in
  thousands | 
| |                                 |  |                       | 
| |                                 |  |                       | 
| | First year - current maturities |  | 2,439                 | 
| | Second year                     |  | 956                   | 
| | Third year                      |  | 193                   | 
| |                                 |  |                       | 
| |                                 |  | 3,588                 | 
| |                                 |  |                       | 

NOTE 7- EMPLOYEE RIGHTS UPON RETIREMENT:

| | a. | Israeli labor law generally requires payment of severance pay upon
  dismissal of an employee or upon termination by the employee of employment in
  certain other circumstances. The severance pay liability of the Israeli
  companies in the Group to their employees, which reflects the undiscounted
  amount of the liability, is based upon the number of years of service and the
  latest monthly salary, and is partly covered by insurance policies and by
  regular deposits with recognized severance pay funds. The amounts funded as
  above are presented among other non-current assets.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Israeli companies in the Group may make withdrawals from the
  amounts funded only for the purpose of paying severance pay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-24

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 7- EMPLOYEE
RIGHTS UPON RETIREMENT (continued):

| | b. | Most of the Companys non-Israeli subsidiaries provide defined
  contribution plans for the benefit of their employees. Under these plans,
  contributions are based on a specified percentage of pay.                                                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                
| | c. | The severance expenses amounted $ 1,249,000, $ 958,000 and $ 758,000
  in the years ended December 31, 2003, 2002 and 2001, respectively. The
  defined contribution plans expenses as mentioned in b. above amounted $
  319,000, $ 172,000 and $ 151,000 in the years ended December 31, 2003, 2002
  and 2001, respectively.
| |    |                                                                                                                                                                                                                                                                                                                                
| | d. | The profits (losses) on the amounts funded totaled $ 311,000, $
  (121,000) and $ 127,000 in 2003, 2002 and 2001, respectively.                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                
| | e. | The Group expects to contribute in the year ending December 31, 2004,
  $ 1,000,000 to the insurance companies in respect of its severance pay
  obligation.                                                                                                                                                                   

NOTE 8 - COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES:

| | a. | Commitments
| | -- | -----------
| |    |            
| |    | 1)         
| |    |            
| |    |            
| |    |            
| |    |            

|                         |  | U.S. $
  in
  thousands | 
|------------------------ |  | ----------------------- | 
|                         |  |                         | 
|                         |  |                         | 
|Year ending December 31: |  |                         | 
|2004                     |  | 1,157                   | 
|2005                     |  | 994                     | 
|2006                     |  | 914                     | 
|2007                     |  | 523                     | 
|2008                     |  | 523                     | 
|Thereafter               |  | 783                     | 
|                         |  |                         | 
|                         |  | 4,894                   | 
|                         |  |                         | 

| |  |    | Rental expenses totaled $ 1,504,000, $ 1,237,000 and $ 1,059,000
  in the years ended December 31, 2003, 2002 and, 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 2) | Effective April 1, 1998, the Companys Chief Executive Officer (the
  CEO) and the previous Vice President in charge of planning and control (the
  VPP) - both related parties and shareholders- were entitled to receive a
  bonus subject to the Companys attaining certain performance milestones.  For the first $ 1,000,000 of the Companys
  net income,  each was entitled to a
  bonus of $ 65,000 and for every subsequent $ 1,000,000 of net income
  -$ 5,000 less than the entitlement in respect of the previous $1,000,000,
  but not less than a bonus of $ 35,000 for every million over the seventh
  million of net income.

F-25

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

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

| |    |                                                     | In addition, according to the same arrangement, the CEO and the VPP
  are entitled each to options to be granted beginning each calendar year,
  equal to 1% of the Companys issued share capital per each grantee for each
  year. The exercise price of the options is equal to the closing market price
  of the shares at the day preceding the grant date. The options are blocked
  over three years from grant date, and become exercisable in three equal
  portions at the end of each year during said three-year period. As of June
  30, 2001, the VPP ceased to be employed by the Company and accordingly has
  not been entitled to the benefits outlined above since that date.                                                                                                                                                                                                                                                                                                                                    
| | -- | --------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 3)                                                  | Royalty commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                     | The Company and some of its subsidiaries are committed to pay the
  Government of Israel royalties on revenues derived from certain products, the
  research and development of which, is partly financed by royalty-bearing
  Government participations.   These
  funding programs, are managed by the Israeli government within the jurisdiction
  of The Ministry of Commerce and Industry and specifically by the Office of
  the Chief Scientist. Under the terms of these funding programs, royalties of
  2%-5% are payable on sales of products developed under such funding programs,
  up to 100%-150% of the amount of funding received  (dollar linked and bearing annual interest at the LIBOR rate).
  Payment of royalties on account of 
  development projects funded as above is conditional upon the ability
  to generate revenues from products developed under such projects.
  Accordingly, the Group is not obligated to pay any royalties on account of
  funded projects which fail to generate revenues.
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                     | As of December 31, 2003, the maximum royalty amount payable by
  the Group on account of projects funded under the Office of the Chief
  Scientist is $ 3,711,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | b. | Contingent liabilities                             
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Law suits against the Company and its subsidiaries:
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 1)                                                  | In August 2000, the Company, together with
  its subsidiary P.O.S. (Restaurant Solutions) Ltd., (PRS), filed a claim
  with the Tel-Aviv District Court for injunctions, accounting records and
  damages (evaluated, for the purpose of computing court fees, at NIS
  3,000,000, or approximately $660,000) against two former employees and
  directors of PRS who currently own the minority interest in PRS. This claim
  alleges that the defendants caused the Company severe damages due to the
  manner of their conduct as employees and directors of PRS and by developing
  software that infringed on the Companys rights.  In January 2003, upon motion of the defendants, the District
  Court transferred the case to the Labor Court. The Company has filed an
  appeal with the Supreme Court of Israel to reverse this decision, which is
  currently pending the decision of the Supreme Court.                                                                                                              
| |    |                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                     | In April 2001, these minority shareholders
  of PRS filed a claim in the Tel-Aviv District Court against PRS and against
  the Company in the amount of approximately $500,000 in respect of sums they
  claim they are entitled to as shareholders of PRS. In addition, they filed a
  motion that the claim be recognized as a derivative
  claim of PRS against the Company for payment of an alleged debt in the amount
  of approximately $3,500,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-26

