20-F/A 1 zk85505.htm 20-F/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F/A
Amendment No.1

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

OR;

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

For the fiscal year ended December 31, 2007

OR;

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

OR;

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

Date of event requiring this shell company report _________________

Commission file No. 0-29742

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

ISRAEL
(Jurisdiction of incorporation or organization)

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

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

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

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

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



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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 20,001,382 Ordinary Shares, nominal value NIS 1.00 per share

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

YES o NO x

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

YES o NO x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days:

YES x NO o

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

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

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

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

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

Item 17 o Item 18 o

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

YES o NO x



EXPLANATORY NOTE

We are filing this amendment to our Annual Report on Form 20-F, or Form 20-F/A, solely (1) to include the report of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global, dated July 21, 2006, and (2) to indicate conformed signatures on the report of Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, dated July 2, 2008, as well as on the consents included in Exhibits 15.1 and 15.2. Though the underlying report and signatures had been obtained, these items were inadvertently omitted in our Annual Report on Form 20-F filed with the Securities and Exchange Commission on July 2, 2008, or the Original Form 20-F. Although we have re-filed the entire Original Form 20-F as amended, for clarity, the amendments are limited in scope to such corrections and do not amend, update, or change any other items or disclosures contained in the Original Form 20-F. Except as described in this paragraph, we do not purport by this Form 20-F/A to update any of the information contained in the Original Form 20-F.



TABLE OF CONTENTS

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

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

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

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PART I

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

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

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

ITEM 1 – IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2 – OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

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ITEM 3 – KEY INFORMATION

A. Selected Financial Data

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

Year ended December 31,
2003
2004
2005
2006
2007
(in thousands, except share and per share data)
 
Consolidated statement of income data                        
Revenues:  
   Product sales   $ 58,432   $ 77,494   $ 91,692   $ 73,195   $ 80,511  
   Services    33,625    45,460    95,679    130,549    140,900  





   Total revenues    92,057    122,954    187,371    203,744    221,411  





Cost of revenues:  
   Cost of product sales    16,576    23,246    31,521    36,690    39,132  
   Cost of services    12,440    18,890    34,465    44,562    65,281  





   Total cost of revenues    29,016    42,136    65,986    81,252    104,413  





Gross profit    63,041    80,818    121,385    122,492    116,998  





Operating expenses:  
   Research and development expenses-net    18,344    34,096    44,683    60,375    58,653  
   Selling and marketing expenses    21,542    24,798    33,382    33,495    31,617  
   General and administrative expenses    13,345    15,944    23,131    27,426    27,539  
   Other income (expenses) - net    (62 )  15    -    22    643  





   Total operating expenses    53,293    74,823    101,196    121,318    118,452  





Income (loss) from operations    9,748    5,995    20,189    1,174    (1,454 )
Financial income (expenses)-net    (95 )  85    202    79    1,032  
Gain arising from issuance of shares by an associated  
   companies    1,068    200    83    -    -  





Income (loss) before taxes on income    10,721    6,280    20,474    1,253    (422 )
Tax benefit (taxes on income)    (2,639 )  (1,553 )  (5,912 )  507    435  
Share in losses of an associated company    (90 )  (137 )  (130 )  (57 )  (3 )
Minority interests in losses (gains) of subsidiaries    288    247    189    (425 )  (508 )





Net income (loss)   $ 8,280   $ 4,837   $ 14,621   $ 1,278   $ (498 )





   
Earnings (losses) per share:  
   Basic   $ 0.67   $ 0.31   $ 0.78   $ 0.07   $ (0.02 )





   
   Diluted   $ 0.63   $ 0.29   $ 0.74   $ 0.06   $ (0.02 )





   
Weighted average number of shares used in computation:  
   Basic    12,323    15,746    18,710    19,491    19,851  
   Diluted    13,083    16,552    19,659    20,127    19,851  

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Year ended December 31,
2003
2004
2005
2006
2007
(U.S. $ in thousands)
 
Consolidated balance sheet data                        
Cash and cash equivalents   $ 46,093   $ 91,413   $ 55,692   $ 55,186   $ 22,484  
Working capital    45,786    97,963    68,216    68,659    71,611  
Total assets    121,122    209,952    271,656    279,174    288,590  
Total debt    13,745    13,859    5,288    6,024    1,055  
Shareholders' equity    75,646    156,171    204,417    211,051    218,518  
Capital stock    45,568    120,994    155,174    161,761    172,025  

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

Risks Related To Our Business

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

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

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

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

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

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

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

  changes in pricing by us or our competitors;

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

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

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

  seasonality in customer purchasing and deployment patterns; and

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

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

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

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

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

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

  problems combining the acquired operations, technologies or products;

  unanticipated costs or liabilities;

  diversion of management's attention;

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

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

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

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

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

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

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

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

  rapid technological advances in hardware and software development;

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

  changing customer needs; and

  frequent new product introductions and enhancements.

