---

---

# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

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

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

For
the fiscal year ended December 31, 2006 OR;

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

For the transition period from_______ to_______

# 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)

Securities registered
or to be registered pursuant to Section 12(b) of the Act: Ordinary Shares, nomina lvalue NIS 1.0 per share

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: 19,613,454 Ordinary Shares, nominal value NIS
1.0 par value 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 checkmark which financial
statements the registrant has elected to follow:

# ITEM 17  o ITEM 18 x

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



---

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TABLE OF CONTENTS

|       |                                                               | Page 
|------ | ------------------------------------------------------------- | -----
|
|
|
|
|PART I |                                                               |      
|      
|       | Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 5    
|       | Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE               | 5    
|       | Item 3. KEY INFORMATION                                       | 6-16 
|       | A. Selected Financial Data                                    | 6-7  
|       | B. Capitalization and Indebtedness                            | 7    
|       | C. Reasons for the Offer and Use of Proceeds                  | 7    
|       | D. Risk Factors                                               | 7-16 
|       | Item 4. INFORMATION ON THE COMPANY                            | 17-38
|       | A. History and Development of the Company                     | 17   
|       | B. Business Overview                                          | 17-37
|       | C. Organizational Structure                                   | 38   
|       | D. Property, Plants and Equipment                             | 38   
|       | Item 4A. UNRESOLVED STAFF COMMENTS                            | 38   
|       | Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 39-52
|       | A. Operating Results                                          | 39-49
|       | B. Liquidity and Capital Resources                            | 49-50
|       | C. Research and Development, Patents and Licenses, Etc.       | 50-52
|       | D. Trend Information                                          | 52   
|       | E. Off -Balance Sheet Arrangements                            | 52   
|       | F. Tabular Disclosure of Contractual Obligations              | 52   

2

---

---



| | Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES        | 53-60
| | --------------------------------------------------------- | -----
| | A. Directors and Senior Management                        | 53-54
| | B. Compensation                                           | 54-55
| | 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                                     | 61-62
| | B. Related Party Transactions                             | 62   
| | C. Interests of Experts and Counsel                       | 62   
| | Item 8. FINANCIAL INFORMATION                             | 62-63
| | Item 9. THE OFFER AND LISTING                             | 64-66
| | A. Offer and Listing Details                              | 64-65
| | B. Plan of Distribution                                   | 65   
| | C. Markets                                                | 66   
| | D. Selling Shareholders                                   | 66   
| | E. Dilution                                               | 66   
| | F. Expenses of the Issue                                  | 66   
| | Item 10. ADDITIONAL INFORMATION                           | 66-78
| | A. Share Capital                                          | 66   
| | B. Memorandum and Articles of Association                 | 66-70
| | C. Material Contracts                                     | 70-71
| | 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                                 | 78   

3

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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                                                      | 81-82
|         | Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 82   
|         | Item 16B. CODE OF ETHICS                                                              | 82   
|         | 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                                                         | 83   
|         | Item 18. FINANCIAL STATEMENTS                                                         | 83   
|         | Item 19. EXHIBITS                                                                     | 84   

4

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# PART I

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

Our
consolidated financial statements are prepared in United States dollars and in accordance
with generally accepted accounting principles in the United States. All references to
dollars or $" in this annual report are to United States dollars,
and all references to Shekels or NIS are to New Israeli Shekels.
On June 21, 2007, the exchange rate between the NIS and the dollar, as quoted by
the Bank of Israel, was NIS 4.23 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 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. We have attempted to identify significant uncertainties and other factors
affecting forward-looking statements in the Risk Factors section that appears in Item 3.D.
Key Information- Risk Factors.

# ITEM 1  IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

# ITEM 2  OFFER
STATISTICS AND EXPECTED TIMETABLE

Not applicable.

5

---

---



# ITEM 3  KEY
INFORMATION

# A. Selected Financial
Data

The
selected consolidated statement of income data set forth below with respect to the years
ended December 31, 2002, 2003, 2004 and 2006 and the selected consolidated balance
sheet data as of December 31, 2002, 2003, 2004 and 2006 set forth below have been
derived from our consolidated financial statements that were audited by
Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited.
The selected consolidated statement of income data set forth below with respect to the
year ended December 31, 2005 and the selected consolidated balance sheet data as of
December 31, 2005 set forth below 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 2004, 2005 and 2006 included elsewhere in this annual report. Historical
results are not necessarily indicative of the results to be expected in the future.

|                                                               | Year ended December 31,
|-------------------------------------------------------------- | -----------------------
|
|
|
|
|Consolidated statement of income data                          |                        
|Revenues:                                                      |                        
|Product sales                                                  |                        
|Services and projects                                          |                        
|                                                               |                        
|Total revenues                                                 |                        
|                                                               |                        
|Cost of revenues:                                              |                        
|Cost of product sales                                          |                        
|Cost of services and projects                                  |                        
|                                                               |                        
|Total cost of revenues                                         |                        
|                                                               |                        
|Gross profit                                                   |                        
|                                                               |                        
|Operating expenses:                                            |                        
|Research and development expenses-net                          |                        
|Selling and marketing expenses                                 |                        
|General and administrative expenses                            |                        
|Other general income (expenses) - net                          |                        
|                                                               |                        
|Total operating expenses                                       |                        
|                                                               |                        
|Income from operations                                         |                        
|Financial income (expenses)-net                                |                        
|Gain arising from issuance of shares by  an associated company |                        
|                                                               |                        
|Income before taxes on income                                  |                        
|Taxes on income                                                |                        
|Share in losses of an associated company                       |                        
|Minority interests in losses (gains) of subsidiaries           |                        
|                                                               |                        
|Net income                                                     |                        
|                                                               |                        
|                                                               |                        
|Earnings per share:                                            |                        
|Basic                                                          |                        
|                                                               |                        
|                                                               |                        
|Diluted                                                        |                        
|                                                               |                        
|                                                               |                        
|Weighted average number of shares used in computation:         |                        
|Basic                                                          |                        
|Diluted                                                        |                        

6

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|                                | Year ended December 31,
|------------------------------- | -----------------------
|
|
|
|
|Consolidated balance sheet data |                        
|Cash and cash equivalents       |                        
|Working capital                 |                        
|Total assets                    |                        
|Total debt                      |                        
|Shareholders' equity            |                        
|Capital Stock                   |                        

# B. Capitalization and
Indebtedness

Not applicable.

# C. Reasons for Offer and
Use of Proceeds

Not applicable.

# D. Risk Factors

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

# Risks Related To Our
Business

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

Our
future growth is critically dependent on increased sales to customers in the retail food
industry. We derive the substantial majority of our revenues from the sale of software
products and the provision of related services to the retail food industry worldwide,
including retailers such as supermarkets, convenience stores and restaurants as well as
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. Any deterioration of the
economy worldwide may result in a curtailment of capital investment by our existing and
potential customers. During the most recent deterioration of the global economy, many
companies, including some of our existing and potential customers, indicated that they
planned to postpone or decrease further capital investment. Any decline in capital
expenditures by our existing and potential customers would reduce our sales and could
result in pressure on our product prices, each of which would have a material adverse
effect on our operating results.

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

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

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

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

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

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

7

---

---



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

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 2006, we have 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;
| | - | --------------------------------------------------------------------------------

| |  | 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 are undergoing 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 178 employees on January 1, 1999 and 1,530 employees on December 31, 2006.
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.
| | - | ----------------------------------------------------

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.

8

---

---



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

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

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

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

| |  | the
potential cancellation of orders based on customers' changing budgetary constraints;
| | - | ----------------------------------------------------------------------------------------

| |  | the
shift in orders  expected  in one  quarter to another  quarter  because of the timing of
              customers' procurement decisions; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
unpredictability of internal acceptance reviews.
| | - | ----------------------------------------------------

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

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

Because
the gross margins on product revenues are significantly greater than the gross margins on
services and project revenues, our combined gross margin has fluctuated from quarter to
quarter, and it may continue to fluctuate significantly based on our revenue mix between
product revenues and services and project revenues. Our operating results in any given
quarter may be adversely affected to the extent our gross margins decline due to our
generating in that quarter a greater percentage than average of services and project
revenues. 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
2003 and 2004, we began 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.

9

---

---



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

Any
changes to third-party hardware and software platforms and applications that our products
work with could require us to modify our products and could cause us to delay releasing a
product until the updated version of that hardware and software platform or application
has been released. As a result, customers could delay purchases until they determine how
our products will operate with these updated platforms or applications, which could
inhibit sales of our products and harm our business. In addition, developing and
maintaining consistent software product performance across various technology platforms
could place a significant strain on our resources and software product release schedules,
which could adversely affect our results of operations. We must continually evaluate new
technologies and implement into our products advanced technology. For example, in 2001 and
2002 we modified our software products to work with Windows XP Embedded and Linux open
source operating systems, and in 2003 and 2004 we began investing in developing versions
of our products based on the Microsoft .Net platform and the J2EE platform. Many existing
and potential customers have not yet acquired these operating systems and we cannot assure
you that these modifications will be successful. Moreover, if we fail in our product
development efforts to accurately address in a timely manner evolving industry standards,
new technology advancements or important third-party interfaces or product architectures,
sales of our products and services will suffer.

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
ASP 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 in the early stages of rolling-out our ASP application services to small chains and
single 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 ASP initiatives may not succeed. Our services include
head-office and back-office applications delivered via the Internet based on an ASP
subscription fee pricing model. We have not long ago begun charging users of our ASP
services a subscription fee for reporting, analysis and merchandising services. In the
future, we plan to offer additional services for a fee. We cannot assure you that these
users will accept our pricing model. In addition, in September 2005, we announced the
introduction of Retalix InSync, our new platform and solution portfolio. Our Retalix
InSync solution portfolio is intended to tightly integrate our enterprise solution
portfolio with our in-store back-office solutions and synchronize the flow of information
between the two. We are in the process of migrating our acquired enterprise resource
planning, or ERP, retail, supply chain execution and warehouse management systems into the
new Retalix InSync platform, but cannot assure you that this migration will be successful
or that customers will purchase these new products. If we are unsuccessful in selling and
marketing our ASP services and 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.

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

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

10

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

In
order for us to establish an e-marketplace for our ASP initiatives, we will need to
generate a community of participating retailers sufficiently large to support such a
marketplace. Even if we successfully establish such a community, we may not be able to
establish an e-marketplace without partnering with strategic 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
e-marketplaces. We cannot assure you that wholesalers and suppliers will choose to
participate in our e-marketplaces. In addition, this is a new and unproven business model,
and we cannot assure you that potential users of the e-market applications will use them.
If we are unsuccessful in establishing an e-marketplace, our revenue growth could be
adversely affected.

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

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

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

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

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

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

Errors
or defects in our software products could diminish demand for our products, 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.

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

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

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

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

11

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

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

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

We
currently sell our software products and ASP services in a number of countries and we
intend to enter additional geographic markets. Our business is subject to risks 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, manufactured or sold
may not protect our products or intellectual property rights, increasing the possibility
of piracy of our technology and products. We currently have no patents or patent
applications pending. We rely on a combination of trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect our intellectual
property rights. Our competitors could also independently develop technologies that are
substantially equivalent or superior to our technology.

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

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

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

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 to it, a portion of which commenced in connection with this
Annual Report on Form 20-F, 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. Although our management has
determined that we had effective internal control over financial reporting as of December
31, 2006, we may identify material weaknesses or significant deficiencies in our future
internal control over financial reporting. In addition, our internal control over
financial reporting has not yet been audited by our independent registered public
accounting firm. 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.

12

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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 SFAS 123(R)
had a material impact on our results, lowering our reported net income by approximately
$3.4 million. 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. The adoption of 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. The future of relations between the
Palestinian Authority and Israel is uncertain. Israels disengagement from the Gaza
Strip and some parts of the West Bank in 2005 may serve to further disrupt the balance
within the Palestinian Authority and affect the overall stability of the region. The
current Palestinian Authority government controlled by Hamas, a militant Islamic
organization, is widely considered to be an obstacle to relations between Israel and the
Palestinian Authority, as well as to stability in the Middle East as a whole.

In
the summer of 2006, Israel waged a war with Hezbollah, a Lebanon-based militant Islamic
organization, which involved thousands of missile strikes and disrupted most day-to-day
civilian activity in northern Israel.

In
addition, in recent years the regime in 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.

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 New Israeli Shekel, the
British Pound Sterling or the Euro. In addition to our operations in Israel, we are
expanding our international operations. Accordingly, we incur and expect to continue to
incur additional expenses in non-dollar currencies. As a result, some of our financial
liabilities are denominated in these non-dollar currencies. In addition, some of our bank
credit is linked to these non-dollar currencies. Most of the time, our non-dollar assets
are not totally offset by non-dollar liabilities. Due to the fact that our financial
results are measured in dollars, our results could be harmed as a result of a
strengthening or weakening of the dollar compared to these other currencies. Our results
could also be adversely affected if we are unable to guard against currency fluctuations
in the future. Accordingly, we may enter into currency hedging transactions to decrease
the risk of financial exposure from fluctuations in the exchange rate of the dollar
against the NIS or other currencies. These measures, however, may not adequately protect
us from future currency fluctuations.

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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. During
2004, 2005 and 2006, the inflation adjusted NIS appreciated against the dollar, which
raised the dollar cost of our Israeli operations. We cannot predict whether in the future
the NIS will appreciate against the dollar or vice versa. Any increase in the rate of
inflation in Israel, unless the increase is offset on a timely basis by a devaluation of
the NIS in relation to the dollar, will increase labor and other costs, which will
increase the dollar cost of our operations in Israel and harm our results of operations.

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

We
receive tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959,
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 2004,
2005 and 2006, net of other tax effects, were approximately $355,000, $2,518,000 and
$415,000 respectively. In addition, an increase in our manufacturing 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, 2006, our total contingent liability to the OCS in this
respect amounted to $5,067,000. 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.

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.

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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.

We
are incorporated in the State of Israel. A substantial number of our executive officers
and directors are not residents of the United States, and a substantial portion of our
assets and the assets of these persons are located outside the United States. Therefore,
it could be difficult to enforce a judgment obtained in the United States against us or
any of these persons.

Service
of process upon us, upon our directors and officers, 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 called upon at least 21 days notice. 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.

15

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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 Global Select Market
(formerly the Nasdaq National Market) in general and trading in shares of technology
companies in particular have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to operating performance. 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. In May 2004, we sold 3,450,000 of our ordinary shares in a
public offering. In addition, we issued an aggregate of 1,005,858 of our ordinary shares
in connection with two acquisitions in April 2005. These shares may be re-sold in part or
whole, at any time, generally without restrictions. 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.

16

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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 purchasing. Recently, we introduced our new
next-generation portfolio of enterprise and supply chain applications based on the Retalix
InSync platform, which are described below in Item 4.B under Our Products.

Principal Capital
Expenditures

We
had capital expenditures of $2.6 million in 2006, $3.1 million in 2005 and $1.8 million in
2004. Our capital expenditures consist primarily of the purchase of computers and
peripheral equipment. We expect that our capital expenditures will be approximately $4.0
million in 2007. 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 global
food and fuel retailers and U.S. grocery and convenience store 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 food and fuel retailers and
foodservice and convenience store distributors to manage their operations more
efficiently, reduce infrastructure 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 two years, we further extended the
scope of our software suite to incorporate supply chain, execution, warehouse 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 receipt 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 $2 billion;
| | - | --------------------------------------------

| |  | Tier
2 - annual revenues of between $500 million and $2 billion;
| | - | ----------------------------------------------------------------

| |  | Tier
3 - annual revenues of between $50 million and $500 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 retail and distribution food and fuel software
industries. We offer software solutions that can serve the needs of the entire range of
food and fuel retailers and U.S. 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 42,000 sites in 51 countries. Our
customers include leading supermarket and grocery chains such as A&P, Hy-Vee, Kroger
and Publix in the United States, Delhaize, Sainsburys and Tesco in Europe, and large
convenience stores and major fuel retailers such as Alon Fina, Caseys and Pilot Oil
in the United States and Husky Oil in Canada. Our annual worldwide sales have grown from
$36.1 million in 2000 to $203.8 million in 2006.

In
December 2006, we merged our wholly-owned subsidiaries, Bass Inc., OMI International Inc.,
Retalix SCM, Inc. and Retalix TCI, LLC into our wholly-owned subsidiary Retalix USA Inc.

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 ERP 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 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 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 store and at headquarters, establishes our presence in
hundreds of new grocery retailers of various sizes, and enhances our ability to support
third party POS solutions as part of our total solution set.

In
August 2004, we acquired 51% of Retalix Italia S.p.A. (then known as Unit S.p.A.), a
supplier of specialized software and hardware solutions for the food and fuel retail
industries in Italy. In December 2004 we acquired the remaining 49% of Retalix Italia.
This acquisition enabled us to improve our exposure and customer base within the European
Market.

In
January 2004, we acquired OMI International, a provider of supply chain execution and
warehouse management systems for the retail food industry. OMI International manages the
various fulfillment processes that take place in retailers warehouses and
distribution centers. The acquisition of OMI International enabled us to enter the supply
chain execution and warehouse management systems market for retailers, broaden our
customer base and expand our suite of products. The addition of OMI Internationals
integrated applications to our suite of retail solutions enables us to provide customers
with end-to-end supply chain management, facilitating enterprise-wide procurement,
merchandising, warehouse management and order management for multi-warehouse,
multi-facility retailers and wholesalers. We believe that the combination of our in-store
solutions with OMI Internationals applications enables retailers to optimize their
replenishment decisions based on point of sale data, thereby reducing lost sales due to
items being out-of-stock on the one hand, while, on the other hand, reducing additional
costs of surplus inventory.

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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
WalMart, are increasingly using their size and scale to realize cost savings and operating
efficiencies from their supply chain, which they then pass on to the consumer in the form
of lower prices. This trend creates an industry dynamic whereby more and more consumers
are attracted to these price-cutting retailers, thus accelerating these retailers
revenue growth and allowing them to further increase their economies of scale. 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 in their supply chain, thereby lowering
their cost base and allowing them to deliver lower prices.

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

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

| |  | capture
and analyze data and leverage customers 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 improved 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 POS systems with little or no integration with their back-office and with no
enterprise-wide information system. These systems generally cannot be easily modified to
provide cross-enterprise visibility, collaboration and integration, nor can they support
the information capture and analysis necessary for reliable forecasting and coordinated
purchasing decisions. In addition, in continuing to rely on these legacy systems,
retailers 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 food and fuel-specific 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. Data
compiled by a large industry provider indicates that North American retailers across all
industries continue to rely upon legacy POS systems that have an average age of eight
years, with some retailers using systems that are as much as 10 to 20 years old.
Consequently, many retailers and distributors are considering replacing their outdated
legacy systems in the near to medium term.

Our Solutions

Our
software solutions provide a robust and comprehensive suite of applications for global
food and fuel retailers and U.S. grocery and convenience store 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 real time 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 entire organization

We
believe that our integrated suite of software solutions is unique among retail and
distribution food software solutions, in that it combines all essential elements of an
enterprise-wide information system  stores, headquarters and warehouses  in a
well-synchronized suite of solutions. Our Retalix InSync Solution Portfolio tightly
integrates our enterprise solution portfolio with our in-store back-office solutions and
synchronizes the flow of information between the two. Such an integrated solution permits
retailers and distributors to generate substantial supply chain operating efficiencies and
cost savings through efficient management of inventory, purchasing and merchandising.

Our solutions provide for
both retail operations management and customer management

While
retail enterprise solutions have traditionally focused exclusively on retail operations
management  principally supply chain and merchandising processes  our
enterprise solutions also include sophisticated customer management tools. Our customer
management tools, Retalix Loyalty and Retalix 1-to-1, focus on influencing consumer
spending habits through the use of personalized promotions and other loyalty card-based
marketing techniques. Our in-store systems provide full support for promotions and loyalty
programs at the checkout lane, and are integrated with our enterprise applications. This
feature enables retailers to devise a wide variety of 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.

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

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

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 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.

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 our enterprise-level applications, such as pricebook,
promotions, loyalty and information services, on an ASP basis, meaning that the
application is remotely hosted on our centralized servers and accessed by the independent
retailer over the web or private data lines. Our Connected Services allow independent
retailers and small chains, in return for a monthly subscription fee, to gain access to
applications that would otherwise be too expensive for them to procure and manage
in-house. With access to these applications, smaller retailers can 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 and distributors are required to process quickly and efficiently. We believe
that retailers and distributors 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 or distributors POS
systems 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 or distributors internal reporting and accounting systems. As a
result, retailers and distributors 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 Albertsons, Sainsburys and Tesco 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 have developed our Retalix InSync Solution Portfolio based
on a thin client architecture, using state of the art service 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. In addition, we are developing a next-generation version of our
existing StoreLine in-store solution, called StoreLine.net, which is based on a thin
client architecture using the Microsoft .Net platform. This capability to provide
for a thin POS and a thin back office solution allows a choice of
additional flexibility and cost savings, as part of our product suite.

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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, especially our new Retalix InSync Solution Portfolio, were designed
and built to facilitate customer customization with reduced efforts. In addition,
multinational retailers and distributors 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. The ability to
customize a complex system with significantly reduced effort and cost provides us with a
significant advantage over our competitors.

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. With the acquisition of TCI
Solutions in 2005, we solidified our leadership in the in-store and headquarters software
segments and added powerful pricing, inventory and DSD capabilities to our offering. With
our acquisitions of OMI International and IDS, we have further expanded our product
offering to include ERP, distribution, supply chain execution and warehouse management
systems. In September 2005, we announced the introduction of Retalix InSync, our new
platform and solution portfolio. We are progressing as planned in migrating our acquired
ERP, retail, supply chain execution and warehouse management systems onto the new Retalix
InSync platform. We believe that with our integrated solutions, we will be well positioned
to leverage our large customer base to become the leading provider of retail 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 in-store systems that do not provide the functionality
required by a retailer or distributor 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, database independent 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 and distribution formats such as grocery, fuel and QSRs with a
single solution;
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | able
to support multi-national retailers and distributors 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 and
distributors 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
and distributors. 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.