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

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

| |  |    | In March 2003, the Company filed an amended
  statement of defense as well as a counterclaim. In July 2002, directors of
  PRS appointed by these minority shareholders filed a motion in the Tel-Aviv
  District Court against PRS and its other directors, requesting a court order
  to disclose certain information that will enable them to establish the sum of
  a debt claimed by the Company from PRS.                                                                                                                                                                             
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | The Companys management believes that it
  has meritorious defenses against these claims and that the claims will not
  have a material effect on its consolidated financial statements. The
  Companys management is unable to estimate the outcome of these claims. No
  provision has been made in these consolidated financial statements in respect
  of these claims.                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 2) | In 1998, prior to the acquisition of Retail
  Control Systems Inc. (R.C.S.) by the Company, a legal claim was filed
  against R.C.S. by a customer for an amount of approximately $1,300,000, including
  consequential damages and loss of revenue. The claim alleges that R.C.S.
  breached its contractual obligation to the claimant and fraudulently
  misrepresented facts concerning the product sold to the claimant.                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | An additional legal claim filed against
  R.C.S. prior to its acquisition by the Company, by a dealer who sold one of
  R.C.S.s products early in 1994, states that promised features and
  enhancements were never delivered. The damages claimed in this suit are in
  excess of $200,000.                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | These claims are handled by R.C.S.s Errors
  and Omissions insurers. The limit of liability of the Companys relevant
  Errors and Omissions insurance was $1,000,000 per claim and in aggregate. The
  management of R.C.S. is of the opinion that it has meritorious defenses
  against these claims and believes that they will not have a material effect
  on its financial statements. No provision has been made in these consolidated
  financial statements in respect of these claims.                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 3) | In December 2003, a legal claim for an
  amount of approximately $150,000 was filed 
  against the Companys subsidiary Retalix U.S.A. Inc. by a local
  customer. The claim is for damages allegedly caused by system and network
  software not operating as warranted by BASS in 1998 (prior to the Companys
  acquisition of BASS). The Company believes that Retalix U.S.A. Inc. has
  meritorious defenses against this claim and is unable to estimate the outcome
  of the claim. No provision has been made in these consolidated financial
  statements in respect of this claim.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 4) | In December 2002, a legal claim for the
  total amount of approximately $240,000 was filed against the Companys
  subsidiary PalmPoint, by a local customer. The claim alleges damages caused
  by services and products not duly provided by PalmPoint. In February 2003,
  PalmPoint filed a statement of defense that rejects the claim in its
  entirety.                                                                                                                                                                                                                              
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | The management of PalmPoint is of the
  opinion that PalmPoint has meritorious defenses against the claims. No
  provision has been made in these consolidated financial statements in respect
  of this claim.                                                                                                                                                                                                                                                                                                                                                                             

F-27

---

---

RETALIX
LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

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

| |    | 5)                                                                                                                        | In October 2003, Leumi Card Ltd. (Leumi Card),
  by letters addressed to StoreAlliance and its directors, complained  that StoreAlliance breached an
  understanding it allegedly had with Leumi Card in regard to the execution of
  a transaction  involving an investment
  by Leumi Card in StoreAlliance and further business cooperation between the
  parties. To date, no legal procedures have been instituted against
  StoreAlliance in connection with this claim. Based on the advice of the
  Companys legal counsel, the management of the Company is of the opinion that
  the Company has meritorious defenses against the claim. At this stage the
  Companys management and legal counsel are unable to estimate the outcome of
  this complaint. Furthermore, the management of the Company believes that the
  claim will not have a material effect on its financial statements. No
  provision has been made in these consolidated financial statements in respect
  of this claim.
| | -- | ------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                           | In addition, in November, 2003, Leumi Card
  filed a legal claim against Cell-Time - an associated company, alleging that
  Cell-Time has breached an understanding it had with the claimant
  regarding  business cooperation
  between the parties and in addition that Cell-Time conducted negotiations in
  regard to the above cooperation with the claimant, in an improper manner.
  Furthermore, Leumi Card requested the court to enforce a draft contract
  exchanged between the parties as a binding agreement and to cancel an
  agreement pursuant to such business cooperation signed by Cell-Time with a
  third party. In January 2004, the parties agreed in court to continue
  negotiations in regard to further business cooperation and the claimant
  withdrew its claim without prejudice. To date, no additional proceedings have
  been exercised against Cell-Time in this context.                                                                                                
| |    |                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | c. | Pledges                                                                                                                  
| |    |                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Marketable securities totaling approximately $ 2.5 million as of
  December 31, 2003 are pledged to secure a bank credit.

NOTE9- SHAREHOLDERS EQUITY:

| | a. | Share capital                                                                       
| | -- | ------------------------------------------------------------------------------------
| |    |                                                                                     
| |    | As to shares issued in consideration for acquisitions of
  subsidiaries, see note 2.
| |    |                                                                                     
| | b. | Option plans:                                                                       
| |    |                                                                                     
| |    | 1)                                                                                  
| |    |                                                                                     
| |    |                                                                                     