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

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

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

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

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

  the potential cancellation of orders based on customers’ changing budgetary constraints and changing economic conditions;

  the shift in orders expected in one quarter to another quarter because of the timing of customers’ procurement decisions; and

  the unpredictability of internal acceptance reviews.

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

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

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

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

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

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

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

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

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

9



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

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

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

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

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

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

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

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

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

  requires the execution of implementation procedures in multiple layers of software;

  offers a retailer more deployment options and other configuration choices; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

        Antitrust scrutiny of B2B initiatives may adversely affect our business.

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

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

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

  potentially weak protection of intellectual property rights;

  economic and political instability;

  import or export licensing requirements;

  trade restrictions;

  difficulties in collecting accounts receivable;

  longer payment cycles;

  unexpected changes in regulatory requirements and tariffs;

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

  fluctuations in exchange rates; and

  potentially adverse tax consequences.

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

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

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

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

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

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

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

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

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

Risks Related To Our Location In Israel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Our Ordinary Shares

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

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

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

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

  announcements concerning us or our competitors;

  changes in pricing policies by us or our competitors;

  general market conditions, and changes in market conditions in our industry; and

  the general state of the securities market.

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

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

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

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

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

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ITEM 4 – INFORMATION ON THE COMPANY

A. History and Development of the Company

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

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

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

        Principal Capital Expenditures

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

B. Business Overview

Overview

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

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

  Tier 1 - annual revenues of over $4 billion;

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

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

  Tier 4 – annual revenues of below $50 million.

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

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

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

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

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

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

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

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        Our Market Opportunity

The customer retention battle

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

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

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

The information system needs of food and fuel retailers and distributors

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

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

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

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

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

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

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

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

  quickly and efficiently implement pricing, product and marketing decisions; and

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

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The food and fuel software opportunity

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

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

Our Solutions

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

Our integrated solutions span the retailers’ and distributors’ organization

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

Our solutions provide for both retail operations management and customer management

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

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

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

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

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

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

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

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

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

Our robust solutions provide system resiliency and data redundancy

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

Our next generation ‘thin client’ architecture reduces the cost and physical footprint of IT systems

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

Our enterprise solutions can be easily integrated with existing IT infrastructures

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

Our enterprise solutions can be easily customized, localized and personalized

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

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Our Growth Strategy

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

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

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

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

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

  based on open standards software architecture and are hardware neutral;

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

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

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

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

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

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

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

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

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

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

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

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

Continue broadening market penetration through strategic acquisitions

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

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

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

Our Products

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

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

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

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

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

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

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

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

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

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

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

In-Store Solutions

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

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

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

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

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

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

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

Retalix StoreLine

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

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

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

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

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

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

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

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

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

Retalix Store.net

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

Retalix StorePoint

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

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

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

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

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

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

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

Retalix PocketOffice (RPO)

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

Retalix BackOffice (RBO)

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

Retalix Store

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

Enterprise Solutions

Retalix HQ

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

Retalix InSync ThinStore

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

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

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

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

  Product and Price Management – allows retailers to centrally manage their product pricing according to specific criteria;

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

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

  POS Hosting – assists retailers with POS parameters, keyboards, modifiers, price changes, and other features;

  Sales Analysis –facilitates multiple views of sales, product and store data and provides for customized views of such data according to different users’ needs;

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

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

Retalix Loyalty and Central Promotions

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

  create and sustain customer interest;

  focus on household spending over time;

  optimize value through customer segmentation;

  simplify campaign management;

  manage supplier funding;

  develop built-in cost controls; and

  develop personalized marketing programs.

Supply Chain Management and Warehouse Management Solutions

Retalix TRICEPS Warehouse Management

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

Retalix BICEPS Purchasing Management

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

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Retalix PROMPT Invoice Matching

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

Retalix Yard Management (formerly MDS)

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

Retalix ABS Billing and Order Management

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

Retalix DemandAnalytX

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

Distribution Solutions

Retalix Power Enterprise

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

Retalix Power Warehouse

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

Retalix Power Buy

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

Retalix Power Sell

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

Retalix Power Net

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

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Retalix Dock Scheduling (formerly BGI SmartDock.net)

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

Retalix Traffic Management (formerly BGI TMS)

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

Retalix InSync

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

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

  service oriented architecture (SOA);

  web services;

  Java/J2EE development standard;

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

  interoperability (Unix, Linux, Windows, iSeries, Mainframes); and

  application server independence (IBM WebSphere, Jboss).