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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 retail 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
StoreLine.net application, and announced the first installation of this new POS software
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 new thin client solutions and our ability to
support multiple enterprises from a single data center, we are now able to offer our
enterprise level applications, such as product and price management, sales analysis,
promotions, loyalty and information services, to Tier 3 and Tier 4 retailers on an ASP
basis. We provide these Connected Services through StoreNext in return for a monthly
subscription fee. These Connected Services enable Tier 3 and Tier 4 retailers to enjoy
many of the benefits of enterprise and back-office applications that were originally
designed for Tier 1 and Tier 2 retailers, without the need to make a significant upfront
investment in the systems and personnel required to run these applications in-house. To
date, StoreNext USA had signed up about 700 stores and StoreNext Israel has signed up over
900 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.

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

Through
the collection of sales and inventory data obtained in providing Connected Services to
Tier 3 and Tier 4 retailers, we are able to provide suppliers with aggregated Tier 3 and
Tier 4 sales data, including visibility into inventory movement and aggregated market
share information. This data enables suppliers to better understand market trends and
changing consumer demands, which previously had been difficult to gauge because of the
large number of independent retailers and the fragmented nature of the market, thereby
enabling suppliers to optimize their supply replenishment strategy. As we add more
retailers to our Connected Services, we are able to offer suppliers an increasingly
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, or e-marketplace, for suppliers in the retail food
industry in Israel, where the number of retailer subscribers to our Connected Services
through our StoreNext Israel venture has reached a critical mass. We have further expanded
this community to enable collaboration between retailers and suppliers in Israel to allow
them to share with each other inventory and pricing information. We intend to provide
similar e-marketplace and collaboration services through our StoreNext USA venture as the
number of subscribers to our Connected Services in the United States grows. We 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 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,
particularly the United Kingdom and Scandinavia. In 2004, we announced significant new
sales that were viewed as market entries in new markets, such as France and Italy in
Europe, and China, Japan and India in Asia and during 2006 we have also strengthened our
activities in Eastern Europe. We aim to continue to establish our presence in these new
markets, as well as to expand into additional countries in Europe, Asia and Latin America.
In addition, we are beginning to expand into other types of retail sectors, such as health
and beauty and pharmacy, 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.

23

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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 U.S. grocery and convenience store
distributors, from multi-national supermarket and major convenience store chains and major
fuel retailers to local independent grocers. We offer our customers a full suite of
software products to address all the principal elements of their retail operations:

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

Enterprise
Headquarters Solutions: Suite of software tools that provides large supermarket and
convenience store chains and major fuel retailers with a comprehensive, modular solution
which centralizes operation and management of their enterprise-wide and back-office
activities such as 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 sophisticated customer
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 in-store and headquarters software acquired with TCI Solutions. For the fuel and
convenience store markets our main product is our Microsoft .Net-based HQC (headquarters
solution for convenience store) product.

Supply
Chain and Warehouse Management Solutions: Suite of supply chain execution 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, invoice reconciliation and yard and dock
management. Our supply chain execution and warehouse management systems consist of TRICEPS
(Transportation, Receiving, Inventory Control and Productivity Systems) Warehouse
Management, BICEPS (Buyers Inventory Control Effecting Profits and Services) Purchasing
Management, PROMPT Invoice Matching, MDS Yard and Dock Management, ABS (Advanced Billing
System) Advanced Billing and Order Management, and DemandAnalytX for optimized demand
forecasting and order optimization. We added these solutions to our product suite in
January 2004 through our acquisition of OMI International. Our new Retalix InSync Solution
Portfolio will consolidate these offerings into a single product portfolio.

Food
Distribution Enterprise Resource Planning Solutions: An ERP suite of supply chain
execution and warehouse management software solutions that provides food and foodservice
distributors with a complete solution to run their business. We added this software to our
portfolio with the acquisition of IDS in 2005, and it will be part of the Retalix InSync
Solution Portfolio. This suite of products includes modules that provide master data
management, purchasing, ordering, billing, light warehouse management, rebates,
accounting, electronic data interchange, or EDI, tradeshow management, and other features.
This suite also includes products that provide: a full featured warehouse management
package for foodservice, convenience store or grocery distribution; an advanced buying
package for foodservice, convenience store and grocery distribution; PC based software to
assist sales agents of foodservice, convenience store and grocery distributors in their
work while visiting customers; a web based ordering portal for retailers ordering from a
foodservice, convenience store or grocery distributor; and a handheld solution for
distributors.

ASP
and Supplier Solutions: Our StoreNext solutions, tailored to smaller chains and
independent grocers, enable smaller establishments with limited IT resources to enjoy the
benefits of our headquarters and back office applications through an ASP 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 on key supply chain and merchandising decisions in order to
achieve greater efficiencies throughout the supply chain. We anticipate that revenues
relating to these solutions will account for a growing portion of our overall revenues in
future periods. 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.

24

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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 
   Keyboard or touch
   Highly configurable
   Multi-language, currency and tax
   High availability and resilience
   Hardware neutral
   Supports multiple types of POS
  formats  grocery, fuel, QSRs                      |  |  Client server, Windows
  operating system                                                                          |  |  Supermarkets and grocers  All Tiers                       
|                                                |  |                                                                                                                                                                                                                                                                       |  |                                                                                                                      |  |                                                              
|Retalix StoreLine.net(in
  development)[still?] |  |  POS solution 
   Allows retailers to run POS
  applications remotely
   Reduces total cost of ownership of
  in-store IT infrastructure
   Highly scalable                                                                                                       |  |  Web-based, open
  architecture
  Based on thin client architecture
   Developed on the Microsoft .Net platform |  |  Supermarkets and grocers  All Tiers                       
|Retalix StorePoint                              |  |  POS, front-office and back-office solution 
   Touch based, highly configurable
   Multi-language, currency and tax
   High availability and resilience
   Hardware neutral
   Supports multiple types of POS
  formats  convenience store, fuel, QSRs, kiosk |  |  Client server, Windows
  operating system                                                                          |  |  Convenience store, QSRs, and fuel retailers                
|RPO (Retalix
  Pocket Office)                   |  |  Mobile, hand-held suite of front-office and back-office
  applications 
   Allows employees to perform
  front-office and back-office functions from their in-store location                                                                                       |  |  Microsoft Windows CE
  platform                                                                                    |  |  Supermarkets and grocers  All Tiers
   Convenience stores
|RBO (Retalix Back
  Office)                     |  |  Functionally rich 
  back-office applications
   Interfaces to several types of POS formats
   Integrated with StoreLine                                                                                                                                          |  |  Client server, Windows operating system                                                                            |  |  Supermarkets and grocers  Tier 2  Tier 4                 
|Retalix Store                                   |  |  Functionally rich store based
  back-office applications
   Powerful price generation and
  competitive pricing capabilities
   DSD, Inventory
   Interfaces to many types of POS formats
  and vendors
   Acquired from TCI                                    |  |  Client server, Windows operating system, database independent
   Developed on Delphi                              |  |  Supermarkets and grocers  Tier 1  Tier 3                 
|Retalix ScanMaster                              |  |  POS solution 
   Highly configurable
   Multi-language and tax
   Broad set of customer loyalty
  functionality support
   Integrated with self-checkout systems                                                                                                |  |  Client server, Windows
  operating system                                                                          |  |  Supermarkets and grocers  Tier 3 & Tier 4                 

25

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|                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                          |  |                                                                                       
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------
|Enterprise Solutions                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                          |  |                                                                                       
|Retalix HQ                                            |  |  Functionally rich HQ based
  back-office applications
   Powerful price generation and
  competitive pricing capabilities
   DSD, Inventory
   Interfaces to many types of POS formats
  and vendors
   Acquired from TCI                                                                                                                                                                                                                                                                                 |  |  Client server, Windows operating system, Database independent 
   Developed on Delphi                                                 |  |  Tier 1  Tier 3 supermarkets                                                        
|Retalix InSync ThinStore                              |  |  DSD, Receiving, Shelf Price Audit, Perpetual Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  J2EE, Websphere, operating system and database independent                                                                             |  |  Tier 1  Tier 3 supermarkets                                                        
|                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                          |  |                                                                                       
|Retalix HQC    Retalix HQ
  for
  C-Stores and Fuel  |  |  Enterprise system for central management of head-office and
  back-office applications 
   Broad functionality  product and
  pricing, promotions, loyalty, ordering, receiving, analysis and reporting
   Provides for central location of the
  server hosting the software, with users throughout the enterprise accessing
  applications through browsers
   Single data repository
   Integrated with Retalix StorePoint
   Reduces the technology footprint and
  maintenance in the retail store |  |  Web-based, open
  architecture
   Based on web services and thin client
  architecture
   Developed on the Microsoft .Net platform |  |  Large chain convenience stores and fuel retailers                                   
|Retalix Loyalty                                       |  |  Enterprise system for central management of consumer loyalty
  programs 
   Based on POS loyalty and
  promotion T-Log
   Powerful customizable promotion engine
  
  Supports a wide variety of loyalty programs, from simple loyalty cards
  to long term programs                                                                                                                                                                                                                                       |  |  Web-based, open
  architecture
   Based on web services and thin client
  architecture
   Developed on the Microsoft .Net platform |  |  Tier 1 & Tier 2 supermarkets
   Large chain convenience stores
  and fuel retailers
|                                                     
|Supply Chain and Warehouse Management Solutions
(WMS) |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                          |  |                                                                                       
|TRICEPS Warehouse
  Management                        |  |  Automated warehouse location and task management system 
   Optimizes distribution of
  warehouse resources
   Provides real time warehouse data to
  warehouse managers                                                                                                                                                                                                                                                                                                                                    |  |  Advanced Radio Frequency
  (RF) and Voice technology                                                                                   |  |  Tier 1 & Tier 2 supermarkets                                                        
|BICEPS Purchasing
  Management                        |  |  Automated procurement system 
   Just in time and forward buying
  procurement
   Invoice and purchase order
  reconciliation
   Vendor profiling
   Item inventory management                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                          |  |  Tier 1 & Tier 2 supermarkets                                                        
|PROMPT Invoice
  Matching                             |  |  Automated invoice reconciliation system 
   Tracks invoices and interfaces
  with general ledger systems
   Provides real time inventory levels
   Reduces time necessary to resolve cost
  discrepancies                                                                                                                                                                                                                                                                                                  |  |  EDI and EFT technology                                                                                                                 |  |  Tier 1 & Tier 2 supermarkets                                                        

26

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|                                            |  |                                                                                                                                                                                                                        |  |                                                                |  |                                                                                                               
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|MDS Yard and Dock
  Management              |  |  Automated yard and dock resource management system 
   Real time management of yard /
  dock arrivals and departures                                                                                                |  |  Advanced RF, EDI and
  Advanced Ship Notice (ASN) technology |  |  Tier 1 & Tier 2 supermarkets  Tier 1 & Tier 2 grocery and food service
distributors                        
|                                            |  |                                                                                                                                                                                                                        |  |                                                                |  |                                                                                                               
|                                            |  |  Automatically directs arrivals to optimal storage location
   Manages trailer usage and reduces
  bottlenecks                                                                                                       |  |                                                                |  |                                                                                                               
|ABS Advanced
  Billing and Order Management |  |  Automated billing and pricing system 
   Enables billing that reflects
  pre-determined margin objectives
   Provides custom pricing according to
  item
   Allows multiple order types and
  calculation methods |  |                                                                |  |  Tier 1 & Tier 2 supermarkets                                                                                
|DemandAnalytX                               |  |  Interprets store-level POS data, forecasts demand
   Determines and places optimal
  replenishment orders
   Manages order approval and stock taking
  in the store using handhelds                                |  |  Demand forecasting and replenishment optimization            |  |  Tier 1  Tier 3 supermarkets
   Large and small chain convenience
  stores
   Tier 1  Tier 3 distributors
|Retalix InSync MDM                          |  |  Master data management
   Data synchronization
   Global data synchronization network
  & general staging                                                                                                          |  |  J2EE, Websphere, operating system and database independent   |  |  Tier 1  Tier 3 supermarkets
   Tier 1  Tier 3 distributors                                               
|Retalix InSync
  Purchasing and Forecasting |  |  Distribution center purchasing
   Load building
   Cost management 
   Deals management
   Supplier portal                                                                                                       |  |  J2EE, Websphere, operating system and database independent   |  |  Tier 1  Tier 3 supermarkets
   Tier 1  Tier 3 distributors                                               
|Retalix InSync
  Order Management & Billing |  |  Store/Customer order management
   Allocation, substitutions, forced
  distributions, etc.
   Rate and cost engine, billing engine                                                                                 |  |  J2EE, Websphere, operating system and database independent   |  |  Tier 1  Tier 3 supermarkets
   Tier 1  Tier 3 distributors                                               
|Retalix InSync WMS                          |  |  Automated warehouse location and task management system 
   Optimizes distribution of
  warehouse resources
   Provides real time warehouse data to
  warehouse managers                                           |  |  J2EE, Websphere, operating system and database independent   |  |  Tier 1  Tier 3 supermarkets
   Tier 1  Tier 3 distributors                                               
|Distributor Solutions                       |  |                                                                                                                                                                                                                        |  |                                                                |  |                                                                                                               
|Retalix Power Enterprise                    |  |  ERP solution for food and foodservice distributors
   Master data    item, supplier,
  store, etc.
   Ordering, receiving, forecasting, deals
  and more
   Tradeshow management
   Simple WMS                  |  |  iSeries based ERP system                                     |  |  Tier 1  Tier 3 distributors
   Tier 2 & Tier 3 supermarkets                                               
|Retalix Power WMS                           |  |  Automated warehouse location and task management system
   Advanced Radio Frequency (RF)
  & Voice technology                                                                                                       |  |  iSeries based WMS                                            |  |  Tier 1  Tier 3 distributors
   Tier 2 & Tier 3 supermarkets                                               

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|                                                             |  |                                                                                                                                                                                                                                                                                                                                            |  |                                                                  |  |                                                                
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------- |  | ---------------------------------------------------------------
|Retalix Power BUY                                            |  |  Advanced procurement
  solution for food and foodservice distributors
   Forecasting                                                                                                                                                                                                                                                    |  |  iSeries based                                                  |  |  Tier 1  Tier 3 distributors
   Tier 2 & Tier 3 supermarkets
|                                                             |  |                                                                                                                                                                                                                                                                                                                                            |  |                                                                  |  |                                                                
|                                                             |  |  Ordering, receiving 
   Load balancing                                                                                                                                                                                                                                                                                                  |  |                                                                  |  |                                                                
|Retalix CRM-Power NET                                        |  |  Web order management system
   View and act on store orders on
  the web                                                                                                                                                                                                                                                                |  |  Java based                                                     |  |  Tier 1 & Tier 3 distributors
   Tier 2 & Tier 3 supermarkets
|Retalix Power CRM  - Power PDARetalix Power CRM  Power Sell |  |  Handheld applications for delivery
   Notebook applications for  sales and delivery agents                                                                                                                                                                                                                                              |  |  Java based Client Server Delphi                               |  |  Tier 1  Tier 3 distributors
   Tier 2 & Tier 3 supermarkets
|                                                             |  |                                                                                                                                                                                                                                                                                                                                            |  |                                                                  |  |                                                                
|ASP and Supplier Solutions                                   |  |                                                                                                                                                                                                                                                                                                                                            |  |                                                                  |  |                                                                
|Connected Services                                           |  |  Provides retailers access to ASP applications in return for a
  monthly subscription fee
   Allows these retailers access to
  applications that would otherwise be too expensive or difficult to manage
  in-house                                                                                                                     |  |  ASP.Net technology for enterprise and back-office applications |  |  Tier 3 & Tier 4 independent grocers                          
|Supplier Solutions                                           |  |  Aggregated retail food industry data
   Collaborative supply chain
  functionality
   E-marketplace for retail food industry 
   Enables supplier to better understand
  market trends and consumer demands
   Enables retailers and suppliers to
  streamline work processes,  exchange
  pricing, inventory and market information |  |                                                                  |  |  Suppliers to all Tiers of supermarkets and grocers           

In-Store Solutions

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

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

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

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

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

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

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

StoreLine

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

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

| | Retalix
Café  touch-screen based POS application for in-store coffee shops and
restaurants;
| | --------------------------------------------------------------------------------------------

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

| | Retalix 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 Self Scan  hand-held, customer-driven, self-scanning system designed for interactive
shopping and for alerting customers to specific promotions;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Retalix e-Shop  internet grocery shopping application that supports home shopping services as
well as the logistical steps that follow the online purchasing process, such as item
selection, temporary storage in store, truck loading, drop-off prioritization and money
collection; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Retalix CallCenter
 call-center application for supermarket chains designed for quick data entry
and processing of customer orders and, when integrated with our enterprise solution,
supporting personalized promotions and providing up-to-date pricing and promotion
information.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

StoreLine.net

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

StorePoint

StorePoint
is a fully integrated, modular open architecture POS solution for the multi-format
convenience store and fuel sectors. StorePoint supports a variety of retail formats, such
as 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 quick service food 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.

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

| | Retalix POS  touch-screen based POS application for in-store coffee shops and
restaurants;
| | -------------------------------------------------------------------------------------------

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

29

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| | RFS  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;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Retalix Self-Order  food service with self-order stations and drive-thru operations
support; and
| | -------------------------------------------------------------------------------------------------

| | Retalix Customer Loyalty  flexible suite of customer behavioral incentive programs, store value
cards and automatic reward fulfillment at a variety of customer touch points, including
at the fuel pump, the POS and on the internet.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Retalix PocketOffice (RPO)

RPOis 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, with some sales to Tier 2 retailers.

Retalix Store

Retalix
Store, a store back-office application that was acquired with TCI Solutions, 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 that was acquired as part of TCI Solutions, 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 databaseindependent.

Retalix InSync ThinStore

Retalix
InSync ThinStore, a web-based centralized store back office application developed on
the InSync Platform, is one of the first ThinStore back office system to be offered in
North America to Tier 1 through Tier 3 retailers. It has robust receiving capabilities,
based on the Retalix Store functionality.

Retalix 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, personalized and targeted promotions, 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.

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

| |  | Product
and Price Management  allows retailers to centrally manage their product pricing
according to specific criteria and also enables collaboration with suppliersproduct
and pricing data;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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  provides retailers with a data warehouse solution that facilitates
multiple views of sales, product and store data and provides for customized views of such
data according to different users needs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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

Retalix
Loyalty is a set of customer management tools that enables businesses, at the
enterprise level and the store/POS level, to implement a wide variety of broad-based,
personalized promotions and loyalty card-based marketing programs. Retalix Loyalty allows
retailers, through the use of personalized 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.
| | - | ----------------------------------------

Warehouse Management
Solutions

With
our acquisition in January 2004 of OMI International, a provider of supply chain execution
and warehouse management systems for the retail food industry, we are able to offer a
comprehensive set of warehouse management solutions designed for complex, multi-facility
warehouses and distribution centers. We are progressing in developing the Retalix InSync
Solution Portfolio, which will be the next generation of these products, adding new
technology and integrating them with other offerings in the Retalix product suite. Our
suite of supply chain management applications includes:

TRICEPS Warehouse
Management

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

BICEPS Purchasing
Management

BICEPS
Purchasing Management is an automated procurement system that handles
just-in-time turn, promotion, forward buy and invoice/purchase order
reconciliations. BICEPS enables retailers purchasing departments to identify and
purchase products according to item and category criteria, and thereby to identify
opportunities to improve inventory quality and profit margins. In addition, BICEPS allows
retailers to view and manage 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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PROMPT Invoice Matching

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

MDS Yard and Dock
Management

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

ABS Billing and Order
Management

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

DemandAnalytX

Our
DemandAnalytX software suite interprets store-level POS data, forecasts demand and
determines and places optimized replenishment orders, enabling retailers, manufacturers,
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 supply chain costs.

Distribution Solutions

With
the acquisition of IDS, we acquired a robust set of ERP and supply chain applications for
the food and foodservice distribution market. The main offerings in this product line are:

Retalix
Power Enterprise  a full featured ERP application that 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 WMS 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 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;

Power CRM Solutions:

Retalix
Power Sell a PC based software 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 a web based ordering portal for retailers ordering from a
foodservice, convenience store or grocery distributor; and

Retalix
Power PDA a handheld solution for distributors

Retalix InSync

In
September 2005, we announced our new state-of-the-art, web-based portfolio of synchronized
applications  the only complete suite designed and developed to meet the most
demanding 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. This is the platform on which our existing products will be integrated
and on which new products will be developed. The benefits of this portfolio include
seamless integration between applications, lower total cost of ownership, or TCO, and
customers ability to integrate third-party applications on top of Retalix InSync.
Retalix InSync unifies our applications onto a single platform, reducing the need for
custom integrations.