F-28

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
9 - SHAREHOLDERS EQUITY(continued):

| |  |  | On March 5, 1998, the Companys Board of Directors approved the
  Second 1998 Share Option Plan (the Second 1998 Plan). Under the Second 1998
  Plan (as was amended from time to time) up to 5,000,000 options can be
  granted to employees, directors and consultants of the Company to purchase
  ordinary shares of the Company. Each option is exercisable into one ordinary
  share of the Company. The exercise price of each option under this plan is to
  be at least equal to the fair value of one ordinary share at grant date.
  Unless terminated earlier, the options granted to date under the Second 1998
  Plan will expire under the terms of the option agreements beginning in 2004
  through April 2008.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | At December 31, 2003, 737,271 options remained available for grant
  under the Second 1998 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | Compensation expense in respect of the CEO entitlement to options as
  from July 1, 2002, due to the CEOs change in employment status from an
  employee to a service provider, is determined based on the fair value of the
  options. Total expenses in 2003 and 2002 in respect of these options were
  $ 307,000 and $ 65,000 respectively.                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | Through December 31, 2003, 1,268,816 options had been exercised under
  the Second 1998 Plan at exercise prices ranging between $ 8.25 and $ 16.43.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | Following is a summary of the status of the option plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                                                      |  | 2003      |   | 2002                                  |       | 2001   | 
|--------------------------------------------------------------------- |  | --------- | - | ------------------------------------- | ----- | ------ | 
|                                                                      |  |           |   |                                       |       |        | 
|                                                                      |  | Number    |   | Weighted
  average
  exercise
  price |       | Number | 
|                                                                      |  |           |   |                                       |       |        | 
|                                                                      |  |           |   | U.S.  $                               |       |        | 
|                                                                      |  |           |   |                                       |       |        | 
|Options outstanding at beginning
       of year                       |  | 3,837,329 |   |                                       | 13.36 |        | 
|Changes during the year:                                              |  |           |   |                                       |       |        | 
|Granted
  - at market value                                           |  | 267,499   |   |                                       | 8.87  |        | 
|Exercised                                                             |  | (971,415  | ) |                                       | 9.69  |        | 
|Forfeited                                                             |  | (139,500  | ) |                                       | 10.11 |        | 
|                                                                      |  |           |   |                                       |       |        | 
|Options outstanding at end of
  year                                  |  | 2,993,913 |   |                                       | 14.19 |        | 
|                                                                      |  |           |   |                                       |       |        | 
|Options exercisable at year-end                                       |  | 2,246,396 |   |                                       | 15.83 |        | 
|                                                                      |  |           |   |                                       |       |        | 
|Weighted average fair value of
       options granted during the year |  |           |   |                                       | 2.68  | *      | 
|                                                                      |  |           |   |                                       |       |        | 

| |  |  | * | 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
|---------------------------------------- |  | ----------------------
|                                         |  |                       
|                                         |  | 2003                  
|                                         |  |                       
|                                         |  |                       
|Dividend yield                           |  | 0%                    
|Expected volatility                      |  | 26.08%-52.71%         
|Risk free interest rate                  |  | 2%-7%                 
|Expected holding period (in
      years) |  | 1-3                   

F-29

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
9 - SHAREHOLDERS EQUITY (continued):

| |  | The following table summarizes information about options under the
  Companys Second 1998 Plan outstanding at December 31, 2003:
| |  | ---------------------------------------------------------------------------------------------------------------------------------

| | Options outstanding      | 
| | ------------------------ | 
| |                          | 
| | Exercise
  price
  U.S.$ | 
| |                          | 
| | 8.25                     | 
| | 8.38                     | 
| | 8.75                     | 
| | 9.01                     | 
| | 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
  (approximately 7.7% of the shares of the subsidiary) to be granted to certain
  employees of the Company and the subsidiary. In addition, within the context
  of an investment agreement signed on December 31, 2000, additional 90,000
  options to purchase 90,000 ordinary shares, NIS 0.01 par value, of the
  subsidiary were granted to an investor. All options granted under the
  Subsidiary Plan vest as follows: 33.33% after the first year, another 33.33%
  after the second year and another 33.33% after the third year (in cases where
  the optionee is an employee of the Company or its subsidiary - provided that
  the employee is still employed by the subsidiary or the Company at the date
  of vesting). In addition, the options are not exercisable prior to: (1) the
  consummation of an IPO of the subsidiarys securities, (2) a merger of the
  subsidiary or (3) seven years from the date of grant.
| |  |  | The rights conferred by ordinary shares obtained upon exercise of the
  options will be identical to those of the other ordinary shares of the
  subsidiary. Any option not exercised within 10 years of grant date will
  expire.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | Some of the options under the Subsidiary Plan are subject to the
  terms stipulated by Section 102 of the Israeli Income Tax Ordinance.
  Among other things, the Ordinance provides that the subsidiary will be
  allowed to claim as an expense for tax purposes the amounts credited to the
  employees as a benefit, when the related tax is payable by the employee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-30

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
9 - SHAREHOLDERS EQUITY (continued):