        The Retalix InSync solution portfolio currently includes the following:

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

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

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

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

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

SaaS Solutions

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

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Supplier Solutions

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

Professional Services

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

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

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

Customers

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

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

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Recent Significant Acquisitions

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

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

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

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

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

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

The StoreNext Initiatives

StoreNext USA

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

StoreNext Israel

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

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

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

Sales and Marketing

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

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

Direct Sales

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

Marketing Alliances

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

Dealer Sales

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

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

Competition

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

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

  breadth of product offerings;

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  interoperability of solutions and solution components;

  suitability for multi-national, multi-concept retailers;

  quality track record;

  established reputation with key customers;

  products that balance feature/performance requirements with cost effectiveness;

  scope and responsiveness of professional services and technical support;

  retail and business know-how and expertise;

  compatibility with emerging industry standards;

  ease of upgrading and ease of use; and

  timeliness of new product introductions.

C. Organizational Structure

We have the following subsidiaries and related companies:

Subsidiary
Country of
Residence

Proportion of voting
power held (%)

Proportion of ownership
interest held (%)

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

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

(2) Ceased operations.

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

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

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

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

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

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D. Property, Plants and Equipment

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

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

ITEM 4A – UNRESOLVED STAFF COMMENTS

        None.

ITEM 5 – OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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

A. Operating Results

Overview

General

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

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

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

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

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

        Highlights since the beginning of 2005 include:

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

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

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

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

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

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

Application of Critical Accounting Policies and Use of Estimates

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

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

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

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Revenue recognition

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

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

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

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

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

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

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

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

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

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

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

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

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Goodwill and Intangible Assets

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

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

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

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

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

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

Stock based compensation

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

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

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

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

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

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

Tax provision

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

Other non critical accounting policies and additional discussion of accounting characteristics

Our functional currency

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

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

Bad debt and allowance for doubtful accounts

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

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Effects of Prior Year Misstatements

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

Sources of Revenue

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

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

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

Product Sales

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

Services

        Revenues from services consist of:

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

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

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

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

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Multiple element agreements

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

Sales to integrators

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

Sales through resellers

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

Cost of Revenues

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

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

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

Operating Expenses

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

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

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

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

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

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

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

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

Share in Losses of an Associated Company

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

Minority Interests in Losses (Gains) of Subsidiary

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

Operating Results

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

Year ended December 31,
2005
2006
2007
 
Revenues:                
   Product sales    48.9 %  35.9 %  36.4 %
   Services    51.1    64.1    63.6  



       Total revenues    100.0 %  100.0 %  100 %
Cost of revenues:  
   Cost of product sales    16.8 %  18.0 %  17.7 %
   Cost of services    18.4    21.9    29.5  



       Total cost of revenues    35.2 %  39.9 %  47.2 %



Gross profit    64.8 %  60.1 %  52.8  
   Operating expenses:  
     Research and development expenses, net    23.1 %  29.6 %  26.5 %
     Selling and marketing expenses    17.8    16.4    14.3  
     General and administrative expenses    12.3    13.5    12.4  
     Other general expenses, net              0.3  



       Total operating expenses    54.0 %  59.5 %  53.5 %



Income (loss) from operations    10.8    0.6    (0.7 )%
Financial income (expense), net    0.1    -    0.5  



Income (loss) before taxes on income    10.9 %  0.6 %  (0.2 )%
Tax benefit (taxes on income)    (3.2 )  0.2    0.2  
Minority interests in losses (gains) of subsidiaries    0.1    (0.2 )  (0.2 )



       Net income (loss)    7.8 %  0.6 %  (0.2 )%




44



Comparison of 2005, 2006 and 2007

Revenues

Year ended December 31,
% Change
% Change
2005
2006
2007
2005
2006
2007
2006 vs. 2005
2007 vs. 2006
(U.S. $ in millions)
% of total revenues
 
Product sales     $ 91.7   $ 73.2   $ 80.5    49 %  36 %  36 %  (20 )%  10 %
Services    95.7    130.5    140.9    51 %  64 %  64 %  36 %  8 %



   Total revenues   $ 187.4   $ 203.7   $ 221.4                   9 %  9 %




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

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

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

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

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

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

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

Cost of Revenues

Year ended December 31,
% Change
% Change
2005
2006
2007
2005
2006
2007
2006 vs. 2005
2007 vs. 2006
(U.S. $ in millions)
% of corresponding revenues
 
Cost of product sales     $ 31.5   $ 36.7   $ 39.1    34 %  50 %  49 %  16 %  6. 5%
Cost of services    34.5    44.6    65.3    36 %  34 %  46 %  29 %  46 %



   Total cost of revenues   $ 66.0   $ 81.3   $ 104.4          23 %  28




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

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

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

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Operating Expenses

Year ended December 31,
% Change
% Change
2005
2006
2007
2005
2006
2007
2006 vs. 2005
2007 vs. 2006
(U.S. $ in millions)
% of revenues
 