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

| |  | service
oriented architecture;
| | - | ------------------------------

| |  | 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 includes the following:

| |  | Retalix
InSync Platform  all of the Retalix InSync Solutions are built on top of a robust
set of platform services. The platform is structured in four layers:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | data
layer  consists of a dynamic data model, a thick layer of meta data that actually
defines how the services will be configured and executed, a flexible and extendable
business entity layer and a robust industry specific integrated catalog;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | platform
services layer  includes a rich set of GUI services, workflow, logs, data
synchronization, reporting, rule engine and search and selection features;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | application
services layer  includes perpetual inventory, or PI, rates, costing, retail price
generation and demand forecasting; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | science
layer  includes data (cleansing) logic, demand logic, price elasticity logic, key
performance indicators, or KPI, alert tools, and optimization tools.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 robust purchasing solution for the retail and distribution
markets. Includes demand forecasting, purchase order triggering, generation and review,
load building, price brackets and PI;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Forecasting  an advance demand and supply based DC forecasting and forecast
modeling tool. Supports turn and promotion forecasting;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync WMS  a full-featured warehouse management package that supports the needs of
small and large scale food and non-food retail and distribution warehouses. Main modules
include receiving, voice and RF, directed put-away, replenishment and picking movements,
selection and shipping, X-Docking, radio frequency identification tags, or RFID, labor
standards and optimization tools;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Order Management & Billing  a sophisticated product that allows retail
and distribution organization 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Invoice Reconciliation  sophisticated 3-way and 2-way (DSD) matching process
(matching invoice, order, and receiving documents) that facilitates automation and
maximization of fee and revenue collection and minimizes loss of revenue and labor;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync ThinStore  a web-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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Analyzer BI  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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Customer Portal  a robust J2EE based customer portal, based on the acquired
Power Net (IDS) customer portal. Supports customer order entry and presentation; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retalix
InSync Supplier Portal  a robust J2EE based supplier portal, based on the acquired
Power Net (IDS) customer portal. Supports vendor processes such as new items and deals.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ASP and Supplier Solutions

We
provide ASP and supplier solutions through StoreNext USA and StoreNext Israel described in
more details below.

ASP Solutions

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

Supplier Solutions

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

Services and Projects

Our
professional services personnel provide customers with expertise and assistance in
planning, designing and implementing our integrated information software solutions.
Professional services personnel assist retailers with initial system planning, 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 StoreLine product offerings.

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

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Customers

Our
software has been deployed worldwide in supermarket and grocery stores, convenience
stores, fuel retailers and quick service restaurants. The following list is a
representative sample of companies that purchased an aggregate of at least $200,000 of our
products and services in 2005 and 2006 combined.

|Grocery                          | Convenience Stores
and Fuel Retailers | Distributors                 
|-------------------------------- | ------------------------------------- | -----------------------------
|
|
|
|
|Albertsons (US)                  | BP (UK)                               | Farner-Bocken Company (US)   
|Big Y (US)                       | Alon Oil (US)                         | Food Services of America (US)
|Costco (US)                      | Casey's (US)                          | Sysco (US)                   
|Hannaford Bros. (US)             | Irving Oil (US)                       | Met Cash (Australia)         
|K-VA-T (US)                      | Pilot Corporation (US)               
|Publix (US)                      | Tesoro (US)                          
|Carrefour (Europe)               | Husky Oil (Canada)                   
|Delhaize Group (Europe)          | Welcome Break (UK)                   
|Sainsbury's (UK)                
|Tesco Stores (UK)               
|A.S. Watson (Europe)            
|Intermarche (Europe)            
|Woolworth's (Australia)         
|Shoprite Checkers (South Africa)

Recent Significant
Acquisitions

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 $942,659 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.

In
August 2004, we acquired 51% of Retalix Italia (then Unit), a supplier of
specialized software and hardware solutions for the food and fuel retail industries in
Italy. In December 2004, we acquired the remaining 49% of Retalix Italia. Retalix Italia
focuses on the delivery, deployment and support of the Retalix advanced enterprise-wide
retail solutions to the Italian, as well as other European, food and fuel retail markets.

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In
January 2004, we acquired OMI International, a provider of supply chain execution and
warehouse management systems for the retail food industry, for aggregate consideration of
approximately $19.5 million in cash and ordinary shares, including related transaction
expenses. OMI integrated applications provide end-to-end supply chain management enabling
enterprise-wide procurement, merchandising, warehouse management and order management for
multi-warehouse, multi-facility food retailers and wholesalers. The acquisition of OMI
enabled us to enter into the supply chain execution and warehouse management systems
markets for retailers, broaden our customer base and expand our suite of products. In
early 2004, we also acquired the independent operations of the distributors of OMIs
products in Israel and Europe.

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 supplies StoreNext USA with POS, back office and mobile solutions
software and Fujitsu supplies StoreNext USA with POS hardware. 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,
2006, we estimate that StoreNext USA had more then 700 stores that have signed up to
Connected Services. On March 31, 2006, Retalix increased its ownership of StoreNext USA
from 50.01% to 95% for consideration of approximately $4.9 million.

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. In addition, StoreNext Israel has
established an e-marketplace across the Israeli retail supply chain by building a
subscriber base comprised of both retailers and suppliers. The aim of this initiative is
to provide its members supply chain efficiencies by providing up-to-date aggregated
data. To date, StoreNext Israel subscribers include over 900 stores and 1,000 suppliers.
StoreNext Israel is currently running an online collaboration project with Supersol, the
largest supermarket chain in Israel, and several of its key suppliers, including
Osem-Nestle, Strauss-Elite, Unilever Israel, Central Bottling Company Ltd. (Coca Cola
Israel) and Hogla-Kimberley.

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 Coca Cola Israel. As of
December 31, 2006, 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. 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.

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 chains and major fuel retailers have
historically represented the substantial majority of our revenues. We target Tier 3 and
Tier 4 food retailers indirectly through our channel partners, subsidiaries and through
our StoreNext initiatives in the United States and Israel. For larger supermarket and
convenience store chains, fuel retailers and distributors, we also provide professional
services including project management, implementation, application training and technical
and documentation services. We also provide development services to customize our
applications to meet specific requirements of our customers, as well as ongoing support
and maintenance services.

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

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

In
October 1997, we entered into a global marketing partnership program with NCR for our
convenience store products. Under this agreement, we became an NCR Global Solutions
Partner, which allows our StorePoint product line to be promoted by NCR in the worldwide
convenience store sector.

Dealer Sales

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

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

| |  | breadth
of product offerings;
| | - | -----------------------------

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

37

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# C. Organizational
Structure

We have the following subsidiaries
and related companies:

|Subsidiary                                        | Country of
Residence | Portion of ownership
interest held (%) | Portion of voting
power held (%)
|------------------------------------------------- | -------------------- | -------------------------------------- | --------------------------------
|
|
|
|
|Retalix Holdings Inc.                             | United States        | 100                                    | 100                             
|Retalix USA Inc.(1) (8)                           | United States        | 100                                    | 100                             
|Retail Control Systems Inc. (1)                   | United States        | 100                                    | 100                             
|StoreNext Retail Technology LLC (1)               | United States        | 95                                     | 95                              
|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.
|--- | ----------------------------------------------------------------------------------------

|(8) | In
December 2006, some of our previously existing subsidiaries (OMI           International
Inc., Retalix SCM Inc., BASS Inc. and Retalix TCI LLC) merged into           Retalix USA
Inc.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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
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, in Ivrea and
Rome in Italy, in Sydney, Australia, in Tokyo, Japan and in Petah-Tikva, Israel. We
believe our facilities are adequate for our current and planned operations.

# ITEM 4A 
UNRESOLVED STAFF COMMENTS

None.

38

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# 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 U.S. grocery and convenience store 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 food and fuel retailers and
foodservice and convenience store distributors to manage their operations more
efficiently, reduce infrastructure 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 Base Products in February
2006, TCI Solutions and IDS in April 2005, Unit S.p.A. (Retalix Italia) in August 2004,
and OMI International in January 2004.

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

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

During
2006, 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 our 2005 acquisitions 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 2004 include:

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

| |  | In
March 2006, we 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
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. As part of the
acquisition we retained 31of Base Products employees. The purpose of this
acquisition was to strengthen our customer base and position in the small and independent
retail sector in the United States.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

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| |  | 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, now called Retalix TCI, LLC, 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. As part of the acquisition, we
retained 111 of TCI Solutions employees. 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 will be eligible for release to the sellers from escrow only if certain future
customer retention milestones are met as of April 1, 2007. As part of the acquisition, we
retained 133 of IDSs employees. 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
August 2004, we acquired UNIT, now called Retalix Italia, a supplier of specialized
software and hardware solutions for the food and fuel retail industries in Italy and
Europe. As part of the acquisition, we retained 59 of UNITs employees.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
January 2004, we acquired OMI International, a provider of supply chain execution and
warehouse management systems for the retail food industry, for aggregate consideration of
approximately $19.5 million in cash and ordinary shares, including related transaction
expenses. This acquisition was concluded on January 2, 2004. As part of the acquisition,
we retained 67 of OMI Internationals employees. The purpose of the acquisition of
OMI International was to enable us to enter the supply chain execution and warehouse
management systems market for retailers, broaden our customer base and expand our suite
of products. As expected, we invested significant resources in developing a
next-generation, web-based version of OMI Internationals applications and in
integrating these applications with ReMA, our web-based enterprise application suite.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
announced numerous new customer agreements, including BP, French-based Carrefour and
Mousquetaires-Intermarche, Tesco (Retalix Back Office systems for sites across the United
Kingdom, Europe and Asia), Alon USA, Zen and Drug-Eleven in Japan, Lotus Supermarkets in
China, Rautakirja in Finland and Woolworths in Australia. These new customers in
Europe, Asia and the Pacific-Rim represent the advancement of our strategy to expand our
business to new retail markets around the globe.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
completed a public offering of 3,450,000 of our ordinary shares at a price to the public
of $18.00 per share in May 2004. The proceeds of the offering, net of underwriting
discount and other related expenses, amounted to approximately $59 million.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, the accounts of our subsidiaries and the accounts of a
variable interest entity of which we are the primary beneficiary.

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.

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, and to some extent from the sale of complementary computer and other hardware
equipment, all of which we classify as revenues from product sales. We also derive
revenues from maintenance and other professional services which are principally software
changes and enhancements requested by customers, all associated with products sold by us
and which we classify as revenues from services and projects. See further discussion of
sources of revenues below.

40

---

---



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.

We
derive our revenues primarily from the licensing of integrated software products, and to
some extent from the sale of complementary computer and other hardware equipment, all of
which we classify as revenues from product sales. We also derive revenues from maintenance
and other 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 we sell and which we classify as revenues from services
and projects.

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. In software arrangements that require
significant customization, integration and development, revenue is recognized in
accordance with SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.

Where
software license arrangements involve multiple elements, the arrangement consideration is
allocated using the residual method. Under the residual method, revenue is recognized for
the delivered elements when (1) Vendor Specific Objective Evidenc, or VSOE of the fair
values of all the undelivered elements exists, and (2) all revenue recognition criteria of
SOP 97-2, as amended, are satisfied. Under the residual method, any discount in the
arrangement is allocated to the delivered element. Our VSOE of fair value for maintenance
is based on a consistent 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 accounted for
under SOP 97-2 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
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.k to
our consolidated financial statements included elsewhere in this annual report).

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.

41

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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.

During
2006, as a result of a special impairment analysis done in view of a profit warning we
published in October, 2006 and our annual impairment analysis, we determined that no
goodwill of any of our past acquisitions was impaired.

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 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.

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 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.

42

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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 generally generate revenues in dollars or in NIS linked
to the dollar. Our financing is also comprised primarily of dollar denominated loans. As a
result, the dollar is our functional currency. Transactions and balances originally
denominated in dollars are presented at their original amounts. Balances in non-dollar
currencies are translated into dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For non-dollar transactions and other
items (stated below) reflected in the statements of income (loss), the following exchange
rates are used: (1) for transactions  exchange rates at transaction dates or average
rates of the period reported and (2) for other items (derived from non-monetary balance
sheet items such as depreciation and amortization, changes in inventories, etc.) 
historical exchange rates. Currency transaction gains or losses are carried to financial
income or expenses, as appropriate.

The
functional currency of 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.

43

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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 is 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 ending 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 and projects. 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
2006, two customers accounted for 5% or more of our revenues. During 2005, one single
customer accounted for 5% or more of our revenues. During 2004, none of our customers
accounted for 5% or more of our revenues.

Product Sales

Product
sales primarily consist of the sale of software through perpetual license agreements with
direct customers, integrators, distributors and dealers. Sales to Tier 3 and Tier 4
retailers and to suppliers and manufacturers 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 and Projects

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

44

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| |  | 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 2006 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 and
projects. 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
 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. Beginning in July 2002, we
began consolidating the results of StoreNext USA into our financial statements. As
hardware sales constitute a significant portion of StoreNext USA revenues, our cost of
product sales has increased, reflecting the higher costs of hardware. 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 and Projects
 Cost of services and projects consists of costs directly
attributable to service and project sales, including compensation, travel and overhead
costs for personnel providing software support, maintenance services, market information
services, messaging, Connected Services and other services. Because the cost of services
and projects is substantially higher, as a percentage of related revenues, than the cost
of products, our overall gross margins may vary from period to period as a function of the
mix of services and projects versus product revenues in such periods. As compared to our
historical results, IDS and OMI International have higher percentages of revenues from
services and projects than product sales, as well as lower gross margins for their service
related revenues. As a result, our cost of services and projects 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, the implementation of SFAS
123(R) resulted in 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 benfits, travel, trade shows,
public relations and promotional expenses. We compensate our sales force through salaries
and incentives. As we continue to focus our efforts on selling our products directly, we
also pay commissions to some of our sales personnel. Selling and marketing expenses have
increased significantly over the last few years as we have increased our efforts to
strengthen our marketing channels, particularly through direct sales.

45

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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.
However, as a result of certain fixed costs associated with growth, general and
administrative expenses as a percentage of sales have decreased.

Other General Income
(Expenses), Net consists primarily of gains or losses with respect to ordinary
course dispositions of fixed assets.

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 has committed to invest $1.25 million in consideration for its share in Cell-Time and
the other parties have committed to grant Cell-Time rights to use certain of their
technologies. As of December 31, 2005, Dai has fulfilled its above commitment. As a result
of Dais investments, we recorded in 2005 and 2004, gains of $83,000 and $200,000,
respectively, 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 Subsidiaries

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

Operating Results

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

| |                                                                                | Year ended December 31,
| | ------------------------------------------------------------------------------ | -----------------------
|
|
|
|
| | Revenues:                                                                      |                        
| | Product sales                                                                  |                        
| | Services and projects                                                          |                        
| |                                                                                |                        
| | Total revenues                                                                 |                        
| | Cost of revenues:                                                              |                        
| | Cost of product sales                                                          |                        
| | Cost of services and projects                                                  |                        
| |                                                                                |                        
| | Total cost of revenues                                                         |                        
| |                                                                                |                        
| | Gross profit                                                                   |                        
| | Operating expenses:                                                            |                        
| | Research and development expenses, net                                         |                        
| | Selling and marketing expenses                                                 |                        
| | General and administrative expenses                                            |                        
| | Other general expenses, net                                                    |                        
| |                                                                                |                        
| | Total operating expenses                                                       |                        
| |                                                                                |                        
| | Income from operations                                                         |                        
| | Financial income, net                                                          |                        
| | Gain arising from issuance of shares by a subsidiary and an associated company |                        
| |                                                                                |                        
| | Income before taxes on income                                                  |                        
| | Taxes on income                                                                |                        
| | Share in losses of an associated company                                       |                        
| | Minority interests in losses (gains) of subsidiaries                           |                        
| |                                                                                |                        
| | Net income                                                                     |                        
| |                                                                                |                        

46

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Comparison of 2004, 2005
and 2006

Revenues

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

During
2006, our revenue increase resulted primarily from an increase in sales to US 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 and projects increased as a percentage of total revenues
to 64% compared to 51% in 2005 and 37% in 2004, primarily due to the significant portion
of such revenues derived from some large international and US customers as well as in IDS,
the activities of which we acquired in April 2005. In 2006, our revenues from licenses
decreased in comparison to 2005, which caused the decrease in product sales in 2006, in
spite of an increase in sales of hardware.

During
2005, our revenue increase resulted primarily from an increase in sales to international
customers in both the supermarket and convenience store sectors, where revenues increased
from $32 million in 2004 to $75.2 million in 2005, an increase of approximately 137%. In
addition, revenues in the United States increased from $79.7 million in 2004 to $98.4
million in 2005 primarily due to the increase of our sales in the supply chain sector and
the contribution of the acquired IDS activities to these sales. International sales in
2005 consisted, in significant part, of several large sales. In addition, during 2005, our
revenues from services and projects increased as a percentage of total revenues to 51%
compared to 37% in 2004 and 36% in 2003, primarily due to the significant portion of such
revenues derived from some large international customers as well as in IDS, the activities
of which we acquired in April 2005.

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.

Cost of Revenues

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

The
increase in cost of product sales as a percentage of product sales in 2006 was 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.The increase in cost of product sales as a percentage of product sales
in 2005 was primarily attributable to the amortization of intangibles associated with
acquisitions. In 2004, this increase resulted primarily from an increase in hardware
associated sales attributable to our StoreNext USA initiative. In July 2002, we began to
consolidate the results of StoreNext USA into our financial statements. Although
historically we generated revenues primarily from the sale of software and related
services, StoreNext USA also generates revenues from the sale of third party point-of-sale
hardware, which generally has a higher associated cost of revenues and lower gross
margins. We expect our gross margins for future periods to be lower than our historical
gross margins as a result of both the consolidation of the StoreNext USA results and our
acquisition of IDS and OMI International, which generate a larger portion of revenues from
services, with a lower associated gross margin.

Operating Expenses

|                              | Year ended December 31, | % Change | % Change
|----------------------------- | ----------------------- | -------- | --------
|
|
|
|
|
|Research and development, net |                         |          | $       
|Selling and marketing         |                         |          |         
|General and administrative    |                         |          |         
|                              |                         |          |         
|Total operating expenses      |                         |          | $       

47

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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. The significant
growth in research and development expenses reflects our considerable investments in
developing our next-generation applications and our recently introduced products, adapting
these products to large chain environments as well as integrating our recently acquired
supply chain and warehouse management systems into our synchronized suite of products.
Approximately 15% or $2.2 million of the increase in these 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. Although we believe that in 2004, 2005 and
in 2006 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.

Selling and Marketing Expenses. During 2004 and 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 $0.5 million of expenses in
2006 were attributable to SFAS 123(R). We anticipate that selling and marketing expenses
will continue to increase in absolute dollars as we expand our operations.

General and Administrative
Expenses. In 2006, our general and administrative expenses were
consistent as percentage of sales in comparison to 2005 and 2004, despite approximately
$0.4 million of expenses in 2006 attributable to SFAS 123(R).

Financial Income
(Expenses), Net

Financial
income, net, totaled $79,000 in 2006, compared to $202,000 in 2005 and $85,000 in 2004.
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. In 2004, significantly lower interest rates
and thus yields on our financial reserves were the main contributor to lower interest
income, compared to 2005, in spite of significantly lower costs related to sales of
receivables in 2004.

Corporate Tax Rate

The
general corporate tax rate in Israel is 31% for the 2006 tax year, and is scheduled to be
reduced to 29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year
and 25% for the 2010 tax year and thereafter. Our effective consolidated tax rate,
however, was minus 48% (plus 30% excluding the effect of a release of a valuation
allowance attributable to an acquisition, in one of our subsidiaries) in 2006, 29% in 2005
and 25% in 2004. 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 2012. 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 the Companys income has been tax exempt in recent years due to the
approved enterprise status granted to most of their production facilities. The Company has
decided to permanently reinvest the amount of such tax exempt income and not to distribute
it as dividends. Accordingly, no deferred taxes have been provided in respect of such
income in 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, 2006, been distributed as dividends is approximately $3,950,000.

Out
of our retained earnings as of December 31, 2006, approximately $15,800,000, 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 $3,950,000 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.

48

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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 Privileged Enterprise routes do
not require pre-approval by the Investment Center of the Israeli Ministry of Industry,
Trade and Labor, 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 Subsidiariesthese amounts consisted in 2006 primarily of the
minority interests in the gains of StoreNext Israel. These gains are attributable to a
release of a valuation allowance attributable to an acquisition performed a few years ago
by StoreNext Israel. In 2005 and 2004, 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 $55.2million, $55.7 million and $91.4
million, as of December 31, 2006, 2005 and 2004, respectively. Our total cash and
cash equivalents, short-term bank deposits and short- and long-term marketable securities,
net of short-term bank credit amounted to approximately $56.2 million as of December 31,
2006, compared to $64.7 million as of December 31, 2005, and $104.3 million
as of December 31, 2004. The relatively high financial resources during 2004, is
primarily a result of approximately $58.9 million of proceeds we received from a public
offering of 3,450,000 of our ordinary shares, which we completed in May 2004. During 2005
and 2006, our financial resources decreased primarily due to approximately $54.1 million
and $8.4 million respectively, of cash used to finance the acquisition of new subsidiaries
and activities as well as additional investments in subsidiaries and in spite of a
positive cash flow of $12.5 million and $3.1 million respectively, provided by operating
activities.

Net
cash provided by operating activities was $3.0 million in 2006 and $12.5 million in 2005
and $6.2 million in 2004, primarily the result of net income of $1.3 million, $14.6
million and $4.8 million, respectively.

Net
cash used in investing activities in 2006, 2005 and 2004 of approximately $6.9 million,
$47.7 million and $28.5 million, respectively, was primarily attributable to cash
spent on acquisitions of subsidiaries which amounted to approximately $8.4 million in
2006, $54.1 million in 2005 and $16.3 million in 2004, in addition to the net investment
in debt securities of $10.0 million in 2004.

Our
capital expenditures (consisting of the purchase of fixed assets) were $2.6 million, $3.1
million and $1.8 million in 2006, 2005 and 2004, respectively, mostly attributable to
purchasing of computer and peripheral equipment including software systems and licenses.

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 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 exercise
of options. Net cash provided by financing activities in 2004 amounted to approximately
$67.4 million, primarily attributable to our public equity offering completed in May
2004, which yielded approximately $58.9 million in proceeds. An additional factor was the
issuance of ordinary shares upon the exercise of options by employees, the proceeds from
which amounted to $10.1 million.

Public Offering in May
2004

We
completed a public offering of 3,450,000 of our ordinary shares at a price to the public
of $18.00 per share in May 2004. The proceeds of the offering, net of underwriting
discount and other related expenses, amounted to approximately $58.9 million. A portion of
these proceeds was used by us in the acquisitions of TCI Solutions and IDS and for general
business purposes. The balance of these proceeds has been invested in short-term bank
deposits and investment-grade, interest-bearing securities.