|                           |    |                                                                                                                                                                                            | During 2001, the options under the Subsidiary Plan were granted to
  employees at an exercise price per share of $ 0.01, and to one employee at an
  exercise price of $5.55. Through December 31, 2003, 69,834 of these options
  were forfeited.                                                                                                                                                                                                    
|-------------------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                           |    |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                           |    |                                                                                                                                                                                            | The compensation (income) expenses attributable to the Subsidiary
  Plan - in accordance with the provisions of APB 25 - that have been charged
  against income in the years ended December 31, 2003, 2002 and 2001 were
  ($63,000), $ 53,000 and $ 38,000, respectively.                                                                                                                                                                           
|                           |    |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                           | c. | Dividends:                                                                                                                                                                                
|                           |    |                                                                                                                                                                                           
|                           |    | 1)                                                                                                                                                                                         | In the event that cash dividends are declared by the Company, such
  dividends will be paid in Israeli currency. Under current Israeli
  regulations, any cash dividend in Israeli currency paid in respect of
  ordinary shares purchased by non-residents of Israel with non-Israeli
  currency may be freely repatriated in such non-Israeli currency, at the rate
  of exchange prevailing at the time of conversion.                             
|                           |    |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                           |    | 2)                                                                                                                                                                                         | As of December 31, 2003, the distribution of $ 11.4 million from
  the retained earnings as cash dividends would subject the Company to
  a 25% income tax on the amount distributed. The retained earnings are
  otherwise exempt from the 25% income tax, due to the Companys approved
  enterprise status. Consequently, the amount of profits available for distribution
  will be reduced by the amount of the tax levied, See also note 10g(5).
|                          
|NOTE 10 - TAXES ON INCOME:
|                          
|                           | a. | Tax benefits under the Law for the
  Encouragement of Capital Investments, 1959                                                                                                           
|                           |    |                                                                                                                                                                                           
|                           |    | Some production facilities of the Company as well as facilities of
  one of its Israeli subsidiaries (the Companies) have been granted approved
  enterprise status under the above law.
|                           |    |                                                                                                                                                                                           
|                           |    | The main tax benefits available to the Companies are:                                                                                                                                     
|                           |    |                                                                                                                                                                                           
|                           |    | 1)                                                                                                                                                                                         | Reduced tax rates                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                           |    |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                           |    |                                                                                                                                                                                            | In respect of income derived from their approved enterprises, the
  Companies are entitled to reduced tax rates during a period of seven years
  from the year in which such enterprises first earn taxable income (limited to
  twelve years from commencement of production or fourteen years from the
  date of approval, whichever is earlier).                                                                                                   
|                           |    |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                           |    |                                                                                                                                                                                            | The Company has seven approved enterprises and one of its Israeli
  subsidiaries has one approved enterprise.                                                                                                                                                                                                                                                                                                                                         
|                           |    |                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                           |    |                                                                                                                                                                                            | Income derived from the approved enterprises is tax exempt during the
  first two years of the seven-year tax benefit period as above, and is subject
  to a reduced tax rate of 25% during the remaining five years of benefits.                                                                                                                                                                                                                     

F-31

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 10 - TAXES ON
INCOME (continued):

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | As of December 31, 2003, the periods of benefits relating to five of
  the approved enterprises of the Company have already expired. The periods of
  benefits relating to its other approved enterprises will expire in 2005 and
  2009. The period of benefits relating to the approved enterprises of the
  Company Israeli subsidiary has not yet commenced (it is restricted through
  the year 2013).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | In the event of distribution of cash dividends from income which was
  tax exempt as described above, the Companies would have to pay the 25% income
  taxes in respect of the amount distributed (the amount distributed for this
  purpose includes the amount of the income taxes that applies as a result of
  the distribution (see g(5) below and note 9c(2)).                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Accelerated depreciation                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The Companies are entitled to claim accelerated depreciation in
  respect of equipment used by approved enterprises during the first five tax
  years of the operation of these assets.                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The entitlement to the above benefits is conditional upon the
  Companies fulfillment of the conditions stipulated by the above law, the
  regulations published thereunder 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 Consumer
  Price Index (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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company is an industrial company as defined by this law and as
  such is entitled to certain tax benefits, consisting mainly of accelerated
  depreciation as prescribed by regulations published under the Inflationary
  Adjustments Law, and the right to claim expenses  in connection with issuance of its shares to the public, as
  well as the amortization of patents and certain other intangible property
  rights, as a deduction for tax purposes.                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 corporate rate of 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-32

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
10 -  TAXES ON INCOME (continued):

| | e. | Carryforward tax losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Carryforward tax losses of certain subsidiaries as of December 31,
  2003 and 2002 aggregate approximately $5,003,000 and $ 4,080,000,
  respectively.                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Under the Inflationary Adjustments Law, carryforward tax losses are
  linked to the Israeli CPI.                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Carryforward tax losses in Israel may be utilized indefinitely.                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | f. | Reform of the Israeli tax system                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In 2002, an 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 came 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          |  
| | -------------------------------------------- |  | -------------------- | -
| |                                              |  |                      |  
| |                                              |  | 2003                 |  
| |                                              |  |                      |  
| |                                              |  | U.S. $  in thousands |  
| |                                              |  |                      |  
| | 1)   Provided in respect of
  the following: |  |                      |  
| | Provisions
  for employee rights             |  | 597                  |  
| | Carryforward
  tax losses                    |  | 1,786                |  
| | Doubtful
  accounts                          |  | 632                  |  
| | Research
  and development                   |  | 2,077                |  
| | Other                                        |  | 123                  |  
| |                                              |  |                      |  
| |                                              |  | 5,215                |  
| | L e s s-
  valuation allowance               |  | (1,527               | )
| |                                              |  |                      |  
| |                                              |  | 3,688                |  
| |                                              |  |                      |  

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

| |                        |  | December 31          | 
| | ---------------------- |  | -------------------- | 
| |                        |  |                      | 
| |                        |  | 2003                 | 
| |                        |  |                      | 
| |                        |  | U.S. $  in thousands | 
| |                        |  |                      | 
| |                        |  |                      | 
| | As a current asset     |  | 2,402                | 
| | As a non-current asset |  | 1,286                | 
| |                        |  |                      | 
| |                        |  | 3,688                | 
| |                        |  |                      | 

F-33

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
10 -  TAXES ON INCOME (continued):

| |    | 3)                                                                                         | Realization of the deferred tax assets is conditional upon earning a
  sufficient amount of taxable income in the coming years. The value of the
  deferred tax assets, however, could decrease in future years if estimates of
  future taxable income are reduced.                                                                                                                                                                                              
| | -- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 4)                                                                                         | The deferred taxes are computed at the tax rates of 23%- 43%.                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 5)                                                                                         | As stated in a. above, part of the income of the Company and a
  certain Israeli subsidiary  is tax
  exempt due to the approved enterprise status granted to most of their
  production facilities.  The Company
  has decided to permanently reinvest the amount of such tax exempt income, and
  not to distribute it as dividends (see note 9c).  Accordingly, no deferred taxes have been provided in respect of
  such income in these financial statements.
| |    |                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                            | The amount of income taxes that would have been payable had such tax
  exempt income, earned through December 31, 2003 and 2002, been
  distributed as dividends is approximately $ 2,845,000.                                                                                                                                                                                                                                                                    
| |    |                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | h. | Income (loss) before taxes on income and
  income taxes included in the income statements:

| |                                                                    |  | Year ended December 31 |       
| | ------------------------------------------------------------------ |  | ---------------------- | ------
| |                                                                    |  |                        |       
| |                                                                    |  | 2003                   |       
| |                                                                    |  |                        |       
| |                                                                    |  | U.S. $  in thousands   |       
| |                                                                    |  |                        |       
| | 1)   Income
  (loss) before taxes on income:                       |  |                        |       
| | Israeli                                                            |  |                        | 8,829 
| | Non-Israeli                                                        |  |                        | 1,892 
| |                                                                    |  |                        |       
| |                                                                    |  |                        | 10,721
| |                                                                    |  |                        |       
| |                                                                    |  |                        |       
| | 2)   Income taxes included
            in the income
  statements: |  |                        |       
| | Current:                                                           |  |                        |       
| | Israeli                                                            |  |                        | 2,520 
| | Non-Israeli                                                        |  |                        | 1,280 
| |                                                                    |  |                        |       
| |                                                                    |  |                        | 3,800 
| |                                                                    |  |                        |       
| | In respect of previous years                                       |  |                        |       
| | Israeli                                                            |  |                        | 1,436 
| | Non-Israeli                                                        |  |                        | (239  
| |                                                                    |  |                        |       
| |                                                                    |  |                        | 1,197 
| |                                                                    |  |                        |       
| | Deferred:                                                          |  |                        |       
| | Israeli                                                            |  |                        | (2,320
| | Non-Israeli                                                        |  |                        | (38   
| |                                                                    |  |                        |       
| |                                                                    |  |                        | (2,358
| |                                                                    |  |                        |       
| |                                                                    |  |                        | 2,639 
| |                                                                    |  |                        |       

F-34

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 10 -
TAXES ON INCOME (continued):

| |  | 2) | Following is a reconciliation of the theoretical tax
  expense, assuming all income is taxed at the regular tax rate applicable to
  companies in Israel (36%) and the actual tax expense:
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                                                                                                       |  | Year ended December 31 |       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------
| |                                                                                                                                                                                                                       |  |                        |       
| |                                                                                                                                                                                                                       |  | 2003                   |       
| |                                                                                                                                                                                                                       |  |                        |       
| |                                                                                                                                                                                                                       |  | U.S. $  in thousands   |       
| |                                                                                                                                                                                                                       |  |                        |       
| | Income before taxes on income, as
  reported
       in the income statements                                                                                                                                          |  |                        | 10,721
| |                                                                                                                                                                                                                       |  |                        |       
| | Theoretical tax expense                                                                                                                                                                                               |  |                        | 3,860 
| | L e s s - tax benefits arising
  from
       approved enterprise status                                                                                                                                               |  |                        | 1,147 
| |                                                                                                                                                                                                                       |  |                        |       
| |                                                                                                                                                                                                                       |  |                        | 2,713 
| |                                                                                                                                                                                                                       |  |                        |       
| | Increase (decrease) in taxes resulting from permanent
       differences:                                                                                                                                             |  |                        |       
| | Disallowable
  deductions                                                                                                                                                                                             |  |                        | 249   
| | Tax
  exempt income                                                                                                                                                                                                   |  |                        | (448  
| | Increase (decrease) in taxes
  resulting from different tax
  rates for non-Israeli subsidiaries                                                                                                                      |  |                        | 128   
| | Increase in taxes in respect of
  tax losses incurred in the
       reported year for which deferred taxes were
       not created                                                                                    |  |                        | 594   
| | 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                            |  |                        | (85   
| | Taxes on income adjustments from
  previous years                                                                                                                                                                     |  |                        | (291  
| | 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 |  |                        | (221  
| |                                                                                                                                                                                                                       |  |                        |       
| | Taxes on income for the reported
  years                                                                                                                                                                              |  |                        | 2,639 
| |                                                                                                                                                                                                                       |  |                        |       

| | 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 tax assessments through
  the year ended December 31, 2001.                                                                                                                                                                                                                                                              
| |    | Tamar Industries M.R Electronics 1985 Ltd. received a
  final assessment through the year ended December 31, 1997. Kochav Orion
  Advertising and Information Ltd, Orlan Orion Systems Ltd and PRS received
  final assessments through the year ended December 31, 1999. The other Israeli
  subsidiaries have not been assessed since incorporation.

F-35

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
10 - TAXES ON INCOME (continued):

| |  | In regard to the Companys U.S. subsidiaries, the
  Internal Revenue Services statute of limitations is normally three years
  from the due date of the return, including extended due dates.  The statute of limitations has expired for
  the 1999 Federal income tax returns of these subsidiaries.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 11 - MONETARY BALANCES IN NON-DOLLAR
CURRENCIES:

| |             |  | December 31, 2003               |      
| | ----------- |  | ------------------------------- | -----
| |             |  |                                 |      
| |             |  | Israeli currency                |      
| |             |  |                                 |      
| |             |  | Linked to
  the
  Israeli
  CPI |      
| |             |  |                                 |      
| |             |  | U.S.  $  in thousands           |      
| |             |  |                                 |      
| |             |  |                                 |      
| | Assets      |  |                                 | 470  
| |             |  |                                 |      
| | Liabilities |  |                                 | 3,290
| |             |  |                                 |      