Research and development, net     $ 44.7   $ 60.4   $ 58.7    24 %  30 %  26 .5%  35 %  (3 )%
Selling and marketing    33.4    33.5    31.6    18 %  17 %  14 %  0 %  (6 )%
General and administrative    23.1    27.4    27.5    12 %  13 %  12 %  19 %  0. 4%








   Total operating expenses   $ 101.2   $ 121.3   $ 117.8    54 %  60 %  53 %  20 %  (3 )%









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

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

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

Financial Income, Net

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

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Corporate Tax Rate

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

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

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

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

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

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

B. Liquidity and Capital Resources

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

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

47



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

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

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

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

Bank Debt

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

Pledges

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

Credit Risk

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

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

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

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

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

48



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

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

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

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

Year Ended
December 31,

Israeli Inflation
Rate
%

NIS Devaluation
(Revaluation)
Rate against the
U.S. dollar
%

Israel Inflation
Adjusted for the
Devaluation of the
NIS against the U.S.
dollar
%

 
2003       (1.9 )  (7.6 )  5.7  
2004     1.2    (1.6 )  2.8  
2005     2.4    6.8    4.4  
2006     (0.1 )  (8.2 )  8.1  
2007     3.4    (9.0 )  12.4  

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

49



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

Research and Development

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

Proprietary Rights

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

Grants from the Office of the Chief Scientist

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

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

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

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

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

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

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

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

D. Trend Information

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

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

E. Off Balance Sheet Arrangements

None.

F. Tabular Disclosure of Contractual Obligations

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

Contractual Obligations (U.S. $ in millions)*
Total
Less
than 1
year

1-3
years

4-5 years
More than 5
years

 
Long-Term Debt Obligations (including current maturities)     $ 1.1   $ 0.3   $ 0.5   $ 0.3 $  -  
Operating Lease Obligations (with regard to offices and facilities  
   and vehicles)    10.4    5.3    3.2    1.0    0.9  
Severance pay    5.6    0.5    0.7    0.8    3.6  





Total    17.1    6.1    4.4    2.1    4.5  






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

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ITEM 6 – DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

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

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

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

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

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

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

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

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

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

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

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

        Brian 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 and a director of Redmatch International Ltd. since October 2007. Mr. Cooper holds a B.A. in Economics from Haifa University.

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

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

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

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

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B. Compensation

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

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

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

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

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

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

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

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

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

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

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C. Board Practices

Corporate Governance Practices

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

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

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

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

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

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

Alternate Directors

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

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External Directors

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

  the company;

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

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

        The term affiliation means any of:

  an employment relationship;

  a business or professional relationship maintained on a regular basis;

  control; and

  service as an office holder.

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

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

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

  the total number of shares of non-controlling shareholders that voted against the election of the director does not exceed one percent of the aggregate voting rights in the company.

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

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

Audit Committee

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

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

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

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

Investment Committee

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

Compensation Committee

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

Internal Auditor

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

D. Employees

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

As of December 31,
Category of Activity
2005
2006
2007
 
Research and Development      598    669    432  
Operations    482    554    813  
Marketing    170    187    159  
Finance and Administration    93    119    164  



   Total    1,343    1,530    1,569  




As of December 31,
Geographical Location
2005
2006
2007
 
United States      617    600    607  
Israel    616    783    816  
Europe    93    116    104  
Rest of The World    17    31    42  



   Total    1,343    1,530    1,569  




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

        Certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations, including the Industrialists Associations, are applicable to our employees by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern cost of living increases, recreation pay and other conditions of employment.

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

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

E. Share Ownership

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

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

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

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

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

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

Amount of Shares for
which the Options are
Exercisable

Exercise Price
in U.S.
dollars

Expiration Date
 
176,557  21.86 January 1, 2009
194,090  24.46 January 1, 2010
196,135  16.29 January 1, 2011
200,014  15.58 January 1, 2012

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

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

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

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

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

RSUs to purchase 30,000 of our ordinary shares at an exercise price of $0.25 per share.These RSUs will vest in three equal portions on November 20, 2008 , November 20, 2009 and November 20, 2010

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

Our Share Option Plans

Second 1998 Share Option Plan

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

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

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

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

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

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

2004 Israeli Share Option Plan

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

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

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

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

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

Stock Option Plan of Subsidiaries

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

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

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

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

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

ITEM 7 – MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

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

Name
Number of
ordinary
shares held

Percentage
of
outstanding
ordinary
shares
(1)(2)

 
Ronex Holdings, Limited Partnership (3)(5)      2,353,085    11.6 %
Prisma Investment House Ltd. (4)    1,832,543    9.1 %
Barry Shaked (5)(6)    1,404,806    6.9 %
Brian Cooper (5)    751,485    3.7 %

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

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

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

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

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

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

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

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

B. Related Party Transactions

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

C. Interests of Experts and Counsel

        Not Applicable.