Bank Debt

As
of December 31, 2006, we had an outstanding bank loan in the principal amount of $1.2
million. This loan is in EURO and accrues interest at the rate of 2.0% per year and
matures through July 2011.

49

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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
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.

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 (Evaluation)
Rate against the
U.S. dollar
% | Israel Inflation
Adjusted for the
Devaluation of the
NIS against the U.S.
dollar
%
| | ----------------------- | ------------------------ | ----------------------------------------------------------- | ----------------------------------------------------------------------------------
|
|
|
|
| | 2002                    | 6.5                      | 7.3                                                         | (0.8)                                                                             
| | 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                                                                               

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

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

# Research and Development

We
believe that our research and development efforts are essential to our ability to
successfully develop innovative products that address the needs of our customers as the
market for enterprise-wide software solutions evolves. In particular, we intend to
continue to invest significant resources in developing new next-generation products for
use in our enterprise solution As of December 31, 2006, our research and development staff
consisted of 669 employees, of whom 401 were located in Israel and the remaining 268 were
located primarily in the United States.

50

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# Proprietary Rights

We
have no patents or patent applications pending. Our success and ability to compete are
dependent in part on our proprietary technology. We rely on a combination of copyright,
trademark and trade secret laws and non-disclosure agreements to establish and protect our
proprietary rights. To date, we have relied primarily on proprietary processes and
know-how to protect our intellectual property. 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. The amount
of grants of the OCS recognized in our statement of operations for the year ended
December 31, 2006 was approximately $586,000. 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 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, as of 2006, to increase the rate of interest accruing on grants by 1% per year.
The amendment proposes to have retroactive effect from January 1, 2006, 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 total manufacturing volume outside of Israel, or subject to the approval
of the Chief Scientist in the case of the transfer of more than 10% of a grant
recipients total 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 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.

51

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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

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 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, 2006:

|Contractual Obligations (U.S. $ in millions)*                                    | Total | Less
than 1
year | 2-3
years | 4-5 years | More than 5
years
|-------------------------------------------------------------------------------- | ----- | ---------------- | --------- | --------- | -----------------
|
|
|
|
|Long-Term Debt Obligations (including current maturities)                        |       |                  | $         | 1.1       |                  
|Operating Lease Obligations (with regard to offices and facilities and vehicles) |       |                  |           | 15.6      |                  
|Severance pay                                                                    |       |                  |           | 4.6       |                  
|                                                                                 |       |                  |           |           |                  
|Total                                                                            |       |                  |           | 21.3      |                  
|                                                                                 |       |                  |           |           |                  

|* | See
also the notes to our audited consolidated financial statements for the year ended
December 31, 2006 included elsewhere in this annual report, and in particular, Note 8
thereto.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

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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
21, 2007.

|Name                | Age |  | Position                                                                              
|------------------- | --- |  | --------------------------------------------------------------------------------------
|
|
|
|
|Barry Shaked        | 50  |  | President, Chief Executive Officer and Chairman of the Board                          
|                   
|Danny Moshaioff     | 60  |  | Executive Vice President, Chief Financial Officer                                     
|                   
|Avinoam Bloch       | 50  |  | Executive Vice President, Chief Operations Officer-International and Israeli Business 
|                   
|Yoni Stutzen        | 55  |  | Executive Vice President, International Sales                                         
|                   
|Reuben Halevi       | 49  |  | Executive Vice President, Product Development, Chief Operating Officer - US Operations
|                   
|Saul Simon          | 54  |  | Executive Vice President, Business Development and CRM Products                       
|                   
|David Bresler       | 51  |  | External Director                                                                     
|                   
|Louis Berman        | 50  |  | External Director                                                                     
|                   
|Sigal Hoffman       | 50  |  | Director                                                                              
|                   
|Brian Cooper        | 51  |  | Director                                                                              
|                   
|Ian O'Reilly        | 58  |  | Director                                                                              
|                   
|Amnon Lipkin-Shahak | 63  |  | Director                                                                              

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

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

Avinoam
Bloch has served as our Executive Vice President, Chief Operations Officer 
International and Israeli Business since January 2005. From January 2002 until January
2005, Mr. Bloch served as Executive Vice President, Products. From January 2000
until January 2002, Mr. Bloch served as Executive Vice President, Operations.
From February 1993 to January 2000, Mr. Bloch served as Vice President,
Engineering responsible for Israeli markets and new technology software development. From
December 1988 to January 1993, Mr. Bloch served as a Product Manager for
Wincor-Nixdorf and Wincor-Nixdorf Italy. He served as a Programmer and Product Manager
from January 1986 to December 1988. Mr. Bloch served as an officer in the
Israeli Defense Forces from 1975 to 1979. Mr. Bloch received a B.Sc. in Computer
Science and Mathematics from the Hebrew University in 1993.

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

53

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Reuben
Halevi has served as our Chief Operating Officer for US operations since August,
2006, in addition to his role of Executive Vice President, Product Development in
which he has served since June 2005. Previously, Mr. Halevi has served as a Vice
President for Development since 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 received a B.Sc. in Industrial and Management Engineering from the
Technion, Israel Institute of Technology in 1983.

Saul
Simonhas served as our Executive Vice President, Business Development and CRM
Products since November 2005, as a vice president with the same responsibilities since
January 2004, and as our Vice President, Business Development from November 1997
until December 2003. Mr. Simon served as Vice President, U.S. Activities for
Adapt Technologies from March 1993 to June 1997. Mr. Simon received a B.Sc.
in Computer Science and Mathematics from Tel Aviv University in 1982.

David
Breslerhas served as an external director since June 2006. Since April 2006, Mr.
Bresler has served as Chairman and Chief Executive Officer of the Happening chain. From
2002 to 2004, Mr. Bresler served as Chief Executive Officer of Golf & Co. 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.

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

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

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

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

Amnon
Lipkin-Shahakhas served as a director since April 2002. Since May 2001,
Mr. Lipkin-Shahak has served as the chairman of the board in the TAHAL Group, and as
a director in the Kardan Group. 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. Mr. Lipkin-Shahak is also a former director of Granit Hacarmel and
NILIT and a former chairman of the Bountiful Israel Council. Between May 1999 and
March 2001, Mr. Lipkin-Shahak served as a member of the Israeli parliament (the
Knesset). During most of this period, Mr. Lipkin-Shahak served as a cabinet minister
in charge of transport (between July 2000 and March 2001) and in charge of
tourism (between July 1999 and July 2000). In December 1998,
Mr. Lipkin-Shahak retired from his position as the Chief of Staff of the Israeli
Defense Forces after thirty-six years of service.

# 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, 2006, was
approximately $1.8 million. This amount includes pension, retirement and similar benefits
in the aggregate amount of $125,000. 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 require the approval of our audit committee, followed by the approval of our
board of directors and then the approval of our shareholders.

Our
external directors receive annual compensation of approximately $9,500 each and in
addition $350 per board meeting or per board committee meeting in which they participate,
and $210 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. This 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 and January 2007, Mr. Shaked
was granted options to purchase a total of up to 176,556, 194,090 and 196,135 of our
ordinary shares, respectively, at exercise prices of $21.86, $24.46 and $16.29 per share,
respectively. The options have a term of four years from the date of grant.

54

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

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

Our
employment agreements with most of our employees located in Israel, including executive
officers and those that are also members of our board of directors, provide for standard
Israeli benefits, such as managers insurance and an educational fund. We make
payments under these programs as follows: pension5.0% of gross salary; severance
pay8.33% of gross salary; disability insuranceup to 2.5% of gross salary (all
of which are considered part of managers insurance); and educational fund7.5%
of gross salary. The total amount we expensed in 2006 under these arrangements for all
executive officers as a group was approximately $125,000.

During
2006, all our directors and executive officers as a group were granted options to purchase
an aggregate of 414,090 shares under our stock option plans. The exercise prices of these
options range from $15.55 to $24.46 and their expiration dates range from December 31,
2009 to August 1, 2010. Of these options, 64,697 became exercisable on January 1, 2007,
73,334 will become exercisable on August 1, 2007, 64,696 will become exercisable on
January 1, 2008, 73,333 will become exercisable on August 1, 2008, 64,697 will become
exercisable on January 1, 2009 and 73,333 will become exercisable on August 1, 2009.

# C. Board Practices

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 thinks
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, 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 2007.

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 and permit the creation of other committees. Currently, the audit committee and
an 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  the Chairman, and all of the members of our audit committee are
independent directors, as defined under the rules of Nasdaq.

55

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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 may be
appointed as an alternate member of any committee of our board, 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.

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.

56

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Audit Committee

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

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

Under
Nasdaq rules, our audit committee, operating under a written charter, assists the board in
fulfilling its responsibility for oversight of the quality and integrity of our
accounting, auditing and financial reporting practices and financial statements and the
independence qualifications and performance of our independent registered public
accounting firm (subject to the shareholders approval under the Companies Law). 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.

The
members of our audit committee are Ian OReilly, David Bresler, Louis Berman and
Brian Cooper, all of which are independent directors. Our board has determined
that Mr. Brian Cooper and Mr. David Bresler are the Audit
Committee Financial Experts.

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 Sigal Hoffman and Brian Cooper.

Internal Auditor

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

| |                   | As of December 31,
| | ----------------- | ------------------
|
|
|
|
| | United States     |                   
| | Israel            |                   
| | Europe            |                   
| | Rest of The World |                   
| |                   |                   
| | Total             |                   
| |                   |                   

57

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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
18% of wages of which the employee contributes approximately 12% and the employer
contributes approximately 6%.

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, holds, as of May 31, 2007, 997,572 of our ordinary shares,
          which equals approximately 5.0% of our issued share capital.

Mr. Brian
Cooper, a director and our former Vice President, holds, as of May 31,           2007,
774,635 of our ordinary shares, which equals approximately 3.9% of our           issued
share capital.

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

All
other directors and executive officers hold as of May 31, 2007, a total of 19,662
of our ordinary shares, which equals approximately 0.1% of our issued share capital.

In
addition, as of May 31, 2007, Mr. Shaked held options to purchase a total of up to
696,548 of our ordinary shares granted to him on January 1, 2004, January 1, 2005, January
1, 2006 and January 1, 2007 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 forwhich the Options areExercisable | Exercise Pricein U.S. dollars | Expiration Date
| | ---------------------------------------------------- | ----------------------------- | ---------------
|
|
|
|
| | 129,767                                              | 23.19                         | January 1, 2008
| | 176,557                                              | 21.86                         | January 1, 2009
| | 194,090                                              | 24.46                         | January 1, 2010
| | 196,135                                              | 16.29                         | January 1, 2011

As
of May 31, 2007, other directors and executive officers held options to purchase a
total of up to 680,500 of our ordinary shares under our Second 1998 Share Option Plan and
the 2004 Israeli Share Option Plan (which are described below), as follows:

Options
to purchase 94,000 of our ordinary shares, which are fully vested, at an exercise price of
$10 per share. The expiration date of these options is April 30, 2008.

Options
to purchase 193,000 of our ordinary shares, which are fully vested, at an exercise price
of $14.875 per share. The expiration date of these options is April 30, 2008.

Options
to purchase 2,500 of our ordinary shares, which are fully vested, at an exercise price of
$8.75 per share. The expiration date of these options is April 30, 2008.

58

---

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Options
to purchase 105,000 of our ordinary shares at an exercise price of $18.56 per share.
Options to purchase 90,000 shares of these options are fully vested, and the remaining
amount will vest in December 31, 2007. The expiration date of these options is June 30,
2008.

Options
to purchase 66,000 of our ordinary shares at an exercise price of $23.02 per share.
Options to purchase 36,667 shares of these options are fully vested, and the remaining
amount will vest in two equal portions on December 31, 2007 and December 31, 2008. The
expiration date of these options is June 30, 2009.

Options
to purchase 220,000 of our ordinary shares at an exercise price of $15.55 per share. These
options will vest in three equal portions on August 1, 2007, August 1, 2008 and August 1,
2009. The expiration date of these options is August 1, 2010.

# Our Share Option Plans

# Second 1998 Share Option
Plan

Our
Second 1998 Share Option Plan, or Second 1998 Plan provides for the granting of incentive
share options to employees, and for the granting of non-statutory options to employees,
directors and consultants. Unless terminated sooner, the Second 1998 Plan will terminate
automatically in May 2012. As of May 31, 2007, options to purchase 6,002,975
ordinary shares have been granted under the Second 1998 Plan, out of which options to
purchase 1,214,627 (excluding options already exercised or expired) ordinary shares were
outstanding, and 61,388 ordinary shares remained available for future grants. These
figures include options to purchase 412,500 ordinary shares granted (net of forfeited
options) under our Second 1998 Plan in August 2006, at an exercise price of $18.55 of
which one-third will vest on August 1, 2007, one-third will vest on August 1, 2008, and
the remaining one-third shall vest on August 1, 2009. These options will expire on August
1, 2010. As of May 31, 2007, 3,219,477 options granted under our Second 1998 Plan
have been exercised.

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

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

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

# 2004 Israeli Share
Option Plan

Our
2004 Israeli Share Option Plan provides for the granting of options to employees,
directors and consultants under either Section 102 or Section 3(9) of the Israeli Income
Tax Ordinance. As of May 31, 2007, options to purchase 1,414,000 ordinary shares
were granted under the 2004 Israeli Share Option Plan. 600,000 options were granted at an
exercise price of $18.56, of which one-third vested on December 31, 2004, two-ninths
vested on December 31, 2005, two-ninths vested on December 31, 2006, and the remaining
two-ninths will vest on December 31, 2007. These options will expire on June 30, 2008. In
addition, options to purchase 164,000 shares were granted at an exercise price of $23.02,
of which one-third vested on December 31, 2005 two ninths vested on December 31, 2006 and
the remaining four ninths will vest in two equal portions on December 31, 2007 and
December 31, 2008. These options will expire on June 30, 2009. These figures include also
options to purchase 585,000 ordinary shares granted (net of forfeited options) under our
2004 Israeli Share Option Plan in August 2006, at an exercise price of $15.55 of which
one-third will vest on August 1, 2007, one-third will vest on August 1, 2008, and the
remaining one-third shall vest on August 1, 2009. These options will expire on August 1,
2010. The options granted under our 2004 Israeli Share Option Plan are all subject to the
capital gains taxation route under Section 102 of the Income Tax Ordinance
[New Version], 1961, which generally provides for a reduced tax rate of 25% on gains
realized upon the exercise of options and sale of underlying shares, subject to the
fulfillment of certain procedures and conditions 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 not entitled to recognize a deduction for tax purposes on the gain recognized by
the employee upon sale of the shares underlying the options. As of May 31, 2007,
41,167 options granted under our 2004 Israeli Share Option Plan have been exercised,
113,339 options were forfeited and 699,339 options remained outstanding.

59

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

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

# 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 May 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
Israeli Income Tax Ordinance (as in effect prior to January 1, 2003). Among other things,
the Section 102 to the Income 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.

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 Income Tax Ordinance [New Version], 1961. 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 May 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.

On
December 1, 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. In addition, the plan stipulates that options, may not be
exercised prior to: (1) the conversion of the corporate entity of StoreNext USA from a
limited liability company to a C-corporation; or (2) the consummation of an initial public
offering of StoreNext USAs securities; or (3) a merger or a significant change of
control in StoreNext USA; or (4) five years from the date of grant.

60

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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. Through December 31,
2006, 14,000 of these options were forfeited. 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. All of these StoreNext USA options will fully vest seven
years from grant or upon an initial public offering or change of control or, in the option
committees discretion, accelerated vesting in the event of a merger, a sale or a
disposition. In addition, these options will vest upon an initial public offering of the
majority interest of StoreNext USA. The options will terminate and expire ten years from
grant.

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

# ITEM 7  MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTION

# A. Major Shareholders

The
following table sets forth, as of May 31, 2007, certain information known to us
with respect to beneficial ownership of our ordinary shares by (1) each shareholder known
by us to be the beneficial owner of five percent or more of our ordinary shares and (2)
all of our executive officers and directors as a group. As of May 31, 2007,
19,885,845 of our ordinary shares were outstanding.

|Name                                                | Number of
ordinary
shares held | Percentage of
outstanding
ordinary
shares (1)(2)
|--------------------------------------------------- | ------------------------------ | ------------------------------------------------
|
|
|
|
|Prisma Investment House Ltd. (3)                    |                                |                                                 
|Wasatch Advisors Inc. (4)                           |                                |                                                 
|Barry Shaked (5)                                    |                                |                                                 
|All directors and executive officers as a group (6) |                                |                                                 

---

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

|(2) | Amounts
include shares that are not currently outstanding but are deemed           beneficially
owned because of the right to purchase them pursuant to options           exercisable on
May 31, 2007, 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 information provided to us by Prisma           Investment
House Ltd. pursuant to Israeli law with respect to their aggregate           holdings.
The method used to compute holdings under Israeli law does not           necessarily bear
the same result as the method used to compute beneficial           ownership under SEC
rules and regulations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | This
information is based solely on Schedule 13G/A filed with the SEC by Wasatch
          Advisors Inc. on February 15, 2007 and relates to their holdings of our shares
          as of December 31, 2006. This is the most updated information available to us
in           regard to their holdings of our shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
options to purchase up to 312,168 shares, held by Mr. Shaked, directly           or
indirectly, that are exercisable on May 31, 2007 or within 60 days
          thereafter.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes
options to purchase 696,668 shares that are exercisable currently or           within 60
days after May 31, 2007 at exercise prices that range from           $8.75 to
$24.46.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

61

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As
of April 30, 2007, 7,639,771 of our ordinary shares were held in the United States,
by 16 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

None.

# C. Interests of Experts
and Counsel

Not
Applicable.

# ITEM 8  FINANCIAL INFORMATION

See
Item 18.

Legal Proceedings

Retail Control Systems
Inc.

Prior
to our 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 excess of $200,000.

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 RCS has meritorious defenses against this claim and
that they will not have any material effect on our financial position and/or
profitability. No provision was recorded in regard to this claim as of December 31, 2006.

StoreNext USA

In
March, 2005, a former dealer in the U.S. (Sierra Nevada Cash Register), filed in the Third
Judicial District Court of Salt Lake County, Utah, a complaint against StoreNext USA,
seeking actual and subsequent damages in excess of $300,000 for breach of the
distributorship agreement and unfair competition. Recently, the court allowed Sierra
Nevada leave to file an amended complaint in which it was allowed to assert a claim under
a certain act which, if ultimately proven, could treble the compensatory damages. In
addition, the Company filed a counter claim against Sierra Nevada for unpaid receivables
for product in the amount of $119,000. Some depositions and written discovery have taken
place but the case in ongoing. We believe that this action will not result in any material
expense and therefore no provision (other than a full provision against the outstanding
debt) was recorded by us in regard to this claim as of December 31, 2006.

IDS

In
June 2006, a fairly large customer in the U.S, filed in the District Court of Madison
County, Nebraska, a complaint against us 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 we
filed a motion to dismiss the complaint on various grounds. In September 2006, the
customer opposed to these motions. In October 2006, the court granted IDSs motion to
compel arbitration and reserved judgment on our motion to dismiss the complaint and stayed
the federal action, all pending the outcome any arbitration. In February 2007, our
subsidiary, Retalix USA Inc., filed a Demand for Arbitration against the customer with the
American Arbitration Association in Dallas, Texas, seeking to recover damages, interest
and attorneys fees in excess of $2.3 million as a result of the customers
failure to pay for products delivered and services rendered as well as other misconducts.
In February 2007, the customer filed a Counterclaim and Demand for Arbitration seeking to
recover damages, interest, taxable arbitration costs and attorneys fees in excess of
$9.9 million for breach of contract, breach of warranties and other misconducts. We,
together with our legal advisors are in the process of addressing the Counterclaim and
Demand for Arbitration. As of December 31, 2006, the balance of debt of this customer for
services supplied by the Company amounted to approximately $$500,000, net of a provision
for doubtful debts of $400,000.

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. We and our legal counsels are in the process of reviewing this
complaint. No provision was recorded in regard to this claim as of December 31, 2006.

62

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Retalix Italia

In
August 2005, an Italian competitor of Retalix Italia approached us and Retalix Italia
claiming that the acquisition of M.P.S. Millennium Pos Solution S.r.l. (MPS)
by Retalix Italia in July 2005 formed an act of unfair competition. No further action has
been taken by the above party, in connection with its above allegation to date. In
addition, in April 2006, the above competitor exercised arbitration proceedings in order
to enforce its claims of co-ownership to a certain product of MPS, as well as indemnity
for certain damages allegedly suffered by him within this context. In May 2006, MPS
requested the arbitral court to reject all claims filed by the above party. In May 2007,
the parties to this dispute signed a settlement agreement according to which all previous
agreements in connection with the relationship between the parties are cancelled and MPS
and the distributor are the sole owners of the product, may further develop and sell the
product  each at its own discretion, and such action by either will not create any
obligation towards the other party. In addition, and regardless of any further sales of
the product by either party, the distributor is to pay MPS use fees totaling approximately
$53,000, in installments, during the period of June 2007 to June 2010. The agreement also
stipulates that MPS is to provide the distributor training for a consideration totaling
approximately $40,000 as well as support services to continue until the end of January
2008, for a consideration totaling approximately $66,000.

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
approximately $350,000. This claim is handled by our insurers. We believe that our
exposure due to this claim and any retention that it may be required to pay in connection
with it is immaterial and thus no provision was recorded in regard to this claim as of
December 31, 2006.

Other Claims and Disputes

We
and our subsidiaries are also parties to several other claims filed against us totaling
approximately $180,000. In addition, we and our subsidiaries are parties to several
disputes with former or current customers and service providers. These disputes, estimated
at a total of $1.2 million, have not materialized to court claims and some of them are in
mediation process. We have recorded as of December 31, 2006 a provision of approximately
$320,000 which we estimate as sufficient to cover any expenses arising from the above
claims and disputes.