NOTE 12 - SUPPLEMENTARY BALANCE
SHEET INFORMATION:

| |                                                                     |  | December 31          |       
| | ------------------------------------------------------------------- |  | -------------------- | ------
| |                                                                     |  |                      |       
| |                                                                     |  | 2003                 |       
| |                                                                     |  |                      |       
| |                                                                     |  | U.S. $  in thousands |       
| |                                                                     |  |                      |       
| | a.  Accounts receivable:                                            |  |                      |       
| | 1)   Trade:                                                         |  |                      |       
| | Open
  accounts                                                     |  |                      | 23,754
| | Less
  - allowance for doubtful
                    accounts        |  |                      | 2,778 
| |                                                                     |  |                      |       
| |                                                                     |  |                      | 20,976
| |                                                                     |  |                      |       
| | 2)   Other:                                                         |  |                      |       
| | Israeli
  Government departments
                    and
  agencies |  |                      | 167   
| | Employees                                                           |  |                      | 224   
| | Prepaid
  expenses                                                  |  |                      | 957   
| | Sundry                                                              |  |                      | 465   
| |                                                                     |  |                      |       
| |                                                                     |  |                      | 1,813 
| |                                                                     |  |                      |       
| | b.   Inventories:                                                   |  |                      |       
| | Raw
  materials and supplies                                        |  |                      | 229   
| | Products
  in process                                               |  |                      |       
| | Finished
  products                                                 |  |                      | 824   
| |                                                                     |  |                      |       
| |                                                                     |  |                      | 1,053 
| |                                                                     |  |                      |       

F-36

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 12 - SUPPLEMENTARY BALANCE
SHEET INFORMATION (continued):

| | c. | Marketable securities:
| | -- | ----------------------
| |    |                       
| |    | 1)                    

| |  | Amortized
  cost                        |       | Unrealized 
  gains |  | Unrealized
  losses |     | Aggregate
  fair value | 
| |  | --------------------------------------- | ----- | ------------------- |  | ------------------- | --- | ---------------------- | 
| |  |                                         |       |                     |  |                     |     |                        | 
| |  | U . S .   $   I n  
  t h o u s a n d s |      
| |  |                                         |      
| |  |                                         |       |                     |  |                     |     |                        | 
| |  |                                         | 7,570 |                     |  |                     | 178 |                        | 
| |  |                                         |       |                     |  |                     |     |                        | 

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

| |                                    |  | U.S. $  in
  thousands |      
| | ---------------------------------- |  | ---------------------- | -----
| |                                    |  |                        |      
| | 2004                               |  |                        | 4,051
| | 2005                               |  |                        | 425  
| | 2006                               |  |                        | 1,541
| | 2007 and thereafter (through 2010) |  |                        | 1,553
| |                                    |  |                        |      
| |                                    |  |                        | 7,570
| |                                    |  |                        |      

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

| |                                  |  | December 31          |      
| | -------------------------------- |  | -------------------- | -----
| |                                  |  |                      |      
| |                                  |  | 2003                 |      
| |                                  |  |                      |      
| |                                  |  | U.S. $  in thousands |      
| |                                  |  |                      |      
| |                                  |  |                      |      
| | Among current assets:            |  |                      |      
| | Trading                          |  |                      | 984  
| | Held to maturity bond securities |  |                      | 4,051
| |                                  |  |                      |      
| |                                  |  |                      | 5,035
| | As non-current assets            |  |                      | 3,519
| |                                  |  |                      |      
| |                                  |  |                      | 8,554
| |                                  |  |                      |      

| |    | 3)                                                                                                                                                                                                                                                           | As to pledges on securities, see note 8c.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------
| |    |                                                                                                                                                                                                                                                              |                                          
| | d. | Lines of credit                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                             
| |    | The Company, through its U.S. subsidiaries, has several lines of
  credit totaling $ 5,000,000. Interest is payable monthly at the prime
  rate. The total amount drawn down under these lines of credit, as of December
  31, 2003, amounted to $3,500,000.

F-37

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 12 - SUPPLEMENTARY BALANCE
SHEET INFORMATION (continued):

| | e. | Long-term receivables:
| | -- | ----------------------
| |    |                       
| |    | 1)                    

| |                              |  | December 31,
  2003    |    
| | ---------------------------- |  | ---------------------- | ---
| |                              |  |                        |    
| |                              |  | U.S. $  in
  thousands |    
| |                              |  |                        |    
| | Long-term loans to employees |  |                        | 304
| | Long-term trade receivables  |  |                        | 750
| | Less - Unamortized discount* |  |                        | (56
| |                              |  |                        |    
| |                              |  |                        | 998
| |                              |  |                        |    

* The discount is based on imputed interest
of 3%-4 %.

| |  | 2) | Long-term loans to employees 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 granted and collected in
  dollars, bear an annual interest of 4% and are payable up to five years from
  the date of grant.                                

NOTE 13 - DERIVATIVES
AND OTHER FINANCIAL INSTRUMENTS:

| | a. | Concentrations of credit risks - allowance
  for doubtful accounts                                                                                                                                                                                                                                                                                                                                 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | All of the Groups cash and cash equivalents and
  marketable securities as of December 31, 2003 and 2002 were deposited with
  Israeli, U.K. and U.S. banks and with an investment management firm. Such
  securities represent mainly corporate bonds issued by investment grade rated
  corporations. The Group is of the opinion that the credit risk in respect of
  these balances is remote.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Most of the Groups revenues derives 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, 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 notional amount of derivatives at December 31, 2003 is
  approximately $ 2.7 million.                                                                                                                                                                                                                                                                                                          
| |    | As to the fair value of derivatives, see c. below. As to the fair
  value of marketable securities, see note 12c.                                                                                                                                                                                                                                                                                  