ITEM 8 – FINANCIAL INFORMATION

        See Item 18.

Legal Proceedings

Retail Control Systems Inc.

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

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

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IDS

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

Retalix USA

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

Tamar

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

Other Claims and Disputes

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

Dividend Policy

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

        Significant Changes

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

ITEM 9 – THE OFFER AND LISTING

A. Offer and Listing Details

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

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

High
Low
 
2003     $ 23.19   $ 8.75  
   
2004     24.74    16.45  
   
2005     26.99    20.17  
   
2006     27.07    16.02  
   
2007     23.30    15.67  
   
2006:   
   
First Quarter   $ 26.65   $ 23.54  
   
Second Quarter    27.07    21.03  
   
Third Quarter    22.17    16.50  
   
Fourth Quarter    19.34    16.02  
   
2007:   
   
First Quarter   $ 21.83   $ 17.00  
   
Second Quarter    23.30    19.00  
   
Third Quarter    20.13    15.67  
   
Fourth Quarter    20.91    16.66  
   
2008:   
   
First Quarter   $ 18.18   $ 12.85  
   
Most recent six months:   
   
December 2007   $ 17.60   $ 16.66  
   
January 2008    15.73    12.85  
   
February 2008    18.18    15.82  
   
March 2008    16.18    13.32  
   
April 2008    15.13    13.82  
   
May 2008    16.83    14.05  
   
June 2008, through June 26, 2008    14.54    13.41  

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

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

High
Low
 
2003     NIS101.40 NIS43.25  
   
2004     110.00    73.79  
   
2005     122.40    90.95  
   
2006     123.40    65.39  
   
2007     93.75    61.30  
   
2006:   
   
First Quarter   NIS122.40 NIS 109.00
   
Second Quarter    123.40    95.69  
   
Third Quarter    99.18    73.18  
   
Fourth Quarter    82.08    65.39  
   
2007:   
   
First Quarter   NIS90.12 NIS69.13
   
Second Quarter    93.75    79.77  
   
Third Quarter    84.49    65.03  
   
Fourth Quarter    83.80    61.30  
   
2008:   
   
First Quarter    65.30    45.48  
   
Most recent six months:   
   
December 2007    68.59    61.30  
   
January 2008    60.05    49.14  
   
February 2008    6.30    58.94  
   
March 2008    58.00    45.48  
   
April 2008    53.72    48.16  
   
May 2008    57.08    47.80  
   
June 2008, through June 26, 2008    44.02    49.36  

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

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B. Plan of Distribution

        Not applicable.

C. Markets

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

D. Selling Shareholders

        Not applicable.

E. Dilution

        Not applicable.

F. Expenses of the Issue

        Not applicable.

ITEM 10 – ADDITIONAL INFORMATION

A. Share Capital

        Not applicable.

B. Memorandum and Articles of Association

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

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

Objects and Purposes

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

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

Directors

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

Election of Directors

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

Remuneration of Directors

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

Powers of the Board of Directors

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

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

Dividend and Liquidation Rights

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

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

Redeemable Shares

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

Fiduciary Duties of Office Holders

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

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

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

  all other important information pertaining to these actions.

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

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

  refrain from any activity that is competitive with the company;

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

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

Approval of Certain Transactions Under Israeli Law

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

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

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        Under Israeli law, an extraordinary transaction is a transaction:

  other than in the ordinary course of business;

  otherwise than on market terms; or

  that is likely to have a material impact on the company’s profitability, assets or liabilities.

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

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

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

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

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

  the transaction will increase the relative holdings of a shareholder that holds five percent or more of the company’s outstanding share capital or voting rights or that it will cause any person to become, as a result of the issuance, a holder of more than five percent of the company’s outstanding share capital or voting rights.

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

Changing the Rights Attached to Shares

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

Shareholders Meetings

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

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

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

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Duties of Shareholders

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

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

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

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

Exculpation, Insurance and Indemnification of Office Holders

Exculpation of Office Holders

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

Insurance of Office Holders

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

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

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

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

Indemnification of Office Holders

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

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

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

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

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

Limitations on Exculpation, Insurance and Indemnification

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

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

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

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

  any fine levied against the office holder.