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.

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.

63

---

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# ITEM 9  THE OFFER
AND LISTING

# A. Offer and Listing
Details

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

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

|                                 | High | Low
|-------------------------------- | ---- | ---
|
|
|
|
|2002                             |      |    
|                                 |      |    
|2003                             |      |    
|                                 |      |    
|2004                             |      |    
|                                 |      |    
|2005                             |      |    
|                                 |      |    
|2006                             |      |    
|                                 |      |    
|2005:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2006:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2007:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Most recent six months:          |      |    
|                                 |      |    
|December 2006                    |      |    
|                                 |      |    
|January 2007                     |      |    
|                                 |      |    
|February 2007                    |      |    
|                                 |      |    
|March 2007                       |      |    
|                                 |      |    
|April 2007                       |      |    
|                                 |      |    
|May 2007                         |      |    
|                                 |      |    
|June 2007, through June 20, 2007 |      |    

On June 20, 2007, the last
reported sale price of our ordinary shares on the Nasdaq Global Select Market was
$19.68 per share.

64

---

---



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
|-------------------------------- | ---- | ---
|
|
|
|
|2002                             |      |    
|                                 |      |    
|2003                             |      |    
|                                 |      |    
|2004                             |      |    
|                                 |      |    
|2005                             |      |    
|                                 |      |    
|2006                             |      |    
|                                 |      |    
|2005:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2006:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Second Quarter                   |      |    
|                                 |      |    
|Third Quarter                    |      |    
|                                 |      |    
|Fourth Quarter                   |      |    
|                                 |      |    
|2007:                            |      |    
|                                 |      |    
|First Quarter                    |      |    
|                                 |      |    
|Most recent six months:          |      |    
|                                 |      |    
|December 2006                    |      |    
|                                 |      |    
|January 2007                     |      |    
|                                 |      |    
|February 2007                    |      |    
|                                 |      |    
|March 2007                       |      |    
|                                 |      |    
|April 2007                       |      |    
|                                 |      |    
|May 2007                         |      |    
|                                 |      |    
|June 2007, through June 21, 2007 |      |    

On June 21, 2007, the last
reported sale price of our ordinary shares on the Tel Aviv Stock Exchange was NIS
82.58 per share.

# B. Plan of Distribution

Not
applicable.

65

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# 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 amended on November 1, 2005.
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
19,885,845 ordinary shares were outstanding as of May 31, 2007.

# 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.

66

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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.

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.

67

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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.

# 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:

68

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

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

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

Exculpation, Insurance
and Indemnification of Office Holders

# Exculpation of Office
Holders

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

# Insurance of Office
Holders

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

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

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

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

# Indemnification of
Office Holders

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

| |  | a
financial liability imposed on him in favor of another person by any judgment, including
a settlement or an arbitration award approved by a court, 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

69

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Limitations on
Exculpation, Insurance and Indemnification

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

| |  | a
breach by the office holder of his duty of loyalty, unless, with respect to
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 70 days have passed from the time that the requisite proposals for
approval of the merger have been filed with the Israeli Registrar of Companies.

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

The
Companies Law also provides that an acquisition of shares in a public company must be made
by means of a tender offer if as a result of the acquisition the purchaser would become a
25% shareholder of the company, unless there is already another 25% shareholder of the
company. Similarly, the Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 45% shareholder of the company, unless there is already a
majority shareholder of the company. These requirements do not apply if the acquisition is
made in a private placement. 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 (1) at least 5% of the companys outstanding shares will be
acquired by the offerer and (2) 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.

# C. Material Contracts

TCI Solutions Acquisition

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. A portion of the cash consideration was placed in escrow to secure
certain representations and warranties of the sellers.

Also
in April 2005, we executed an agreement and plan of merger with TCI Solutions, pursuant to
which TCI Solutions merged in November 2005, with and into one of our subsidiaries 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. After the
merger was completed, we changed TCI Solutions name to Retalix TCI, LLC. On December
2006, Retalix TCI, LLC merged into Retalix USA Inc.

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IDS Acquisition

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, assumption of certain of IDSs liabilities
and 497,364 of our ordinary shares. Of the shares representing the aggregate
consideration, 207,236 shares were eligible for release from escrow only if certain were
to be met as of April 1, 2007. These milestones were met and accordingly these shares were
eventually released in April, 2007. On December 2006, IDSs successor, Retalix SCM
Inc., merged into Retalix USA Inc.

# 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 (5) a
trust that has a valid election in effect to be treated as a U.S. person.

This
summary is for general information purposes only and does not purport to be a
comprehensive description of all of the U.S. federal income tax considerations that may be
relevant to a decision to purchase 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 U.S./Israel 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 any 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, regulated investment company, or other financial
institution or financial services entity; (2) a broker or dealer in securities
or foreign currency; (3) a person who acquires our ordinary shares in connection with
employment or other performance of services; (4) a U.S. holder that is subject to the
alternative minimum tax; (5) a U.S. holder that holds the ordinary shares as a hedge or as
part of a hedging, straddle, conversion or constructive sale transaction; (6) a tax-exempt
entity; (7) real estate investments; (8) a U.S. holder that expatriates out of the United
States; and (9) a person having a functional currency other then U.S. dollar.

71

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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, nor
are the possible application of U.S. federal gift or estate taxes or alternative minimum
tax or any aspect of state, local or non-U.S. tax laws.

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, and we do not intend to pay
cash dividends in the foreseeable future. In the event that we do pay dividends, and
subject to the discussion under the 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 earnings and profits will be treated first as a non-taxable return of
capital, reducing the U.S. Holders tax basis for the ordinary shares to the extent
thereof, and then as capital gain. Corporate holders generally will not be allowed a
deduction for dividends received. In general, preferential tax rates not exceeding 15% for
qualified dividend income and long-term capital gains are applicable for U.S.
Holders that are individuals, estates or trusts. For this purpose, qualified
dividend income means, inter alia, dividends received from a qualified foreign
corporation. A qualified foreign corporation is a corporation that is
entitled to the benefits of a comprehensive tax treaty with the United States which
includes an exchange of information program. The U.S. Internal Revenue Service, or IRS,
has stated that the Israel/U.S. Tax Treaty satisfies this requirement and we believe we
are eligible for the benefits of that treaty.

The
amount of a distribution with respect to our ordinary shares will be measured by the
amount of fair market value of any property distributed, and for U.S. federal income tax
purposes, the amount of any Israeli taxes withheld therefrom. (See discussion below under
Israeli Taxation  Taxation of Non-Residents on Receipt of Dividends.)
Cash distributions paid by us in NIS will be included in the income of U.S. Holders at a
U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend
is includible in the income of the U.S. Holder, and U.S. holders will have a tax basis in
such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S.
Holder subsequently converts the NIS, any subsequent gain or loss in respect of such NIS
arising from exchange rate fluctuations will be U.S. source ordinary exchange 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 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
30 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 will be treated as U.S. source income for U.S. foreign tax
credit purposes (see discussion below under Israeli Taxation-Application of the
Israel/U.S. Tax Treaty to Capital Gains Tax.). A loss realized by a U.S. Holder on
the sale, exchange or other disposition of ordinary shares is generally allocated to U.S.
source income. However, 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

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

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

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

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.

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

If
we become a PFIC, each U.S. Holder who has not elected to treat us as a qualified electing
fund, 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 2006 and do not anticipate being a PFIC in 2007. 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. U.S. federal income taxes are imposed
on the taxable income of the U.S. consolidated group at progressive income tax rates
ranging from 15% to 35%. The corporation is subject to the same U.S. 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.

# 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. Following an amendment to the Tax Ordinance, which came into effect
on January 1, 2006, the corporate tax rate is scheduled to decrease as follows:, 29% for
2007 tax year, 27% for the 2008 tax year, 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 ofForeign Ownership | Rate ofReduced 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 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
2012.

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 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. 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 approved enterprise programs in which the year of election under
the Investments Law is 2004 or later, unless such programs received 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.

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

| |  | Deduction
of all costs related to shares issue in a stock market and patents over an 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
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

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

# 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.

As
of January 1, 2006, the tax rate 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 shares at the regular corporate tax rate on capital gains derived
from the sale of shares, unless such companies were not subject to the Adjustments Law (or
certain regulations) at the time of publication of the aforementioned amendment to the Tax
Ordinance that came into effect on January 1, 2006, 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).

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 an Israeli resident (i) has a controlling
interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or
is entitled to 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly.

In
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 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.

77

---

---



# 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 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). Such tax rate is reduced to 12.5% for dividends not
generated by an Approved Enterprise (or Benefited Enterprise) if the non-resident is a
U.S. corporation and holds 10% or more of our 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, and provided that not more than 25% of the Israeli companys gross income
consists of interest or dividends.

# 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.

# I. Subsidiary
Information

Not
applicable.

78

---

---



# 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, 2006, we had the following open foreign currency forward contracts all of
up to six months in term and maturing between January to February 2007:

|Sell                     | Buy  |               |              
|------------------------ | ---- | ------------- | -------------
|
|
|
|
|Pounds Sterling 1.0      | $1.9 | October 2006  | January 2007 
|                         |      |               |              
|Pounds Sterling 1.9      | $3.7 | November 2006 | February 2007
|                         |      |               |              
|New Israeli Shekels 24.3 | $5.7 | November 2006 | February 2007
|                         |      |               |              
|New Israeli Shekels 6.3  | $1.5 | December 2006 | February 2007
|                         |      |               |              
|Euros 0.6                | $0.8 | October 2006  | January 2007 
|                         |      |               |              
|Australian Dollars 0.8   | $  1 | November 2006 | February 2007

The
fair value of these outstanding contracts as of December 31, 2006 reflects a liability in
the amount of $336,000, 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,
2006.

(In thousands, except percentages)

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

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

|** | Weighted
average yield as per the performance of 2006
|-- | -----------------------------------------------------

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

79

---

---



# 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, 2006:

(in thousands)

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

# Interest Rate Risk

Our
interest expenses and income are sensitive to changes in interest rates, as all of our
cash reserves and borrowings are subject to interest rate changes. Most of our financial
reserves are 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.

80

---

---



# PART III

# ITEM 15  CONTROLS
AND PROCEDURES

# Disclosure controls and procedures

As
of December 31, 2006, 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 (the Exchange Act)). Our management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and our management necessarily applies
its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective as of December
31, 2006, to provide reasonable assurance that the information required to be disclosed in
filings and submissions under the Exchange Act, is recorded, processed, summarized, and
reported within the time periods specified by the Securities and Exchange
Commissions rules and forms, and that material information related to us and our
consolidated subsidiaries is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions about required disclosure.

# Managements annual
report on internal control over financial reporting

Our
management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a- 15(f)~ of the Exchange
Act. Our internal control system was designed to provide reasonable assurance to our
management and our board of directors regarding the reliability of financial reporting and
the preparation and fair presentation of published financial statements for external
purposes in accordance with generally accepted accounting principles. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurances with respect to
financial statement preparation and presentation. 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 decline.

Under
the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal ControlIntegrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2006.

Pursuant
to temporary rules of the Securities and Exchange Commission that permit us to only
provide managements report on internal control over financial reporting, this Annual
Report on Form 20-F does not include an audit report by our independent registered public
accounting firm regarding the effectiveness of our internal control over financial
reporting and such firm has not attested to managements report on our internal
control over financial reporting above.

# Changes in internal
control over financial reporting

As
of the end of the period covered by our previous annual report, we performed an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures. The evaluation was performed with the participation of our key corporate
senior management and under the supervision and with the participation of our chief
executive officer and chief financial officer. Based on this prior evaluation, our
principal executive officer and principal financial officer became aware of several
revisions to our internal control over financial reporting that were required to our
previously announced quarterly and annual financial statements for 2005. These revisions
reflected changes in timing of the recognition of revenues, accounting treatment for open
contracts of acquired entities and activities, reallocations among Retalixs classes
of revenues and other expense issues.

Based
upon the these revisions, our chief executive officer and our chief financial officer
concluded that our disclosure controls and procedures were not effective as of December
31, 2005 because at that time we did not have effective controls designed and in place to
ensure that these items were accounted for and reported in accordance with generally
accepted accounting principles. In order to address the failure to have effective controls
designed and in place as described above, we implemented stricter internal control over
financial reporting to insure more detailed reporting in advance to management and review
by management of transactions with lower minimums of volume. We also recruited additional
qualified accounting personnel and improved our documentation of procedures, policies and
controls as well as their actual implementation. In addition, we are using more relevantly
experienced external evaluation firms in connection with accounting due diligence
processes and purchase price allocations in order to insure that key accounting issues are
addressed.

There
is no assurance that the disclosure controls and procedures or the new internal control
over financial reporting will operate effectively under all circumstances. Nevertheless,
our chief executive officer and our chief financial officer believe that with the
implementation of these corrective actions, the controls and procedures were effective as
of December 31, 2006, so as to provide reasonable assurance that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the Securities
and Exchange Commissions rule and forms.

81

---

---



# ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

Our
board of directors determined that Mr. Brian Cooper and Mr. David Bresler are audit
committee financial experts as defined in Item 16A of Form 20-F. Both Mr. Cooper and
Mr. Bresler have long term experience in senior financial positions in large corporations
and the board has relied on their experience in determining that they are audit committee
financial experts. Mr. Cooper and Mr. Bresler are 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.

# ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Kesselman
& Kesselman, a member of PricewaterhouseCoopers International Limited, served as our
principal independent registered public accounting firm since October, 2006. Kost, Forer,
Gabbay & Kasierer, a member firm of Ernst & Young, has served as our
independent registered public accounting firm from April, 2005 until
October,  2006. Kesselman & Kesselman, a member of PricewaterhouseCoopers
International Limited, 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 2005 and 2006:

|                   | Year Ended December 31,
(U.S. $ in thousands)
|------------------ | ---------------------------------------------
|
|
|
|
|Audit Fees         |                                              
|Audit Related Fees |                                              
|Tax Fees           |                                              
|                   |                                              
|Total              |                                              
|                   |                                              

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

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

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

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

None.

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

None.

82

---

---



# 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.

83

---

---



# 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.                                                                                                                                            
| | *1.2        | Articles of Association of Registrant, as amended.                                                                                                                                              
| | **4.1       | Employment Agreement dated December 1, 1999, between Point of Sale Limited and Danny Moshaioff.                                                                                                 
| | **4.2       | Agreement dated December 30, 1999, between Point of Sale Limited and the Corex Development Company (C. D. C.) Limited.                                                                          
| | ***4.3      | Second 1998 Share Option Plan.                                                                                                                                                                  
| | ****4.4     | 2004 Israeli Share Option Plan.                                                                                                                                                                 
| | *****4.5    | Stock Purchase Agreement, dated as of April 1, 2005, among Retalix Ltd., TCI Solutions, Inc., certain selling shareholders of TCI Solutions, Inc., and Retalix Holdings Inc.                    
| | ******4.6   | Agreement and Plan of Merger, dated as of April 1, 2005, by and among Retalix Ltd., Retalix Holdings Inc., RTLX LLC, Survivor RTLX LLC and TCI Solutions, Inc.                                  
| | *****4.7    | 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.
| | 8           | Principal Subsidiaries of Retalix Ltd.                                                                                                                                                          
| | 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.                                                                         
| | 15.1        | Consent of Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited.                                                                                                     
| | 15.2        | Consents of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.                                                                                                                     
| | 15.3        | Consent of Mayer Hoffman McCann P.C.                                                                                                                                                            

---

| | * | Previously
filed as an exhibit to Retalixs report on Form 6-K filed on November 2, 2005, and
incorporated herein by reference.
| | - | -------------------------------------------------------------------------------------------------------------------------------

| | ** | Previously
filed as an exhibit to Retalixs annual report on Form 20-F for the fiscal year
ended December 31, 1999, and incorporated herein by reference.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | *** | Previously
filed as an exhibit to Retalixs Registration Statement on Form F-1, dated July 10,
1998, and incorporated herein by reference.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | **** | Previously
filed as an exhibit to Retalixs annual report on Form 20-F for the fiscal year
ended December 31, 2003, and incorporated herein by reference.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | ****** | Previously
filed as exhibit 99.2 to Retalixs registration statement on Form F-3/A filed on
September 30, 2005, and incorporated herein by reference.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------

84

---

---



# SIGNATURES

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

|Date: June 21, 2007 |  | RETALIX LTD.By: /s/ Barry Shaked
Barry Shaked, President, Chief Executive Officerand Chairman of the Board of Directors
|------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|Date: June 21, 2007 |  | By: /s/ Danny Moshaioff
Danny Moshaioff, Chief Financial Officer
|------------------- |  | ----------------------------------------------------------------------------------------

85

---

---



RETALIX LTD.
2006 ANNUAL REPORT ON
FORM 20-F

INDEX TO THE FINANCIAL
STATEMENTS

|                                                        | Page       
|------------------------------------------------------- | -----------
|
|
|
|
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2        
|CONSOLIDATED FINANCIAL STATEMENTS:                     
|Balance sheets                                          | F-3 - F-4  
|Statements of income                                    | F-5        
|Statements of changes in shareholders' equity           | F-6        
|Statements of cash flows                                | F-7 - F-9  
|Notes to consolidated financial statements              | F-10 - F-47

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

F - 1

---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of
RETALIX LTD.

We
have audited the consolidated balance sheet of Retalix Ltd. (the Company)
and its subsidiaries as of December 31, 2006 and the related consolidated statements
of income, changes in shareholders equity and cash flows for each of the years ended
December 31, 2006 and 2004. These financial statements are the responsibility of the
Companys Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

For
the year ended December 31, 2004, we did not audit the financial statements of certain
consolidated subsidiaries whose revenues constitute approximately
65.2% of total consolidated revenues for the year ended December 31, 2004. We did not
audit the financial statements of an associated Company, in which the companys share
in its losses approximate $ 137,000 for the year ended December 31, 2004. The
financial statements of the above subsidiaries and associated company were audited by
other independent registered public accounting firms, whose reports have been furnished to
us and our opinion, insofar as it relates to amounts included for those subsidiaries and
associated company, is based solely on the reports of the other independent auditors.

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

In our opinion, based on our audits
and the reports of the other independent auditors, the financial statements referred to
above present fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2006 and the consolidated results of
their operations and their cash flows for each of the years ended December 31, 2006
and 2004, in conformity with accounting principles generally accepted in the United States
of America.

As discussed in note 1q to the
consolidated financial statements, as of January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

As
discussed in Note 1u to the consolidated financial statements, on January 1, 2006, the
Company initially applied the provisions of Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements, and recorded a cumulative effect adjustment to the retained earnings
as of that date.