F-38

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

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

|                               | c. | Derivative financial instruments                                                                                                                                                                                                                                                                                                              
|------------------------------ | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                               |    |                                                                                                                                                                                                                                                                                                                                               
|                               |    | The Company has only limited involvement with derivative financial
  instruments. The Company carries out transactions involving foreign exchange
  derivative financial instruments (forward exchange contracts). These
  transactions do not qualify for hedge accounting under FAS 133.                                                    
|                               |    |                                                                                                                                                                                                                                                                                                                                               
|                               |    | During 2003, the Company entered into a foreign currency forward
  contract for conversion of pounds sterling into a notional amount in dollars
  of approximately $ 2.5 million. This contract was rolled over three times
  during 2003 and is still outstanding as of December 31, 2003.                                                   
|                               |    |                                                                                                                                                                                                                                                                                                                                               
|                               |    | The fair value of the open contract as of December 31, 2003 is
  $ 90,000 and reflects the estimated amounts that the Group would pay to
  terminate the contract at the reporting date, which was charged to financial
  expenses.                                                                                                           
|                               |    |                                                                                                                                                                                                                                                                                                                                               
|NOTE 14 - SEGMENT INFORMATION:
|                              
|                               | a. | The Company conducts business globally and is managed geographically.
  The Company and its subsidiaries reportable segments are strategic business
  units, which are distinguished by the geographical areas in which they
  generate revenues, based on the location of customers.                                                         
|                               |    |                                                                                                                                                                                                                                                                                                                                               
|                               |    | The Company evaluates performance based on the revenues presented for
  each geographical segment. Segment assets information is not given, since the
  Company does not evaluate performance based on such assets.  Based on the foregoing criteria, the
  Company has the following reportable segments: Israel, U.S.A. and
  International.
|                               |    |                                                                                                                                                                                                                                                                                                                                               
|                               |    | Geographic segments:                                                                                                                                                                                                                                                                                                                          
|                               |    |                                                                                                                                                                                                                                                                                                                                               
|                               |    | Summarized financial information by geographic segment for 2003, 2002
  and 2001 is as follows:                                                                                                                                                                                                                                               

| |                                                                                            |  | Year ended December 31 |       
| | ------------------------------------------------------------------------------------------ |  | ---------------------- | ------
| |                                                                                            |  |                        |       
| |                                                                                            |  | 2003                   |       
| |                                                                                            |  |                        |       
| |                                                                                            |  | U.S. $  in thousands   |       
| |                                                                                            |  |                        |       
| |                                                                                            |  |                        |       
| | Revenues:                                                                                  |  |                        |       
| | U.S.A.                                                                                     |  |                        | 62,621
| | Israel                                                                                     |  |                        | 11,559
| | International*                                                                             |  |                        | 17,877
| |                                                                                            |  |                        |       
| | Total revenue                                                                              |  |                        | 92,057
| |                                                                                            |  |                        |       
| | * The international segment
          includes revenues from
          customers in Europe |  |                        | 13,681
| |                                                                                            |  |                        |       

F-39

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 14 - SEGMENT
INFORMATION(continued):

| | b. | Enterprise-wide disclosure                                                                                                    
| | -- | ------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                               
| |    | The composition of the Groups property, plant and equipment
  according to the physical location of the assets is as follows:

| |        |  | Depreciated
  balance at 
  December 31 |       
| | ------ |  | --------------------------------------- | ------
| |        |  |                                         |       
| |        |  | 2003                                    |       
| |        |  |                                         |       
| |        |  | U.S. $  in thousands                    |       
| |        |  |                                         |       
| |        |  |                                         |       
| | Israel |  |                                         | 7,691 
| | U.S.   |  |                                         | 2,411 
| | U.K.   |  |                                         | 27    
| |        |  |                                         |       
| |        |  |                                         | 10,129
| |        |  |                                         |       

| |    | As for goodwill and other assets, see note 4.                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                            
| | c. | Revenues from customer exceeding 10% of
  total revenues                                                                                                                                                                   
| |    |                                                                                                                                                                                                                            
| |    | In the years ending December 31, 2003 and 2002, no customer generated
  revenues in excess of 10% of the Groups total revenues. In 2001, one
  customer generated revenues in excess of 10% of the Groups total revenues.

NOTE 15 - SELECTED
INCOME STATEMENT DATA:

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

| |                                                                                |  | Year ended December 31 |      
| | ------------------------------------------------------------------------------ |  | ---------------------- | -----
| |                                                                                |  |                        |      
| |                                                                                |  | 2003                   |      
| |                                                                                |  |                        |      
| |                                                                                |  | U.S. $  in thousands   |      
| |                                                                                |  |                        |      
| |                                                                                |  |                        |      
| | The changes in allowance for doubtful
       accounts are composed as follows: |  |                        |      
| | Balance at beginning of year                                                   |  |                        | 1,367
| | Increase during the year                                                       |  |                        | 1,822
| | Bad debt written off                                                           |  |                        | (411 
| |                                                                                |  |                        |      
| | Balance at end of year                                                         |  |                        | 2,778
| |                                                                                |  |                        |      

F-40

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 15 - SELECTED
INCOME STATEMENT DATA(continued):

| |                                                                    |  | Year ended December 31 |     
| | ------------------------------------------------------------------ |  | ---------------------- | ----
| |                                                                    |  |                        |     
| |                                                                    |  | 2003                   |     
| |                                                                    |  |                        |     
| |                                                                    |  | U.S. $  in thousands   |     
| |                                                                    |  |                        |     
| | b.      Financial income
  (expenses) - net:                       |  |                        |     
| | Realized
  gain on marketable
                  securities
  - net |  |                        | 18  
| | Non-dollar
  currency gains (losses) - net                         |  |                        | 374 
| | Interest
  and bank commissions - net                              |  |                        | (487
| |                                                                    |  |                        |     
| |                                                                    |  |                        | (95 
| |                                                                    |  |                        |     
| | c.      Other general income
  (expenses) - net:                   |  |                        |     
| | Gain
  (loss) on sale of property and
                 equipment   |  |                        | (62 
| | Gain
  on sale of dealership activity                              |  |                        |     
| |                                                                    |  |                        |     
| |                                                                    |  |                        | (62 
| |                                                                    |  |                        |     
| |                                                                    |  |                        |     

| | d. | Earnings per share:
| | -- | -------------------

Following
are data relating to the weighted average number of shares - basic and diluted
- used in the computation of EPS:

| |                                                                                                                         |  | 2003                          |        | 2002 |  | 2001   | 
| | ----------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | ---- |  | ------ | 
| |                                                                                                                         |  |                               |        |      |  |        | 
| |                                                                                                                         |  | Number of shares in thousands |       
| |                                                                                                                         |  |                               |       
| | Weighted average number of shares
       issued and outstanding- used in     computation of basic earning per     share |  |                               | 12,323 |      |  | 11,902 | 
| |                                                                                                                         |  |                               |        |      |  |        | 
| | Add incremental shares from assumed
       exercise of options                                                          |  |                               | 760    |      |  | 493    | 
| |                                                                                                                         |  |                               |        |      |  |        | 
| | Weighted average number of
       shares used in computation
       of diluted earnings per share                       |  |                               | 13,083 |      |  | 12,395 | 
| |                                                                                                                         |  |                               |        |      |  |        | 