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

Anti-Takeover Provisions; Mergers and Acquisitions

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

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

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

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

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

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C. Material Contracts

        None

D. Exchange Controls

Exchange Controls and Other Limitations Affecting Security Holders

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

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

E. Taxation

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

U.S. Taxation

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

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

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

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

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

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

Distributions on Ordinary Shares

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

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

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

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

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Disposition of Shares

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

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

Passive Foreign Investment Companies

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

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

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

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

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

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

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

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

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

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Backup Withholding

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

Non-U.S. Holders of Ordinary Shares

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

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

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

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

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

Taxation of our U.S. Subsidiaries

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

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

        Israeli Taxation

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

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General Corporate Tax Structure

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

Law for the Encouragement of Capital Investments, 1959

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

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

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

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

Percent of
Foreign Ownership

Rate of
Reduced Tax

Reduced Tax Period
Tax Exemption Period
 
0-25% 25% 5 years 2 years
25-49% 25% 8 years 2 years
49-74% 20% 8 years 2 years
74-90% 15% 8 years 2 years
90-100% 10% 8 years 2 years

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

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

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

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Amendment of the Investments Law

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

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

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

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

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

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

        The amendment will apply to programs in which the year of election under the Investments Law is 2004 or later, unless such programs received Approved Enterprise approval from the Investment Center on or prior to December 31, 2004, in which case the amendment provides that the terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.

Tax Benefits for Research and Development

        Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures in scientific research and development projects, if the expenditures are approved by the relevant Israeli government ministry and the research and development is for the promotion of the enterprise. Such of research and development expenditures not so approved are deductible over a three-year period.

Law for the Encouragement of Industry (Taxes), 1969

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

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

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

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

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

  Accelerated depreciation rates on equipment and buildings.

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

Special Provisions Relating to Taxation Under Inflationary Conditions

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

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

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

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

Israeli Transfer Pricing Regulations

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

Capital Gains Tax Applicable to Resident and Non-Resident Shareholders

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

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

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

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

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

Taxation of Dividends Applicable to Non-Resident Shareholders

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

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

F. Dividends and Paying Agents

        Not applicable.

G. Statements by Experts

        Not applicable.

H. Documents on Display

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

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

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I. Subsidiary Information

        Not applicable.

ITEM 11 – QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Sell
Buy
In millions
In millions
Transaction date
Forward date
 
Pounds Sterling 1.0 $2.0 October 2007 January 2008
New Israeli Shekels 27.8 $7.2 November 2007 February 2008
Euros 0.6 $0.9 October 2007 January 2008
Euros 0.8 $1.2 November 2007 February 2008
Euros 2.8 $4.0 December 2007 February 2008

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

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

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

(In thousands, except percentages)

Maturity
Total
book
value

Total
fair
value

2008
2009-10
2011-36
 
Corporate securities held to maturity bearing fixed     Book value     $ 370   $ 670   $ 987   $ 2,027   $ 2,079  
interest rate (1)   WAYM *    6.28 %  5.43 %  5.40 %  4.92 %     
Marketable Securities (1)   Book value   $ 3,085             $ 3,085   $ 3,085  
    WAY**    4.88 %            4.88 %  4.88  
Dollar linked money market funds and deposits (2)   Book value   $ 15,176             $ 15,176   $ 15,176  
    WAIR***    3.80 %            3.80 %  3.80  
New Israeli Shekels linked Deposits (2)   Book value   $ 2,893             $ 2,893   $ 2,893  
    WAIR***    3.59 %            3.59 %  3.59  
British Pounds Sterling linked Deposits (2)   Book value   $ 435             $ 435   $ 435  
    WAIR***    5.37 %            5.37 %  5.37  
Euro linked deposits (2)   Book value   $ 2,382             $ 2,382   $ 2,382  
    WAIR***    1.17 %            1.17 %  1.17  
Australian Dollars Linked deposits (2)   Book value   $ 1,598             $ 1,598   $ 1,598  
    WAIR***    4.00 %            4.00 %  4.00  





Total   Book value   $ 25,939   $ 670   $ 987   $ 27,596   $ 27,648  
    WAY****    3.74 %  5.43 %  5.40 %  3.79 %     






* Weighted average yield to maturity
** Weighted average yield as per the performance of 2007
*** Weighted average interest rate
**** Weighted average yield
(1) Classified in the consolidated financial statements attached herein as marketable securities and marketable debt securities
(2) Classified in the consolidated financial statements attached herein as cash and cash equivalents

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Foreign Currency Risk

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

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

(in thousands)

Currency
Israeli
currency

Other non-dollar
currency

 
Assets     $ 25,359   $ 35,930  
   
Liabilities   $ 32,132   $ 16,070  

Interest Rate Risk

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

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

ITEM 12 – DESCRIPTION OF SECURITIES OTHER THEN EQUITY SECURITIES

        Not applicable.

PART II

ITEM 13 – DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

        Not applicable.

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

        Not applicable.

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PART III

ITEM 15 – CONTROLS AND PROCEDURES

Disclosure controls and procedures

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

Management’s Annual Report on Internal Control over Financial Reporting.

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

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

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

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

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

Management’s Remediation Initiatives. 