/s/ Kesselman & Kesselman
A member of PricewaterhouseCoopers International Limited
Tel-Aviv, Israel
June 21, 2007

F - 2

---

---



# RETALIX LTD.CONSOLIDATED BALANCE SHEETS

|                                                                      | December 31
|--------------------------------------------------------------------- | -----------
|
|
|
|
|A s s e t s                                                           |            
|CURRENT ASSETS(note 11)                                               |            
|Cash and cash equivalents                                             |            
|Marketable securities (notes 8c; 12b)                                 |            
|Accounts receivable (note 12a)                                        |            
|Trade                                                                 |            
|Other                                                                 |            
|Inventories                                                           |            
|Deferred income taxes (note 10g)                                      |            
|                                                                      |            
|T o t a l  current assets                                             |            
|                                                                      |            
|NON-CURRENT ASSETS(note 11)                                           |            
|Marketable debt securities (note 12b)                                 |            
|Deferred income taxes (note 10g)                                      |            
|Long-term receivables (note 12c)                                      |            
|Amounts funded in respect of employee rights upon retirement (note 7) |            
|Other                                                                 |            
|                                                                      |            
|T o t a l  non - current assets                                       |            
|                                                                      |            
|PROPERTY, PLANT AND EQUIPMENT, net (note 3)                           |            
|                                                                      |            
|GOODWILL(note 4)                                                      |            
|                                                                      |            
|OTHER INTANGIBLE ASSETS, net of accumulated amortization (note 4)     |            
|                                                                      |            
|Customer relationship                                                 |            
|                                                                      |            
|Other                                                                 |            
|                                                                      |            
|                                                                      |            
|                                                                      |            
|T o t a l  assets                                                     |            
|                                                                      |            

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

F - 3

---

---



# RETALIX LTD.CONSOLIDATED BALANCE SHEETS

|                                                                                              | December 31
|--------------------------------------------------------------------------------------------- | -----------
|
|
|
|
|Liabilities and shareholders' equity                                                          |            
|CURRENT LIABILITIES(note 11):                                                                 |            
|Short-term bank credit                                                                        |            
|Current maturities of long-term bank loans (note 5)                                           |            
|Accounts payable and accruals:                                                                |            
|Trade                                                                                         |            
|Employees and employee institutions                                                           |            
|Liabilities in respect of executory contracts (note 6)                                        |            
|Accrued expenses                                                                              |            
|Other                                                                                         |            
|Deferred revenues                                                                             |            
|                                                                                              |            
|T o t a l  current liabilities                                                                |            
|                                                                                              |            
|LONG-TERM LIABILITIES(note 11):                                                               |            
|Long-term loans, net of current maturities (note 5)                                           |            
|Employee rights upon retirement (note 7)                                                      |            
|Deferred tax liability (note 10g)                                                             |            
|Deferred revenues                                                                             |            
|                                                                                              |            
|T o t a l  long-term liabilities                                                              |            
|                                                                                              |            
|T o t a l  liabilities                                                                        |            
|                                                                                              |            
|COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES(note 8)                                       |            
|MINORITY INTERESTS                                                                            |            
|                                                                                              |            
|                                                                                              |            
|SHAREHOLDERS' EQUITY(note 9):                                                                 |            
|Share capital - Ordinary shares of NIS 1.00 par value (authorized: December 31, 2006 and      |            
|December 31, 2005 - 30,000,000 shares; issued and outstanding: December 31, 2006 - 19,613,454 |            
|shares; December 31, 2005 - 19,409,003 shares)                                                |            
|Additional paid in capital                                                                    |            
|Retained earnings                                                                             |            
|Accumulated other comprehensive income (loss)                                                 |            
|                                                                                              |            
|T o t a l  shareholders' equity                                                               |            
|                                                                                              |            
|T o t a l  liabilities and shareholders' equity                                               |            
|                                                                                              |            

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

F - 4

---

---



RETALIX LTD. CONSOLIDATED STATEMENTS
OF INCOME

|                                                                                | Year ended
December 31
|------------------------------------------------------------------------------- | ----------------------
|
|
|
|
|REVENUES:(note 14a)                                                             |                       
|Product sales                                                                   |                       
|Services and projects                                                           |                       
|                                                                                |                       
|T o t a l  revenues                                                             |                       
|                                                                                |                       
|COST OF REVENUES:                                                               |                       
|Cost of product sales                                                           |                       
|Cost of services and projects                                                   |                       
|                                                                                |                       
|T o t a l  cost of revenues                                                     |                       
|                                                                                |                       
|GROSS PROFIT                                                                    |                       
|                                                                                |                       
|                                                                                |                       
|OPERATING EXPENSES:                                                             |                       
|Research and development - net                                                  |                       
|Selling and marketing                                                           |                       
|General and administrative (note 15a)                                           |                       
|Other general (income) expenses - net (note 15c)                                |                       
|                                                                                |                       
|T o t a l  operating expenses                                                   |                       
|                                                                                |                       
|INCOME FROM OPERATIONS                                                          |                       
|FINANCIAL INCOME, net (note 15b)                                                |                       
|GAIN ARISING FROM ISSUANCE OF SHARES BY AN ASSOCIATED COMPANY                   |                       
|                                                                                |                       
|INCOME BEFORE TAXES ON INCOME                                                   |                       
|TAXES ON INCOME(note 10)                                                        |                       
|                                                                                |                       
|INCOME AFTER TAXES ON INCOME                                                    |                       
|SHARE IN LOSSES OF AN ASSOCIATED COMPANY                                        |                       
|MINORITY INTERESTS IN LOSSES (GAINS) OF SUBSIDIARIES                            |                       
|                                                                                |                       
|NET INCOME                                                                      |                       
|                                                                                |                       
|EARNINGS PER SHARE - in U.S. $ (note 15d):                                      |                       
|Basic                                                                           |                       
|                                                                                |                       
|Diluted                                                                         |                       
|                                                                                |                       
|WEIGHTED AVERAGE NUMBER OF SHARES USED   IN COMPUTATION OF EARNINGS PER SHARE - |                       
|in thousands(note 15d):                                                         |                       
|Basic                                                                           |                       
|                                                                                |                       
|Diluted                                                                         |                       
|                                                                                |                       

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

F - 5

---

---



RETALIX LTD.
STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

|                                    | Share capital |  |  |        | 
|----------------------------------- | ------------- |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2004          |               |  |  | 12,977 | 
|CHANGES DURING 2004:                |               | 
|Net income                          |               |  |  |        | 
|Differences from translation of non |               | 
|dollar currency financial           |               | 
|statements of a subsidiary and      |               | 
|associated company                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Comprehensive income                |               |  |  |        | 
|                                    |               |  |  |        | 
|Stock based compensation expenses   |               |  |  |        | 
|Issuance of share capital in        |               | 
|respect of acquisition of a         |               | 
|subsidiary                          |               |  |  | 254    | 
|Issuance of share capital to        |               | 
|employees and non-employee          |               | 
|resulting from exercise of options  |               |  |  | 896    | 
|Issuance of share capital in a      |               | 
|public offering net of $3,243,000   |               | 
|share issuance expenses             |               |  |  | 3,450  | 
|                                    |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2004        |               |  |  | 17,577 | 
|CHANGES DURING 2005:                |               | 
|Net income                          |               |  |  |        | 
|Differences from translation of non |               | 
|dollar currency financial           |               | 
|statements of a subsidiary and      |               | 
|associated company                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Comprehensive income                |               |  |  |        | 
|                                    |               |  |  |        | 
|Stock based compensation expenses   |               |  |  |        | 
|Issuance of share capital in        |               | 
|respect of acquisition of a         |               | 
|subsidiary, net of issuance         |               | 
|expenses                            |               |  |  | 1,006  | 
|Issuance of share capital to        |               | 
|employees and non-employee          |               | 
|resulting from exercise of options  |               |  |  | 826    | 
|                                    |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2005        |               |  |  | 19,409 | 
|Effect of SAB 108 adjustments       |               | 
|(note 1u)                           |               |  |  |        | 
|                                    |               |  |  |        | 
|                                    |               |  |  | 19,409 | 
|CHANGES DURING 2006:                |               | 
|Net income                          |               |  |  |        | 
|Differences from translation of non |               | 
|dollar currency financial           |               | 
|statements of a subsidiary and      |               | 
|associated company                  |               |  |  |        | 
|                                    |               |  |  |        | 
|Comprehensive income                |               |  |  |        | 
|Stock based compensation expenses   |               |  |  |        | 
|Issuance of share capital to        |               | 
|employees and non-employee          |               | 
|resulting from exercise of options  |               |  |  | 204    | 
|                                    |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2006        |               |  |  | 19,613 | 
|                                    |               |  |  |        | 

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

F - 6

---

---



(Continued)  1

RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF CASH FLOWS

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

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

F - 7

---

---



(Continued)  2

RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                               | Year ended December 31
|------------------------------------------------------------------------------ | ----------------------
|
|
|
|
|Net cash provided by operating activities - brought forward                    |                       
|                                                                               |                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                          |                       
|Maturity of marketable debt securities held to maturity                        |                       
|Investment in marketable debt securities held to maturity                      |                       
|Acquisition of subsidiaries consolidated for the first time (a)                |                       
|Additional investments in subsidiaries                                         |                       
|Refund in respect of cost of investment                                        |                       
|Purchase of property, plant, equipment and other assets                        |                       
|Proceeds from sale of property, plant and equipment                            |                       
|Amounts funded in respect of employee rights upon retirement, net              |                       
|Long-term loans granted to employees                                           |                       
|Collection of long-term loans from employees                                   |                       
|                                                                               |                       
|Net cash used in investing activities                                          |                       
|                                                                               |                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                          |                       
|Proceeds from issuance of shares in a public offering, net of $3,243,000 share |                       
|issuance costs                                                                 |                       
|Repayment of long-term bank loans                                              |                       
|Issuance of share capital to employees resulting from exercise of options      |                       
|Short-term bank credit - net                                                   |                       
|Minority investment in a subsidiary                                            |                       
|                                                                               |                       
|Net cash provided by (used in) financing activities                            |                       
|                                                                               |                       
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                        |                       
|                                                                               |                       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                      |                       
|                                                                               |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                            |                       
|                                                                               |                       

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

F - 8

---

---



(Continued)  3

RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF CASH FLOWS

# SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:

|    |                                                                           | Year ended December 31
|--- | ------------------------------------------------------------------------- | ----------------------
|
|
|
|
|(a) | Supplementary disclosure of cash flow information -                       |                       
|    | Fair value of assets acquired and liabilities assumed of subsidiaries and |                       
|    | activities acquired at the date of acquisition:                           |                       
|    | Working capital (excluding cash and cash equivalents)                     |                       
|    | Deferred revenues                                                         |                       
|    | Deferred income taxes                                                     |                       
|    | Property plant and equipment, net                                         |                       
|    | Amounts funded in respect of employee rights upon retirement              |                       
|    | Accrued liability for employee rights upon retirement                     |                       
|    | Long-term loan                                                            |                       
|    | Short- term bank credit                                                   |                       
|    | Minority interests in subsidiary                                          |                       
|    | Goodwill and other intangible assets arising on acquisition               |                       
|    | Issuance of the Company's share capital                                   |                       
|    | Increase in account payable- other                                        |                       
|    |                                                                           |                       
|    |                                                                           |                       
|    |                                                                           |                       

|(b) | Supplementary
disclosure of cash flow information    cash paid during                the period
for:
|--- | -----------------------------------------------------------------------------------------------------

| | Interest   |  |  |  | 1,508 |  |  | 1,895 |  |  | 861   | 
| | ---------- |  |  |  | ----- |  |  | ----- |  |  | ----- | 
| |            |  |  |  |       |  | 
| | Income tax |  |  |  | 4,605 |  |  | 4,236 |  |  | 1,818 | 
| |            |  |  |  |       |  | 

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

| | 1) | On
April 1, 2005, the Company acquired substantially all of the assets of
               Integrated Distribution Solutions Inc. (IDS), in consideration
for                cash, as well as the issuance of share capital of the Company in the
total                amount of approximately $ 6,882,000.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | On
April 1, 2005, the Company acquired approximately 73.4% of the issued and
               outstanding shares (on an as-converted-to-common-stock basis) of TCI
Solutions                Inc. (TCI), in consideration for cash, as well as
the issuance of                share capital of the Company in the total amount of
approximately $ 16,980,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | During
2004, the Company acquired 100% of the shares of OMI International, Inc.
               in consideration for the issuance of share capital of the Company in the
total                amount of $5,410,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In
February 2004, the Companys subsidiary in the U.K. acquired the supply
               chain management distribution activities of OMI International Ltd. These
               activities were acquired in consideration for cash, as well as the
issuance of                share capital of the Company in the total amount of
approximately $ 590,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 9

---

---



RETALIX LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# NOTE
1  SIGNIFICANT ACCOUNTING POLICIES:

| | a. | General:
| | -- | --------

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

| | a) | Retalix
Ltd. (the Company), an Israeli corporation whose shares are           listed
on the Nasdaq Global Select Market (under the symbol RTLX)           and on
the Tel-Aviv Stock Exchange (TASE), separately and together           with
its subsidiaries and an associated company (the Group),           develops,
manufactures and markets integrated enterprise-wide, open software           solutions
for the sales operations and supply chain management operations of           food and
fuel retailers, including supermarkets, convenience stores and fuel           stations as
well as suppliers and manufacturers in the food industry.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | As
to the Groups geographical segments and principal customers, see           note
14.
| | -- | ---------------------------------------------------------------------------------------

| | c) | Subsidiary
 over which the Company has control and over 50% of the           ownership.
| | -- | ----------------------------------------------------------------------------------------

| | d) | Associated
company  an investee company (which is not a subsidiary), over           which
financial and operational policy the Company exerts material influence.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Accounting
principles and use of estimates in the preparation of financial           statements:
| | -- | ------------------------------------------------------------------------------------------------

| | The
financial statements have been prepared in accordance with accounting principles
generally accepted (GAAP) in the United States of America (U.S. GAAP).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities at the dates of the financial
statements as well as the reported amounts of revenues and expenses during the reporting
years. Actual results could differ from those estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
currency of the primary economic environment in which the operations of the Group and
almost each member of the Group (except for one subsidiary and the associated company) are
conducted is the U.S. dollar (dollar; $). Most of the Groups
revenues and also most of the Groups expenses incur in dollars or in Israeli
currency linked to the dollar. The Groups financing is mostly in dollars. Thus, the
functional currency of the Group is the dollar.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
and balances originally denominated in dollars are presented at their original amounts.
Balances in non-dollar currencies are translated into dollars using historical and
current exchange rates for non-monetary and monetary balances, respectively. For
non-dollar transactions and other items (stated below) reflected in the statements of
income, the following exchange rates are used: (i) for transactions  exchange rates
at transaction dates or average rates; and (ii) for other items (derived from
non-monetary balance sheet items such as depreciation and amortization, changes in
inventories, etc.)  historical exchange rates. Currency transaction gains or losses
are carried to financial income or expenses, as appropriate. The functional currency of
one subsidiary and of the associated company is their local currency (Euro
and New Israeli Shekel, respectively) (NIS). The financial
statements of the said subsidiary are included in the consolidation based on translation
into dollars in accordance with Financial Accounting Standards Board (FASB)
Statement No. 52 Foreign Currency Translation (FAS 52):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | Assets
and liabilities are translated at year end exchange rates, while operating results items
are translated at average exchange rates during the year. Differences resulting from
translation are presented in shareholders equity under accumulated other
comprehensive income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of the associated company are included in the financial statements
of the Company in accordance with the equity method, based on translation into dollars in
accordance with FAS 52- the resulting translation adjustments are presented under
shareholders equity- accumulated other comprehensive income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Principles
of consolidation:
| | -- | ----------------------------

| | 1) | The
consolidated financial statements include the accounts of the Company and           its
subsidiaries and the accounts of a variable interest entity of which the
          Company is the primary beneficiary.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Intercompany
balances and transactions have been eliminated in consolidation.
| | -- | -----------------------------------------------------------------------------

| | 3) | As
for goodwill and other intangible assets arising on business combinations,           see
 below.
| | -- | ---------------------------------------------------------------------------------------------------

| | c. | Cash
equivalents
| | -- | ----------------

| | The
Group considers all highly liquid investments, which include short-term bank deposits
with an original maturity date of three months or less that are not restricted as to
withdrawal or use, to be cash equivalents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Marketable
securities
| | -- | ---------------------

| | The
Company accounts for investments in marketable securities in accordance with FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in certain marketable bonds are classified as held to maturity because the Company has
the intent and ability to hold such bonds to maturity and are stated at amortized cost
with the addition of computed interest accrued to balance sheet date (such interest
represents the computed yield on cost from acquisition to maturity). Interest and
amortization of premium discount for debt securities are carried to financial income or
expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in other bonds and marketable securities that are classified as trading securities are
stated at market value. The changes in market value of these securities are carried to
financial income or expenses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sales
of securities classified as trading securities are accounted for on specific cost basis.
| | ----------------------------------------------------------------------------------------------

F - 11

---

---



# RETALIX LTD 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | e. | Investment
in an associated company
| | -- | -----------------------------------

| | This
investment is accounted for by the equity method and included among other non-current
assets.
| | --------------------------------------------------------------------------------------------------

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

| | Inventories
include hardware products that are included in finished goods and are valued at the lower
of cost or market. Cost is determined on a first-in, first-out basis.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1) | These
assets are stated at cost; assets of acquired subsidiaries are included           at
their fair value at date of acquisition of these subsidiaries.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
assets are depreciated by the straight-line method, on the basis of their
          estimated useful life.
| | -- | --------------------------------------------------------------------------------------------------------------

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

| |                                    | %              
| | ---------------------------------- | ---------------
|
|
|
|
| | Computers and peripheral equipment | 20-33          
| | Vehicles                           | 15             
| | Office furniture and equipment     | 6-25 (mainly 6)
| | Building                           | 4              
| | Land leasing rights                | 3              

| | Leasehold
improvements are amortized by the straight line method over the term of the lease, which
is shorter than the estimated useful life of the improvements. Land lease rights are
amortized by the straight line method over the term of the lease.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Goodwill
is the excess of the purchase price over the fair value of identifiable net assets
acquired in business combinations accounted for as purchases. The goodwill is not
amortized to earnings, but instead is subject to periodic testing for impairment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
intangible assets are amortized over a period of one to fifteen years.
| | ----------------------------------------------------------------------------

| | FASB
Statement No. 142, Goodwill and Other Intangible Assets requires goodwill and
indefinite-lived intangible assets to be tested for impairment at least annually or
between annual tests if certain events or indicators of impairment occur.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Impairment
in value of long-lived assets
| | -- | ----------------------------------------

| | The
Group applies FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (FAS 144). FAS 144 requires that long-lived assets
(including definite live intangible assets), which are to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



# RETALIX LTD 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

| | 1) | The
Company accounts for income taxes in accordance with FASB Statement No.           109,
Accounting for Income Taxes. Deferred income taxes are           determined
by the asset and liability method based on the estimated future tax           effects of
differences between the financial accounting and the tax bases of           assets and
liabilities under the applicable tax law. Deferred tax balances are           computed
using the tax rates expected to be in effect at time when these           differences
reverse. Valuation allowances in respect of the deferred tax assets           are
provided when it is more likely than not that all or a portion of the           deferred
income tax assets will not be realized. See note 10g for           additional
information regarding the composition of the deferred taxes.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Upon
the distribution of dividends from the tax-exempt income of Approved
          Enterprises (see also notes 9c and 10g), the amount distributed
          will be subject to tax at the rate that would have been applicable had the
          Company not been exempted from payment thereof. The Company intends to
          permanently reinvest the amounts of tax exempt income and it does not intend to
          cause distribution of such dividends. Therefore, no deferred income taxes have
          been provided in respect of such tax-exempt income.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The
Group may incur an additional tax liability in the event of an           inter-company
dividend distribution from foreign subsidiaries; no additional           deferred income
taxes have been provided, since it is the Groups policy           not to
distribute, in the foreseeable future, dividends which would result in
          additional tax liability.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | Taxes
which would apply in the event of disposal of investments in foreign
          subsidiaries have not been taken into account in computing the deferred income
          taxes, as it is the Companys policy to hold these investments, not to
          realize them.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Group derives its revenues from the licensing of integrated software products, and to
some extent from the sale of complementary computer and other hardware equipment, all of
which it classifies as revenues from product sales. The Group also derives revenues from
maintenance and other professional services which are principally software changes and
enhancements requested by customers as well as on-line application, information and
messaging services, mostly associated with products sold by the Group and which it
classifies as revenues from services and projects.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from sales of products and software license agreements are recognized when all of the
criteria in Statement of Position (SOP) 97-2, Software Revenue
Recognition as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition With Respect to Certain Transactions, herein referred to as SOP
97-2, are met. Revenues from products and license fees are recognized when persuasive
evidence of an agreement exists, delivery of the product has occurred, the fee is fixed
or determinable, no further obligations exist and collectibility is probable. In software
arrangements that require significant customization, integration and development, revenue
is recognized in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---



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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | Where
software license arrangements involve multiple elements (mostly software licenses,
maintenance and other professional services), the arrangement consideration is allocated
using the residual method. Under the residual method, revenue is recognized for the
delivered elements when (1) Vendor Specific Objective Evidence (VSOE) of the
fair values of all the undelivered elements exists, and (2) all revenue recognition
criteria of SOP 97-2, as amended, are satisfied. Under the residual method, any discount
in the arrangement is allocated to the delivered element. The Companys VSOE of fair
value for maintenance is based on a consistent 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 accounted
for under SOP 97-2 are recognized as services are performed.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Hardware
sales are recognized on a gross price basis, in accordance with Emerging Issues Task
Force (EITF) 99-19, Reporting Gross Revenue as a Principal versus Net
as an Agent.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
cases where the products are sold to smaller retailers, through resellers, revenues are
recognized as the products are supplied to the resellers in accordance with the
provisions of 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Deferred
revenue includes advances and payments received from customers, for which revenue has not
yet been recognized as well as obligations related to the provision of maintenance
services.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Research
and development expenses are charged to expenses as incurred. Participations received
from the Government of Israel for development of approved projects are recognized as a
reduction of expenses when the related costs are incurred. Development costs incurred
subsequent to the establishment of technological feasibility are capitalized in
accordance with the principles set forth in FASB Statement No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Based on
the Companys product development process technological feasibility is established
upon completion of a working model i.e. only when all planning, designing, coding and
testing have been completed according to design specifications. Costs incurred by the
Company between completion of the working models and the point at which the products are
ready for general release has been insignificant. Therefore, all research and development
costs have been expensed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---



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

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

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

| | Capital
gains arising from the issuance of shares by investee companies to third parties are
reflected in the statement of income on a current basis.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
allowance for doubtful accounts is determined on the basis of rates applied to customer
balances in accordance with aging and on the basis of analysis of specific debts which are
doubtful of collection. In determining the allowance for doubtful accounts, the Group
considers, among other things, its past experience with such customers, the economic
environment, the industry in which such customers operate, financial information available
on such customers, etc.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Earnings
per share (EPS)
| | -- | --------------------------

| | Basic
EPS is computed by dividing net income by the weighted average number of shares
outstanding during the year. Diluted EPS reflects the increase in the weighted average
number of shares outstanding that would result from the assumed exercise of options,
calculated using the treasury-stock method in accordance with FASB Statement No. 128,
Earnings Per Share (FAS 128). The options of certain subsidiaries
(see note 9b(2)) have no effect on the Companys diluted EPS since their effect on
the subsidiaries EPS is anti-dilutive. As to the data used in the per share computation,
see note 15d.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Other
comprehensive income
| | -- | --------------------------

| | Other
comprehensive income, presented in shareholders equity, represents currency
translation adjustments of non-dollar currency financial statements of a subsidiary and
of an associated company (accumulated balance at December 31, 2006, 2005 and 2004, is
$102,000, ($288,000) and $267,000, respectively).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Effective
January 1, 2006, the Company adopted FASB Statement No. 123 (Revised 2004), Share-Based
Payment, a revision of FASB Statement No. 123 (SFAS 123(R)). SFAS
123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees (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 (SAB 107), which provides supplemental
implementation guidance on SFAS 123(R). The Company has applied the provisions of SAB 107
in its adoption of SFAS 123(R).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---