NOTE 16 - SUBSEQUENT
EVENTS:

| | a. | In January 2004, the Company acquired 100% of the shares of OMI
  International, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | ( OMI) from an unrelated party in consideration of $ 19.1 million,
  comprised of $ 13,700,000 in cash , including estimated direct costs and
  226,040 of the Companys ordinary shares valued at approximately $ 5,410,000,
  subject to adjustments as stipulated in the agreement. The excess of cost of
  investment in the amount of approximately $ 18.8 million was attributed to
  goodwill and identified intangible assets to be amortized over their
  estimated useful lives. OMI is a Texas corporation that provides supply chain
  management solutions and services.

F-41

---

---

RETALIX LTD.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 16 - SUBSEQUENT
EVENTS(continued):

| | b. | In January 2004, the Companys subsidiary, Store Alliance, acquired
  100% of the shares of DemandX Ltd. ( DemandX) in consideration of $ 150,000
  plus the net annual income of DemandX for the year ended December 31, 2003,
  as stipulated in the agreement. DemandX is an Israeli corporation that
  provides supply chain management data analysis services to suppliers and
  institutions.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                      
| | c. | In February 2004, the Companys subsidiary in the U.K. acquired the
  supply chain management distribution activities of OMI International Ltd.
  These activities were acquired in consideration of approximately $ 275,000 in
  cash and in addition 28,188 ordinary shares of the Company.                                                                                                        

F-42

---

---

Exhibit

Retalix Ltd.

Details of
subsidiaries and associated company

As of December
31, 2003

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, Established in 1996.

Retail Control Systems Inc. (R.C.S.) - a U.S.
Corporation, wholly controlled and owned Acquired in September 2000.

BASS Inc.- a U.S. Corporation,
wholly-controlled and owned by Retalix U.S.A. Acquired in September 2001.

StoreNext Retail Technology LLC - 50.01%
controlled and owned. Established in 2002.

Net Point Ltd.- 95% controlled and owned
(from June 2000 through October 2001 - 75.85%).

P.O.S.
(Restaurant Solutions) Ltd. (PRS) - 69% controlled and owned (established in 1996).

PalmPoint Ltd - 100% controlled and owned
(From April 2002 through February 2003 -96.18% (from March 2001 through
September 2001 - 86.48%, from September 2001 through November 2001 - 88.64% and
from November 2001 through April 2002 - 93.18%).

Tamar Industries M.R Electronics 1985 Ltd. -
100% controlled and owned Acquired in 1999.

Store Alliance.Com Ltd.
(StoreAlliance)  - 51.5% controlled
and owned (from April 2001  through
November 1,2003  59.17% and January 1, 2001 through April 2001 - 66.7%).

Kochav Orion Advertising and Information Ltd.
- wholly controlled and owned. Acquired in September 2000.

Orlan Orion Systems Ltd. - wholly controlled
and owned. Acquired in September 2000.

StoreNext Ltd. - wholly controlled and owned
by StoreAlliance Established in November 2001.

TradaNet Electronic Commerce Services Ltd.
(Tradanet) - wholly-controlled and owned by StoreAlliance. Acquired in April
2001.

IREX Israel Retail Exchange Ltd.  wholly
controlled and owned by StoreAlliance. Established in September 2001.

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 and
commenced operations in April 2003.

Cell-Time
Ltd.- an Israeli corporation, 33% controlled and owned by StoreAlliance.
Established in March 2003, and commenced operations in April 2003.

---

---

Registered Independent Auditors Report

To the Board of Directors ofRetalix USA, Inc. and SubsidiaryWarrendale, Pennsylvania

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

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

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

/s/ Nation Smith Hermes Diamond
San Diego, California
February 5, 2002

---

---

Registered 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 the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 Subsidiaries
as 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

---

---

Registered Independent Auditors Report

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

We have audited the accompanying consolidated balance sheet of Retalix Holdings, Inc. and Subsidiaries
(the Company) (see Note 1 to the consolidated financial statements) as
of December 31, 2003, and the related consolidated statements of income,
stockholders equity, and cash flows for the year then ended. The consolidated
financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on the consolidated financial statements based on our
audit. We did not audit the financial statements of StoreNext Retail Solutions,
LLC, a majority-owned subsidiary, which statements reflect total assets of
approximately $5,606,000 as of December 31, 2003, and total revenues of
approximately $22,688,000 for the year 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 the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Retalix Holdings, Inc. and Subsidiaries
as of December 31, 2003, and the consolidated results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Nation Smith Hermes Diamond
San Diego, California
March 31, 2004

---

---

INDEPENDENT AUDITORS REPORT

Board of Directors
BASS, Inc.

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

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

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

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

Certified Public Accountants

Dayton, Ohio
January 18, 2002

---

---

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of
CELL-TIME LTD.

We have
audited the accompanying balance sheet of Cell-Time Ltd. (the Company)
as of December 31, 2003, and the related statement of operations, changes
in shareholders equity and cash flows for the nine months ended
December 31, 2003 (not presented separately herein). These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of
December 31, 2003, and the results of its operations and cash flows for
the nine months ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.

|Tel-Aviv, Israel | /s/ Kost
  Forer Gabbay & Kasierer
  A Member of Ernst & Young Global
|---------------- | ---------------------------------------------------------------------
|March 31,
  2004 |                                                                      

---

---

INDEPENDENT AUDITORS REPORT

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

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

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

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

By: /s/ Grossman Yanak & Ford LLP

Certified Public Accountants

Pittsburgh, PennsylvaniaJanuary 16, 2002

---

---