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

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

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

Attestation report of the registered public accounting firm

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

Changes in internal control over financial reporting

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

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 16B. CODE OF ETHICS

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

81



ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

Year Ended December 31,
(U.S. $ in thousands)

2006
2007
 
Audit Fees      1,709    2,024  
Audit Related Fees    67    196  
Tax Fees    150    216  
 


Total    1,926    2,436  



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

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

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

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

        None.

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

        None.

ITEM 17 – FINANCIAL STATEMENTS

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

ITEM 18 – FINANCIAL STATEMENTS

        The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1.

82



ITEM 19 – EXHIBITS

  (a) Financial Statements

  1. Reports of Independent Registered Public Accounting Firm

  2. Consolidated Balance Sheets

  3. Consolidated Statements of Income

  4. Statements of Changes in Shareholders’ Equity

  5. Consolidated Statements of Cash Flows

  6. Notes to Consolidated Financial Statements

  7. Reports of Independent Auditors of Certain Associated Companies

  (b) Exhibits

Exhibit No. Exhibit

1.1 Memorandum of Association of Registrant, as amended (previously filed as an exhibit to Retalix's report on Form 6-K filed on November 2, 2005 and incorporated herein by reference)

1.2 Articles of Association of Registrant, as amended.

4.1 Employment Agreement dated December 1, 1999, between Point of Sale Limited and Danny Moshaioff (previously filed as an exhibit to Retalix's annual report on Form 20-F for the fiscal year ended December 31, 1999 and incorporated herein by reference)

4.2 Agreement dated December 30, 1999, between Point of Sale Limited and the Corex Development Company (C. D. C.) Limited (previously filed as an exhibit to Retalix's annual report on Form 20-F for the fiscal year ended December 31, 1999 and incorporated herein by reference)

4.3 Second 1998 Share Option Plan, as amended.

4.4 2004 Israeli Share Option Plan, as amended.

4.5 Asset Purchase Agreement, dated as of April 1, 2005, among Retalix Ltd., Integrated Distribution Solutions, LLC, certain owners of Integrated Distribution Solutions, LLC, and Retalix SCM, Inc. (previously filed as exhibit 2.1 to Retalix's registration statement on Form F-3 filed on June 2, 2005 and incorporated herein by reference)

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

12.1 Certification required by Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.2 Certification required by Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

15.1 Consent of Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited.

15.2 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.

83



SIGNATURES

        The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf.




Date: July 2, 2008
RETALIX LTD.


By: /s/ Barry Shaked
——————————————
Barry Shaked, President, Chief Executive Officer
and Chairman of the Board of Directors




Date: July 2, 2008

By: /s/ Hugo Goldman
——————————————
Hugo Goldman, Chief Financial Officer

84



RETALIX LTD.
2007 ANNUAL REPORT ON FORM 20-F

INDEX TO THE FINANCIAL STATEMENTS

 

 

 

 

 

Page

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSOLIDATED FINANCIAL STATEMENTS:

 

F – 2

Balance sheets

 

F – 3 – F – 4

Statements of income (loss)

 

F – 5

Statements of changes in shareholders’ equity

 

F – 6

Statements of cash flows

 

F – 7 – F – 9

Notes to consolidated financial statements

 

F – 10 – F – 47

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

 


F – 1




  Kesselman & Kesselman
Certified Public Accountants
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of
RETALIX LTD.

We have audited the accompanying consolidated balance sheets of Retalix Ltd. (“the Company”) and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the two year period ended December 31, 2007. We also have audited the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s Board of Directors and management are responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying ‘Management’s Annual Report on Internal Control over Financial Reporting’ under Item 15. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our integrated audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, as of December 31, 2007, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because of a material weakness in internal control over financial reporting related to an insufficient complement of personnel in one of the Company’s United States subsidiaries with an appropriate level of knowledge, experience and training in the application of generally accepted accounting principles commensurate with the Company’s financial reporting requirements. This material weakness, at the United States subsidiary, resulted in the miscalculation of a customer discount, certain revenue based on percentage of completion accounting and certain commission accruals. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the accompanying ‘Management’s Annual Report on Internal Control over Financial Reporting’ under Item 15. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

As discussed in note 1s to the consolidated financial statements, in 2006 the Company changed the manner in which it accounts for share-based compensation. In addition, as discussed in note 1w to the consolidated financial statements, in 2006 the Company changed the manner in which it accounts for quantifying of prior year misstatements. In addition, as discussed in note 1k to the consolidated financial statements, in 2007 the Company changed the manner in which it accounts for income tax uncertainties.