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

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | Prior
to January 1, 2006, The Group accounted for employee stock-based compensation in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees and related interpretations. In accordance with FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123),
the Group disclosed proforma information on the net income and earning per share assuming
the Group had accounted for employee stock option grants using the fair value-based
method defined in SFAS 123.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS 123(R) using the modified prospective method. Under this transition
method, compensation costs recognized in fiscal 2006 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 adjusted for estimated forfeitures, see below, 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). The Companys
consolidated financial statements for prior periods have not been restated to reflect,
and do not include, the impact of SFAS 123(R). The Company selected the Black-Scholes
option pricing model as the appropriate fair value method for its stock-options awards
based on the market value of the underlying shares at the date of grant. The Company
recognizes compensation costs using the multiple option award approach that results in an
accelerated recognition of compensation costs in comparison to the straight line method.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company uses historical stock price volatility as the expected volatility assumption
required in the Black-Scholes option valuation model. As equity-based compensation expense
recognized in the Companys consolidated statement of income for fiscal 2006 is based
on awards ultimately expected to vest, such expense has been reduced for estimated
forfeitures. SFAS 123(R) requires future forfeitures to be estimated at grant date and at
each balance sheet date thereafter. In the Companys pro forma information required
under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures
as they occurred. As a result of the adoption of SFAS 123(R), starting 2006, the Company
recorded the compensation cost based on an expected forfeiture rate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value based on an option-pricing model,
pursuant to the guidance in EITF 96-18 Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services. The fair value of the options granted is revalued over the related
service periods and recognized over the vesting period using the accelerated method.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total compensation costs recognized in the year ended December 31, 2006 income statement
for stock-based employee compensation awards were $2,923,000, net of the tax effect of
$45,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 16

---

---



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

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | The
implementation of SFAS 123(R) did not have any impact on cash flows from operations
during the year ended December 31, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------

| | As
discussed above, prior to fiscal 2006, the Group followed the disclosure-only provisions
of SFAS 123. The following table illustrates the effect on net income and earnings per
share assuming the Group had applied the fair value recognition provisions of SFAS 123 to
its stock-based employee compensation in the years ended December 31, 2005 and 2004,
before the adoption of SFAS 123(R):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                            | Year ended December 31
| | -------------------------------------------------------------------------- | ----------------------
|
|
|
|
| | Net income, as reported                                                    |                       
| | Deduct - the stock based employee compensation effect determined under the |                       
| | fair value method for all awards *                                         |                       
| |                                                                            |                       
| | Pro forma net income                                                       |                       
| |                                                                            |                       
| | Earnings per share:                                                        |                       
| | Basic - as reported                                                        |                       
| |                                                                            |                       
| | Basic - pro forma                                                          |                       
| |                                                                            |                       
| | Diluted - as reported                                                      |                       
| |                                                                            |                       
| | Diluted - pro forma                                                        |                       
| |                                                                            |                       

| | * | The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. See note 9b for weighted average assumptions:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | These
costs are charged to selling and marketing expenses as incurred. Advertising expenses
totaled $2,095,000, $2,716,872 and $1,368,000 in the years ended December 31, 2006, 2005
and 2004, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | s. | Derivative
financial instruments
| | -- | --------------------------------

| | The
Company has only limited involvement with foreign exchange derivative financial
instruments (forward exchange contracts). These contracts do not qualify for hedge
accounting under U.S. GAAP. As a result, changes in the fair value of derivatives are
reflected, as incurred, in the statements of income and included in financial
expenses  net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



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

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | t. | Sale
of receivables
| | -- | -------------------

| | The
Group factors some of its trade receivables. The factoring is effected through banks, on a
non-recourse basis. The transfer of accounts receivable qualify as a sales transaction
under the provisions of FASB Statement No.140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (FAS
140). The resulting costs are charged to financial expenses  net, as incurred.
The balance of factored receivables amounted approximately $35,900,000 and $33,000,000 as
of December 31, 2006 and December 31, 2005, respectively. The expenses resulting from
these sales in the years ended December 31, 2006, 2005 and 2004 amounted to $1,482,000,
$1,836,000 and $658,000, respectively, and are included in financial expenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Adoption
of Staff Accounting Bulletin No. 108, Considering the Effects           of Prior
YearMisstatements when Quantifying Misstatements in Current           Year
Financial Statements.(SAB 108):
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the SEC staff issued SAB 108. SAB 108 was issued in order to eliminate
the diversity of practice surrounding how public companies quantify financial statement
misstatements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Traditionally,
there have been two widely-recognized methods for quantifying the effects of financial
statement misstatements: the roll-over method and the iron curtainmethod.
The roll-over method focuses primarily on the impact of a misstatement on the income
statementincluding the reversing effect of prior year misstatementsbut its
use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain
method, on the other hand, focuses primarily on the effect of correcting the period-end
balance sheet with less emphasis on the reversing effects of prior year errors on the
income statement. Prior to our application of the guidance in SAB 108, the Group used the
roll-over method for quantifying financial statement misstatements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
SAB 108, the SEC staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of the companys
financial statements and the related financial statement disclosures. This model is
commonly referred to as a dual approach because it requires quantification of
errors under both the iron curtain and the roll-over methods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SAB
108 permits existing public companies to initially apply its provisions either by (i)
restating prior financial statements as if the dual approach had always been
applied or (ii) recording the cumulative effect of initially applying the dual
approach as adjustments to the carrying values of assets and liabilities as of
January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained
earnings.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group elected to record the effects of applying SAB 108 using the cumulative effect
transition method.
| | ----------------------------------------------------------------------------------------------------------

F - 18

---

---



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

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | The
following table summarizes the effects (up to January 1, 2006) of applying the guidance
in SAB 108:
| | -------------------------------------------------------------------------------------------------------

| |                                                                | Period in which the misstatement originated | 
| | -------------------------------------------------------------- | ------------------------------------------- | 
|
|
|
|
|
| | Accrued employee medical benefits (1)                          |                                             | 
| | Deferred taxes (2)                                             |                                             | 
| | Current tax expenses (3)                                       |                                             | 
| | Accrued expenses (4)                                           |                                             | 
| | Undemanded credit balance and various unsupported balances (5) |                                             | 
| | Allowance for doubtful accounts (6)                            |                                             | 
| | Revenues from products services and projects (7)               |                                             | 
| | Liabilities in connection with employee rights (8)             |                                             | 
| | Accumulated amortization of land lease rights (9)              |                                             | 
| | Amortization of other intangible assets (10)                   |                                             | 
| | Tax effect of the above adjustments                            |                                             | 
| |                                                                |                                             | 
| | Impact on net income                                           |                                             | 
| |                                                                |                                             | 
| | Retained earnings (11)                                         |                                             | 
| |                                                                |                                             | 

| | These
errors have previously been considered immaterial.
| | --------------------------------------------------------

| | (1) | Prior
to these financial statements, the Group accounted for costs related to           its
U.S. employee medical benefits on an as incurred basis.  All paid           claims,
net of stop-loss reimbursements were recorded as expenses in the current           period.  However,
no liability for future claims, incurred but not reported           (IBNR),
was presented on the balance sheet.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Represents incorrect recognition of a
deferred tax asset valuation allowance applicable to carryforward tax losses, and non
employee share based compensation expenses.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Incorrect
computation of the annual tax provision.
| | --- | --------------------------------------------------

| | (4) | Represents
incorrect accrual of administrative expenses.
| | --- | --------------------------------------------------------

| | (5) | Represents
a cancellation of an old undemanded credit balance and a cancellation                of
certain unsupported balances in some of the Companys U.S. subsidiaries.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Represents
insufficient recognition of allowance for doubtful accounts.
| | --- | -----------------------------------------------------------------------

| | (7) | Represents
incorrect recognition of certain revenues from products, services and
               projects.
| | --- | ---------------------------------------------------------------------------------------------------------

F - 19

---

---



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

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | (8) | Represents
incorrect accrual of liabilities in connection with employee rights
               (bonuses and severance pay).
| | --- | --------------------------------------------------------------------------------------------------------------------------

| | (9) | The Group did not amortize its land
lease rights in real-estate in Raanana Israel. These lease rights expire in July
2032.
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | (10) | Represents
incorrect amortization of other intangible assets attributable to
               acquisitions.
| | ---- | ---------------------------------------------------------------------------------------------------------

| | (11) | Represents
the net reduction to retained earnings recorded as of January 1, 2006                to
record the initial application of SAB 108.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1) | In
September 2006, the FASB issued Statement No. 157, Fair Value           Measurements (SFAS
157). SFAS 157 defines fair value,           establishes a framework for measuring
fair value in generally accepted           accounting principles, and expands disclosures
about fair value measurements.           SFAS No. 157 applies under other accounting
pronouncements that require or           permit fair value measurements. SFAS 157 will be
effective for fiscal years           beginning after November 15, 2007, (January 1, 2008,
for the Company). and           interim periods within those fiscal years.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is currently evaluating the effect that the application of SFAS 157 will have on
its consolidated results of operations and financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In
June 2006, the FASB issued Interpretation No. 48, Accounting for
          Uncertainty in Income Taxes, An Interpretation of SFAS No. 109,          (FIN
48). FIN 48 clarifies the accounting for uncertainty in income           taxes
recognized in an enterprises financial statements in accordance with           FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 also
          prescribes a recognition threshold and measurement attribute for the financial
          statement recognition and measurement of a tax position taken or expected to be
          taken in a tax return that results in a tax benefit. Additionally, FIN 48
          provides guidance on de-recognition, income statement classification of
interest           and penalties, accounting in interim periods, disclosure, and
transition. This           interpretation is effective for fiscal years beginning after
December 15, 2006           (January 1, 2007, for the company).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2007, the Company adopted FIN 48. The Companys accounting policy,
pursuant to the adoption of FIN 48, is to classify interest and penalties recognized in
the financial statements relating to uncertain tax positions, under provision for income
taxes. The adoption of FIN 48 resulted in the recording of an increase of the tax
liabilities totaling $1,900,000 (including interest in the amount of $250,000 
unaudited) associated with uncertain tax benefits and other uncertainties related to tax
returns, which was accounted for as a reduction of the retained earnings balance as of
January 1, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(continued)

NOTE
1  SIGNIFICANT ACCOUNTING POLICIES(continued):

| | 3) | In
June 2006, the Emerging Issues Task Force, reached a consensus on Issue No.
               06-01, Accounting for Consideration Given by a Service Provider to
               Manufacturers or Resellers of Equipment Necessary for an End-Customer to
Receive                Service from the Service Provider. EITF 06-01 provides
guidance on the                accounting for consideration given to third party
manufacturers or resellers of                equipment which is required by the
end-customer in order to utilize the service                from the service provider.
EITF 06-01 is effective for fiscal years beginning                after June 15, 2007.
The Company is currently assessing the impact of EITF 06-01                on its
financial position and results of operations.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In June 2006, the Emerging Issues
Task Force, reached a consensus on Issue No. 06-03, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should be Presented in the Income
Statement (That Is, Gross versus Net Presentation)". EITF 06-03 relates to any tax
assessed by a governmental authority that is directly imposed on a revenue-producing
transaction. EITF 06-03 states that the presentation of the taxes, either on a gross or
net basis, is an accounting policy decision that should be disclosed pursuant to
Accounting Principles Board Opinion No. 22, Disclosure of Accounting Policies,
if those amounts are significant. EITF 06-03 should be applied to financial reports for
interim and annual reporting periods beginning after December 15, 2006. The Companys
current policy is to recognize revenues net of VAT. The Company expects that upon the
adoption of EITF 06-03 its policy will remain the same.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | In
February 2007, the Financial Accounting Standards Board (FASB) issued
               Statement of Financial Accounting Standards (SFAS) No. 159, The Fair
Value                Option for Financial Assets and Financial Liabilities, Including an
Amendment of                FASB Statement No. 115, which will become effective in
2008. SFAS No. 159                permits entities to measure eligible financial assets,
financial liabilities and                firm commitments at fair value, on an
instrument-by-instrument basis, that are                otherwise not permitted to be
accounted for at fair value under other generally                accepted accounting
principles. The fair value measurement election is                irrevocable and
subsequent changes in fair value must be recorded in earnings.  
The Company is currently evaluating
the effect that the application of SFAS 159 will have on its consolidated results of
operations and financial condition.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | In
March 2006 the FASB issued Statement of Financial Accounting Standards No.
               156, Accounting for Servicing of Financial Assets  an
amendment of                FASB Statement No. 140 (FAS 156). This
Statement amends FASB                Statement No. 140, Accounting for Transfers
and Servicing of Financial                Assets and Extinguishments of Liabilities,
with respect to the accounting                for separately recognized servicing assets
and servicing liabilities. In                accordance with the provisions of FAS 156,
separately recognized servicing                assets and servicing liabilities must be
initially measured at fair value, if                practicable. Subsequent to initial
recognition, company may use either the                amortization method or the fair
value measurement method to account for                servicing assets and servicing
liabilities within the scope of this Statement.                FAS 156 is effective for
fiscal years beginning after September 15, 2006                (January 1, 2007, for the
Company). Earlier adoption is permitted as of the                beginning of an entitys
fiscal year, provided the entity has not yet                issued financial statements,
including interim financial statements, for any                period of that fiscal
year. The adoption of this statement is not expected to                have a material
effect on the companys financial statements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Reclassification
| | -- | ----------------

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

F - 21

---

---



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

# NOTE
2  ACQUISITIONS:

| | The
results of the following acquisitions done by the Company to further expand its product
offerings and market position are included in the Companys consolidated statement
of operations as of the date of the acquisition of each company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | In
February 2006, the Company, through its subsidiary Retalix Holdings Inc.
          acquired substantially all of the assets and liabilities of Base Products,
Inc.,           a provider of a suite of hardware and software products and services for
food           and consumer goods retailers, for $2,653,000 in cash. The identified
intangible           assets acquired amounted to approximately $1,287,000 and included
mainly           customer relationships of approximately $1,277,000 to be amortized over
an           estimated useful life of 15 years  see also note 2l and 4b.
          Goodwill arising on the acquisition amounted to approximately $1,614,000. The
          goodwill will be amortized for tax purposes over a period of 15 years. The
          Company expects that this acquisition will strengthen and significantly widen
          its customer relationship in the independent food and consumer goods retail
          industry and thus improve its position in its target markets. Accordingly, the
          acquisition resulted in a significant allocation to goodwill.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
March 2006, the Company through its subsidiary Retalix Holdings Inc.,           acquired
an additional 45% of the equity of StoreNext Retail Technology LLC           (StoreNext
USA) and increased its holdings in StoreNext USA to 95%.           The
consideration the Company paid for this acquisition was approximately
          $4,875,000 in cash. The identified intangible assets acquired amounted to
          approximately $1,553,000 and included mainly customer relationships of
          approximately $833,000 to be amortized over an estimated useful life of 15
years            see also note 4b. Goodwill arising on the acquisition amounted to
          approximately $3,323,000. The Company expects that this acquisition will
          strengthen StoreNext USA and widen its access to hardware sources and thus
          increase its customer relationship and improve its position in its target
          markets. Accordingly, the acquisition resulted in a significant allocation to
          goodwill.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In August 2006, the Company acquired an additional 31% of the equity of P.O.S.
          (Restaurant Solutions) Ltd., or PRS. This acquisition increased the
          Companys holdings in PRS to 100%. The consideration the Company paid for
          this acquisition was approximately $730,000 in cash. Goodwill arising on the
          acquisition amounted to approximately $288,000.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | On
April 1, 2005, the Company, through its subsidiary Retalix Holdings Inc.,
          acquired approximately 73.4% of the issued and outstanding shares (on an
          as-converted-to-common-stock basis) of TCI Solutions Inc. (TCI), a
          provider of retail store and headquarters solutions, including pricing,
          promotions, inventory, management and DSD solutions for the grocery industry in
          consideration of $32,600,000, comprised of $15,603,000 in cash, including
direct           costs consisting mostly of legal, consulting and registration fees, and
715,730           of the Companys Ordinary shares valued at approximately
$16,980,000. The           identified intangible assets acquired amounted to
approximately $9,596,000 and           included mainly acquired technology of
approximately $2,810,000 and customer           relationship of approximately $6,506,000
to be amortized over their estimated           useful lives (4 to 15 years)  see
also note 4b. Goodwill arising on the           acquisition amounted to approximately
$29,413,000. The Company expects that this           acquisition will strengthen and
widen its product offerings and thus improve its           position in its target
markets. In addition, the Company believed it would gain           the ability to
increase sales of both its traditional products and the new           products gained
from the acquisition by cross selling into each others           established
markets. Synergies may also be realized through the use of some           common
corporate overhead resources. Accordingly, the acquisition resulted in a
          significant allocation to goodwill due to the above factors.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---



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

NOTE
2  ACQUISITIONS(continued):

| | Also
in April, 2005, the Company through its subsidiary Retalix Holdings Inc., executed an
agreement and plan of merger with TCI, pursuant to which in November 2005, TCI merged
with and into one of the Companys subsidiaries and all the additional outstanding
common stock andPreferred stock of TCI (other than shares held by the Company and shares
as to which appraisal rights had been properly perfected under Delaware law), were
acquired by the subsidiary for an aggregate of approximately $2,570,000 in cash. Goodwill
arising from this transaction amounted to approximately $2,570,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | On
April 1, 2005, the Company through its subsidiary Retalix Holdings Inc.,
          acquired substantially all of the assets of Integrated Distribution Solutions
          Inc. (IDS), a provider of ERP and distribution solutions for the
          food service, convenience store and grocery industries in consideration of
          $44,859,000, comprised of $37,976,000 in cash, including direct costs
consisting           mostly of legal, consulting and registration fees, and 290,128 of
the           Companys Ordinary shares valued at approximately $6,883,000. In
addition,           the sellers were issued additional 207,236 shares valued at
$4,916,000 that were           eligible for release from escrow as certain customer
retention milestones agreed           upon were met as of April 1, 2007. The identified
intangible assets acquired           amounted to approximately $15,463,000 and included
mainly acquired technology of           approximately $4,120,000 and customer
relationship of approximately $ 10,852,000           to be amortized over their estimated
useful lives (2 to 15 years)  see           also note 4b. Goodwill arising on the
acquisition amounted to approximately           $29,383,000. The goodwill will be
amortized for tax purposes over a period of 15           years. The Company expects that
this acquisition will strengthen and           significantly widen its product offerings
and thus improve its position in its           target markets. In addition, the Company
believed it would gain the ability to           increase sales of both its traditional
products and the new products gained from           the acquisition by cross selling into
each others established markets.           Synergies may also be realized through
the use of some common corporate overhead           resources. Additionally, IDSs
reputation in the industry and its name           recognition are also factors in the
valuation of IDSs goodwill.           Accordingly, the acquisition resulted in a
significant allocation to goodwill           due to the above factors.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | In
July 2005, the Company, through its subsidiary Retalix Italia S.p.A.,           acquired
in whole M.P.S. Millennium Pos Solution S.r.l. in consideration of           $604,000 in
cash. The identified intangible assets acquired amounted to           approximately
$239,000 consisting primarily from acquired technology of           approximately
$193,000 and customer relationship of approximately $46,000, to be           amortized
over their estimated useful lives (5 years).  see also note 4b.           Goodwill
arising on the acquisition amounted to approximately $305,000.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | In
September 2004, the Companys subsidiary, Store Alliance.com Ltd.           (StoreAlliance),
together with The College for Retail Studies           a private company,
established Retail College StoreNext Ltd. (The Retail           College). The
Retail College operates as a school for retail studies           supplying its services
to retailers and suppliers within the Israeli retail           industry, while using and
implementing tools and methodologies offered by           StoreAlliance in the Israeli
market.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the agreement between the parties, StoreAlliance has committed to invest $140,000 in
consideration for 67% of the companys share capital (including capital notes) and
against a counter proportional investment of $70,000 by the minority interest. Such
Investments are to be executed according to terms specified in the formation agreement.
Through October 2005, Store Alliance has invested the full $140,000 under its above
commitment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2005, StoreAlliance invested an additional $100,000 under an agreement signed in
August 2005 with the minority interest. This additional investment increased the Companys
holdings in The Retail College to 75%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---



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

NOTE
2  ACQUISITIONS(continued):

| | During
2006, StoreAlliance invested additional $167,000 in the Retail College under agreements
signed during that period with the minority interest. This additional investment
increased the Companys holdings in the college to 90%. In November 2006, the
investment in the college was fully impaired.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | In
August 2004, the Company acquired 51% of the shares of Unit S.p.A. the name           of
which was later changed to Retalix Italia S.p.A., from an unrelated party in
          consideration of $1,800,000 in cash. In December 2004, the Company acquired an
          additional 49% of the shares of Unit and thus increased its holdings in Unit to
          100%. This additional acquisition was made in consideration of $1,900,000 in
          cash. The identified intangible assets acquired amounted to approximately
          $600,000 and included mainly acquired technology of approximately $300,000 and
          customer relationship of approximately $300,000 to be amortized over their
          estimated useful lives (3 years)  see also note 4b. Goodwill arising on
          the acquisition amounted to approximately $2,800,000.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | In
February 2004, the Companys subsidiary in the U.K. acquired the supply
          chain management distribution activities of OMI International Ltd           (OEL).
These activities were acquired in consideration of           approximately $1,500,000 out
of which approximately $947,000 in cash and in           addition 28,188 Ordinary shares
of the Company valued at approximately $590,000.           The value of the Ordinary
shares issued was determined based on the average           market price of the Companys
shares over several days before and after the           acquisition was agreed and
announced. The identifiedintangible assets           acquired included mainly
customer relationship of approximately $700,000 to be           amortized over their
estimated useful lives (3 years)  see also note 4b.           Goodwill arising on
the acquisition amounted to approximately $800,000. The           goodwill can be
amortized for tax purposes over a period of five years.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | In
January 2004, the Company, through its subsidiary Retalix Holdings Inc.,
          acquired 100% of the shares of OMI International, Inc. (OMI), a
          company that provides supply chain management solutions and services from an
          unrelated party in consideration of $19,100,000, comprised of $13,700,000 in
          cash, including estimated direct costs and 226,040 of the Companys
          Ordinary shares valued at approximately $5,410,000. The value of the Ordinary
          shares issued was determined based on the average market price of the
          Companys shares over several days before and after the acquisition was
          agreed and announced. During October 2004, the Company paid the sellers of OMI
          additional $449,000 as part of an election made with the U.S. Internal Revenue
          Service the result of which for tax purposes, is the step-up of OMIs
          assets value to fair value as of the acquisition date. The identified
intangible           assets acquired amounted to approximately $1,700,000 and included
mainly           acquired technology of approximately $1,200,000 and customer base of
          approximately $400,000 to be amortized over their estimated useful lives (3 to
7           years)  see also note 4b. Goodwill arising on the acquisition amounted
to           approximately $16,800,000. The goodwill will be amortized for tax purposes
over           a period of fifteen years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | In
January 2004, the Companys subsidiary, StoreAlliance, acquired 100% of
          the shares of DemandX Ltd. (DemandX) in consideration of $239,000.
          DemandX is an Israeli corporation that provides supply chain management data
          analysis services to suppliers and institutions. The identified intangible
          assets acquired included mainly customer relationship of approximately $66,000
          to be amortized over its estimated useful life (3 years)  see also note
          4b. Goodwill arising on the acquisition amounted to approximately $84,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---