/s/ Kesselman & Kesselman
A member of PricewaterhouseCoopers International Limited
Tel Aviv, Israel
July 2, 2008

F – 2



RETALIX LTD.
CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

December 31

 

 

 


 

 

 

2007

 

2006

 

 

 


 


 

 

 

U.S. $ in thousands

 

 

 


 

A s s e t s

 

 

 

 

 

 

 

CURRENT ASSETS (note 10)

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

22,484

 

 

55,186

 

Marketable securities (notes 7c; 11b)

 

 

3,455

 

 

4,554

 

Accounts receivable (note 11a)

 

 

 

 

 

 

 

Trade

 

 

81,429

 

 

48,469

 

Other

 

 

5,485

 

 

5,524

 

Inventories

 

 

1,289

 

 

1,154

 

Deferred income taxes (note 9g)

 

 

8,286

 

 

5,930

 

 

 



 



 

T o t a l current assets

 

 

122,428

 

 

120,817

 

 

 



 



 

NON-CURRENT ASSETS (note 10)

 

 

 

 

 

 

 

Marketable securities (note 11b)

 

 

1,657

 

 

1,237

 

Deferred income taxes (note 9g)

 

 

7,050

 

 

4,035

 

Long-term receivables (note 11c)

 

 

5,681

 

 

3,395

 

Amounts funded in respect of employee rights upon retirement (note 6)

 

 

8,806

 

 

6,759

 

Other

 

 

795

 

 

747

 

 

 



 



 

T o t a l non – current assets

 

 

23,989

 

 

16,173

 

 

 



 



 

PROPERTY, PLANT AND EQUIPMENT, net (note 3)

 

 

12,568

 

 

11,180

 

 

 



 



 

GOODWILL (note 4)

 

 

108,926

 

 

107,506

 

 

 



 



 

OTHER INTANGIBLE ASSETS, net of accumulated amortization (note 4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship

 

 

16,450

 

 

17,721

 

Other

 

 

4,229

 

 

5,777

 

 

 



 



 

 

 

 

20,679

 

 

23,498

 

 

 



 



 

T o t a l assets

 

 

288,590

 

 

279,174

 

 

 



 



 

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

F – 3



RETALIX LTD.
CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

December 31

 

 

 


 

 

 

2007

 

2006

 

 

 


 


 

 

 

U.S. $ in thousands
(except share data)

 

 

 


 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

CURRENT LIABILITIES (note 10):

 

 

 

 

 

 

 

Short-term bank credit

 

 

11

 

 

4,742

 

Current maturities of long-term bank loans (note 5)

 

 

258

 

 

224

 

Accounts payable and accruals:

 

 

 

 

 

 

 

Trade

 

 

15,410

 

 

11,535

 

Employees and employee institutions

 

 

8,977

 

 

7,179

 

Accrued expenses

 

 

6,393

 

 

7,288

 

Other

 

 

3,005

 

 

7,443

 

Deferred revenues

 

 

16,763

 

 

13,747

 

 

 



 



 

T o t a l current liabilities

 

 

50,817

 

 

52,158

 

 

 



 



 

LONG-TERM LIABILITIES (note 10):

 

 

 

 

 

 

 

Long-term loans, net of current maturities (note 5)

 

 

786

 

 

1,058

 

Employee rights upon retirement (note 6)

 

 

14,362

 

 

11,392

 

Deferred tax liability (note 9g)

 

 

219

 

 

1,016

 

Other tax payables

 

 

1,097

 

 

-

 

Deferred revenues

 

 

-

 

 

206

 

 

 



 



 

T o t a l long-term liabilities

 

 

16,464

 

 

13,672

 

 

 



 



 

T o t a l liabilities

 

 

67,281

 

 

65,830

 

 

 



 



 

COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES (note 7)

 

 

 

 

 

 

 

MINORITY INTERESTS

 

 

2,791

 

 

2,293

 

 

 



 



 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY (note 8):

 

 

 

 

 

 

 

Share capital – Ordinary shares of NIS 1.00 par value (authorized: December 31, 2007 and December 31, 2006 – 30,000,000 shares; issued and outstanding: December 31, 2007 – 20,001,382 shares; December 31, 2006 – 19,613,454 shares)

 

 

5,273

 

 

5,178

 

Additional paid in capital

 

 

166,752

 

 

156,583

 

Retained earnings

 

 

46,195

 

 

49,188

 

Accumulated other comprehensive income

 

 

298

 

 

102

 

 

 



 



 

T o t a l shareholders’ equity

 

 

218,518

 

 

211,051

 

 

 



 



 

T o t a l liabilities and shareholders’ equity

 

 

288,590

 

 

279,174

 

 

 



 



 

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

F – 4



RETALIX LTD.
CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended
December 31

 

 

 


 

 

 

2007

 

2006

 

2005

 

 

 


 


 


 

 

 

U.S. $ in thousands
(except share and per share data)

 

 

 


 

REVENUES: (note 13a)

 

 

 

 

 

 

 

 </