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

NOTE
2  ACQUISITIONS(continued):

| | l. | The following presents certain unaudited pro forma combined condensed income
          statement information for the years ended December 31, 2006 and 2005, assuming
          that acquisition taken place during 2006, had taken place on January 1, 2005 and
          January 1, 2006 and that the acquisitions taken place in 2005 had taken place on
          January 1, 2005, after giving effect to certain adjustments, including
          amortization of identifiable intangible assets of $15,000 and $1,122,000 in 2006
          and 2005, respectively:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                     | 2006 | 2005
| | ------------------- | ---- | ----
|
|
|
|
| | Revenues            |      |     
| |                     |      |     
| |                     |      |     
| | Net income          |      |     
| |                     |      |     
| | Earnings per share: |      |     
| | Basic               |      |     
| |                     |      |     
| | Diluted             |      |     
| |                     |      |     

| | The
amounts are based upon certain assumptions and estimates and do not reflect any benefits
which might be achieved from combined operations. The pro forma results do not
necessarily represent results, which would have been achieved if the acquisition had
taken place on the basis assumed above, nor are they indicative of the results of future
combined operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
is the allocation of the purchase price of the 2006 acquisitions:
| | ---------------------------------------------------------------------------

| |                                                         | Year ended December 31, 2006
| | ------------------------------------------------------- | ----------------------------
|
|
|
|
| | Current liabilities, net of current assets              |                             
| | Property and equipment, net of accumulated depreciation |                             
| | Goodwill arising on Acquisitions                        |                             
| | Identified intangible assets                            |                             
| |                                                         |                             
| |                                                         |                             
| |                                                         |                             

F - 25

---

---



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

# NOTE
3  PROPERTY, PLANT AND EQUIPMENT:

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

| |                                    | December 31
| | ---------------------------------- | -----------
|
|
|
|
| | Computers and peripheral equipment |            
| | Land lease rights and building     |            
| | Vehicles                           |            
| | Office furniture and equipment     |            
| | Leasehold improvements             |            
| |                                    |            
| |                                    |            
| |                                    |            
| | Less - accumulated depreciation    |            
| |                                    |            
| |                                    |            
| |                                    |            

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

| | c. | Depreciation
expenses totaled $3,431,000, $2,996,000 and $2,207,000, in the           years ended
December 31, 2006, 2005 and 2004, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
4  GOODWILL AND OTHER INTANGIBLE ASSETS:

| | a. | Goodwill
| | -- | --------

| | The
changes in the carrying amount of goodwill for each reportable geographical segment are
as follows:
| | -------------------------------------------------------------------------------------------------------

| |                                                         | U.S. | Israel | International(Europe) | Total 
| | ------------------------------------------------------- | ---- | ------ | --------------------- | ------
|
|
|
|
| | Balance as of January 1, 2005                           |      |        |                       | 32,461
| | Goodwill attributed to new subsidiaries acquired during |      |       
| | 2005 and additional investments in subsidiaries         |      |        |                       | 61,366
| | Differences from translation of non dollar currencies   |      |        |                       | -     
| |                                                         |      |        |                       |       
| | Balance as of December 31, 2005                         |      |        |                       | 93,827
| | Goodwill attributed to new subsidiaries acquired during |      |       
| | 2006 and additional investments in subsidiaries         |      |        |                       | 4,937 
| | Differences from translation of non dollar currencies   |      |        |                       | -     
| | Other adjustments*                                      |      |        |                       | 765   
| |                                                         |      |        |                       |       
| | Balance as of December 31, 2006                         |      |        |                       | 99,529
| |                                                         |      |        |                       |       

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

| | The
Company identified its various reporting units, which consist of geographical areas, and
for which separately identifiable cash flow information is available. The Company uses a
valuation model of future discounted cash flows to determine the fair value of the
reporting units and whether any impairment of goodwill exists.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---



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

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

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

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

| |                                    | Weighted average
amortization
period | Original amount | Amortized balance
| | ---------------------------------- | ------------------------------------ | --------------- | -----------------
|
|
|
|
| |                                    |                                      |                 |                  
| | Software development costs         |                                      |                 |                  
| | Software rights and web site       |                                      |                
| | development costs                  |                                      |                 |                  
| | Customer relationship              |                                      |                 |                  
| | Maintenance and license agreements |                                      |                 |                  
| | Acquired technology                |                                      |                 |                  
| | Distribution rights                |                                      |                 |                  
| | Other identified intangible assets |                                      |                 |                  
| |                                    |                                      |                 |                  
| | Total                              |                                      |                 |                  
| |                                    |                                      |                 |                  

| | 2) | Intangible
assets amortization expenses totaled $5,130,000 $4,474,000 and           $2,610,000 in
the years ended December 31, 2006, 2005 and 2004, respectively.           Future annual
amortization expenses are approximately $3,532,000, $3,254,000,           $2,660,000,
$1,788,000 and $1,357,000 in 2007, 2008, 2009, 2010 and 2011,           respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
5  LONG-TERM LOANS, NET OF CURRENT MATURITIES:

| | a. | Long-
term loans classified by currency of repayment are as follows:
| | -- | --------------------------------------------------------------------

| |                                        | Interest rate as of
December 31, 2006 | December 31
| | -------------------------------------- | ------------------------------------- | -----------
|
|
|
|
| | Bank loan -                            |                                       |            
| | In EURO                                |                                       |            
| | Other:                                 |                                       |            
| | Loan from shareholders of a subsidiary |                                       |            
| |                                        |                                       |            
| |                                        |                                       |            
| | Less - current maturities              |                                       |            
| |                                        |                                       |            
| |                                        |                                       |            
| |                                        |                                       |            

| | * | The
$ LIBOR rate as of December 31, 2006  5.36%.
| | - | -------------------------------------------------

F - 27

---

---



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

NOTE 5  LONG-TERM
LOANS(continued):

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

| |                                    | December 31
| | ---------------------------------- | -----------
|
|
|
|
| | 2007                               |            
| | 2008                               |            
| | 2009                               |            
| | 2010 and thereafter (through 2011) |            
| |                                    |            
| |                                    |            
| |                                    |            

# NOTE
6  LIABILITIES IN RESPECT OF EXECOTORY CONTRACTS:

| | These
liabilities are associated with unfavorable executory contracts assumed in the
acquisition of three of the Companys subsidiaries. The amortization of these
liabilities is based on the contracts terms. Amortization of other liabilities totaled
$259,000, $1,048,000 and $2,265,000 in the years ended December 31, 2006, 2005 and 2004,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
7  EMPLOYEE RIGHTS UPON RETIREMENT:

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

| | b. | Some
of the Companys U.S. subsidiaries provide 401 (k) plans for the           benefit
of their employees. Under these plans, contributions are based on a           specified
percentage of pay.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
severance expenses amounted to $2,469,000, $1,308,000 and $1,399,000 in the
          years ended December 31, 2006, 2005 and 2004, respectively. The 401(k) plans
          expenses as mentioned in b. above amounted to $1,029,000, $826,000 and $449,000
          in the years ended December 31, 2006, 2005 and 2004, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
profits (loss) on the amounts funded totaled $580,000, $ (155,000) and $
          166,000 in the years ended December 31, 2006, 2005 and 2004, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Cash
flow information regarding the Companys liability for employee           rights
upon retirements:
| | -- | -------------------------------------------------------------------------------------------------------

| | 1) | The
Group expects to contribute in the year ending December 31, 2007,           $2,060,000 to
the insurance companies and severance pay funds in respect of its           severance pay
obligation.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
Company expects to pay $642,000 future benefits to its employees during           2007 to
2016 upon their normal retirement age  see breakdown below. The           amount
was determined based on the employees current salary rates and the           number
of service years that will be accumulated upon the retirement date. These
          amounts do not include amounts that might be paid
to employees that will cease working for the Company before their normal retirement age.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---



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

NOTE 7  EMPLOYEE
RIGHTS UPON RETIREMENT(continued):

| |                           | U.S. $
in thousands
| | ------------------------- | -------------------
|
|
|
|
| | Year ending December 31:  |                    
| | 2007                      |                    
| | 2008                      |                    
| | 2009                      |                    
| | 2010                      |                    
| | 2011                      |                    
| | Thereafter (through 2012) |                    
| |                           |                    
| |                           |                    
| |                           |                    

# NOTE
8  COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES:

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

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

| | The
Group has entered into operating lease agreements for the premises it uses; the last
lease expires in 2012. In addition, the Company leases vehicles under standard commercial
leases for periods of three years per vehicle.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
projected charges under the above leases are mainly denominated in U.S. $, at rates in
effect as of December 31, 2006, as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------

| |                          | U.S. $
in thousands
| | ------------------------ | -------------------
|
|
|
|
| | Year ending December 31: |                    
| | 2007                     |                    
| | 2008                     |                    
| | 2009                     |                    
| | 2010                     |                    
| | 2011                     |                    
| | 2012                     |                    
| |                          |                    
| |                          |                    
| |                          |                    

| | Office
and vehicles lease expenses totaled $5,509,000, $4,844,000 and $3,315,000 in the years
ended December 31, 2006, 2005 and 2004, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Effective
April 1, 1998, the Companys Chief Executive Officer (the           CEO),
is entitled to receive a bonus subject to the Companys           attaining certain
performance milestones: For the first $1,000,000 of the           Companys net
income, he is entitled to a bonus of $65,000 and for every           subsequent
$1,000,000 of net income $5,000 less than the entitlement in respect           of the
previous $1,000,000, but not less than a bonus of $35,000 for every           million
dollars over the seventh million of net income.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, according to the same arrangement, the CEO is entitled to options to be granted
beginning each calendar year equal to 1% of the Companys issued share capital per
grantee for each year. The exercise price of the options is equal to the closing market
price of the shares at the day preceding the grant date. The options are fully vested and
blocked over three years from grant date, and become exercisable in three equal portions
at the end of each year during said three-year period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---



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

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

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

| | The
Company and some of its subsidiaries are committed to pay the Government of Israel
royalties on revenues derived from certain products, the research and development of
which, is partly financed by royalty-bearing Government participations. These funding
programs are managed by the Israeli government within the jurisdiction of The Ministry of
Commerce and Industry and specifically by the Office of the Chief Scientist. At the time
the grants were received, successful development of the related projects was not assured.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
case of failure of a project that was partly financed, the Company is not obligated to
pay any such royalties. Under the terms of these funding programs, royalties of 3%-3.5%
are payable on sales of products developed under such funding programs, up to 100% of the
amount of funding received (dollar linked and bearing annual interest at the LIBOR rate).
Payment of royalties on account of development projects funded as above is conditional
upon the ability to generate revenues from products developed under such projects.
Accordingly, the Group is not obligated to pay any royalties on account of funded
projects, which fail to generate revenues.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, total royalty to be paid by the Group in the future on account of
projects funded under the Office of the Chief Scientist is $5,067,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Lawsuits
against the Company and its subsidiaries:
| | --------------------------------------------------

| | 1) | Prior
to the acquisition of Retail Control Systems Inc., or RCS, a legal claim           was
filed against RCS in the Circuit Court of the Seventeenth Judicial Circuit,
          County of Winnebago, Illinois, by a dealer who sold one of RCSs products
          early in 1994, and claims that RCS promised features and enhancements were
never           delivered. The damages claimed in this suit are in excess of $200,000.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 RCS has meritorious defenses against this claim and
that it will not result in any material expense and therefore no provision was recorded
in regard to this claim as of December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In March, 2005, a former dealer in
the U.S. (Sierra Nevada Cash Register), filed in the Third Judicial District Court of Salt
Lake County, Utah, a complaint against StoreNext USA, seeking actual and subsequent
damages in excess of $300,000 for breach of the distributorship agreement and unfair
competition. Recently, the court allowed Sierra Nevada leave to file an amended complaint
in which it was allowed to assert a claim under a certain act which, if ultimately proven,
could treble the compensatory damages. In addition, the Company filed a counter claim
against Sierra Nevada for unpaid receivables for product in the amount of $119,000. Some
depositions and written discovery have taken place but the case is ongoing. The Company
believes that this action will not result in any material expense and therefore no
provision (other than a full provision against the outstanding debt) was recorded in
regard to this claim as of December 31, 2006.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---



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

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

| | 3) | In June
2006, a customer in the U.S, filed in the District Court of Madison County, Nebraska,
complaint against the Company 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 the Company filed
a motion to dismiss the complaint on various grounds. In September, 2006, the customer
opposed to these motions. In October, 2006, the court granted IDSs motion to compel
arbitration and reserved judgment on the Companys motion to dismiss the complaint
and stayed the federal action, all pending the outcome any arbitration. In February,
2007, the Companys subsidiary, Retalix USA Inc., filed a Demand for Arbitration
against the customer with the American Arbitration Association in Dallas, Texas, seeking
to recover damages, interest and attorneys fees in excess of $2.3 million as a
result of the customers failure to pay for products delivered and services rendered as
well as other misconducts. In February, 2007, the customer filed a Counterclaim and
Demand for Arbitration seeking to recover damages, interest, taxable arbitration costs
and attorneys fees in excess of $9.9 million for breach of contract, breach of
warranties and other misconducts. The Company together with its legal advisors are in the
process of addressing the Counterclaim and Demand for Arbitration. As of December 31,
2006, the balance of debt of this customer for services supplied by the Company amounted
to approximately $500,000, net of a provision for doubtful debts amounting $400,000. The
Company believes that it does not have any additional exposure due to this claim and thus
no additional provision was recorded as of December 31, 2006.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | 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. The Company and its legal counsels are in the process of reviewing
          this complaint. No provision was recorded in regard to this claim as of
December           31, 2006.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | In August, 2005, an Italian distributor of Retalix Italia approached the Company
          and Retalix Italia claiming that the acquisition of M.P.S. Millennium Pos
          Solution S.r.l. (MPS) by Retalix Italia in July 2005 formed an act
          of unfair competition. No further action has been taken by the above party, in
          connection with its above allegation to date. In addition, in April, 2006, the
          above distributor exercised arbitration proceedings in order to enforce its
          claims of co-ownership to a certain product of M.P.S., as well as indemnity for
          certain damages allegedly suffered by him within this context. In May 2006, MPS
          requested the arbitral court to reject all claims filed by the above party. In
          May 2007, the parties to this dispute signed a settlement agreement according to
          which all previous agreements in connection with the relationship between the
          parties are cancelled and MPS and the distributor are the sole owners of the
          product, may further develop and sell the product  each at its own
          discretion, and such action by either will not create any obligation towards the
          other party. In addition, and regardless of any further sales of the product by
          either party, the distributor is to pay MPS use fees totaling approximately
          $53,000, in installments, during the period of June 2007 to June 2010. The
          agreement also stipulates that MPS is to provide the distributor training for a
          consideration totaling approximately $40,000 as well as support services to
          continue until the end of January 2008, for a consideration totaling
          approximately $66,000.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | In
September, 2006, a former employee of one of the Companys Israeli
          subsidiaries  Tamar, who was employed by said subsidiary prior to its
          acquisition by the Company, submitted in the magistrates court in Kfar Saba a
          claim against the subsidiary according to which one of the former managers of
          the subsidiary allegedly treated him harshly, which caused the plaintiff severe
          mental damage and disability. The damages claimed under this claim total
          approximately $350,000. The Company believes that its exposure due to this
claim           is immaterial and thus no provision was recorded in regard to this claim
as of           December 31, 2006.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---



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

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

| | 7) | The Company and its subsidiaries are also parties to several other claims filed
          against them totaling approximately $180,000. 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 $1.2 million,
          have not materialized to court claims and some of them are in mediation process.
          The Company has recorded as of December 31, 2006 a provision of approximately
          $320,000 which it estimates as sufficient to cover any expenses arising from the
          above claims and disputes.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A
certain bank account containing $2.1 million in marketable securities as of December 31,
2006, 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, 2006 $205,000 are held as collateral for a credit guarantee and a letter of
credit issued on behalf of a subsidiary.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE
9  SHAREHOLDERS EQUITY:

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

| | 1) | The
Companys shares confer upon the holders the right to receive notice           to
participate and vote in the general meetings of the Company and right to
          receive dividends, if and when declared.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Under
a prospectus dated April 28, 2004, an amount of 3,450,000 Ordinary Shares           of
NIS 1.00 par value of the Company, were issued on May 4 and May 7, 2004 in a
          public offering, in the United States for $18 per share. The net proceeds to
the           Company of $58,857,000 are net of a 5.5% underwriting discount and offering
          expenses of $3,243,000.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | As
to shares issued in consideration for acquisitions of subsidiaries, see note           2.
| | -- | --------------------------------------------------------------------------------------------

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

| | 1) | Companys
Option plans:
| | -- | -----------------------

| | On
March 5, 1998, the Companys Board of Directors approved the Second 1998 Share
Option Plan (the Second 1998 Plan). Under the Second 1998 Plan (as was
amended from time to time) up to 5,000,000 options are available for grant to employees,
directors and consultants of the Company, to purchase Ordinary shares of the Company.
Each option is exercisable into one ordinary share of the Company. The exercise price of
each option under this plan is to be at least equal to the fair value of one Ordinary
share at the grant date. Unless terminated earlier, the options will expire starting from
2005 through May 2012. These options vest over the period of 0  3.5 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006 and 2005, 35,787 and 619,561 options, respectively remained
available for grant under the Second 1998 Plan.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2006 and 2005, 3,165,200 and 2,981,126 options, respectively, had been
exercised under the Second 1998 Plan at exercise prices ranging between $7.125 and
$19.125 per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 10, 2004, the Companys Board of Directors approved the 2004 Israeli Share
Option Plan (the Israeli Plan). Under the Israeli Plan up to 2,000,000
options can be granted to Israeli employees, directors and consultants of the Company to
purchase Ordinary shares of the Company. Each option is exercisable into one Ordinary
share of the Company. Unless terminated
earlier, the options granted to date under the Israeli Plan will expire under the terms of
the option agreements beginning in May 2008 through May 2010. These options vest over the
period of 0  3.5 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---



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

NOTE
9  SHAREHOLDERS EQUITY(continued):

| | As
of December 31, 2006 and 2005, 677,314 and 1,254,403 options, respectively remained
available for grant under the Israeli Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2006 and 2005, 30,289 and 9,912 options, respectively had been exercised
under the Israeli Plan.
| | ---------------------------------------------------------------------------------------------------------------------

| | The
options granted under the Israeli Plan are all subject to the capital gains
taxation route under Section 102 of the Income Tax Ordinance [New Version], 1961,
which generally provides for a reduced tax rate of 25% on gains realized upon the
exercise of options and sale of underlying shares, subject to the fulfillment of certain
procedures and conditions 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, the
Company is not entitled to recognize a deduction for tax purposes of the gain recognized
by the employee upon sale of the shares underlying the options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensation
expense in respect of the CEO entitlement to options (in prior years, due to the CEOs
status as a service provider), was determined also prior to the adoption of SFAS 123(R),
based on the fair value of the options. Total expenses in the years ended December 31,
2006, 2005 and 2004 in respect of these options, before the tax effect, were $923,000
$167,000 and $148,000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                                      | 2006 | 2005 | 2004
|----------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Options outstanding at beginning of year              |      |      |     
|Changes during the year:                              |      |     
|Granted                                               |      |      |     
|Exercised*                                            |      |      |     
|Forfeited or expired                                  |      |      |     
|                                                      |      |      |     
|Options outstanding at end of year**                  |      |      |     
|                                                      |      |      |     
|Options exercisable at year-end                       |      |      |     
|                                                      |      |      |     
|Weighted average fair value of options granted during |      |     
|the year                                              |      |      |     
|                                                      |      |      |     

| | * | The
total intrinsic value of options exercised during the years ended December 31 2006, 2005
and 2004 is $1,492,000, $9,793,000 and $7,986,000, respectively.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | As
of December 31, 2006, there was $5,363,000 of total unrecognized compensation cost (net
of forfeitures) related to nonvested share-based compensation arrangements granted under
the plans. The weighted average realization period of the above unrecognized compensation
cost was 1.42 years.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---



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

NOTE
9  SHAREHOLDERS EQUITY(continued):

| | The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. Following are the relevant weighted average
assumptions:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                    | Year ended December 31
| | ---------------------------------- | ----------------------
|
|
|
|
| | Dividend yield                     | 0%                    
| | Expected volatility                | 33%-42%               
| | Risk free interest rate            | 3%-5%                 
| | Expected holding period (in years) | 3-4                   

| | The
following table summarizes information about options under the Company's plans
                      outstanding at December 31, 2006:
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Exercise
price
U.S.$ | Number of
options
outstanding at
December 31,
2006 | Aggregate
intrinsic value *
in U.S. $
In thousands | Number of
options
exercisable at
December 31,
2006 | Aggregate
intrinsic value
* in U.S. $
In thousands | Weighted
average
remaining
contractual
life (in
years) of options
outstanding | Weighted
average
remaining
contractual
life (in
years) of
exercisable
options
| | -------------------- | -------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------- | ----------------------------------------------------------------------------- | -----------------------------------------------------------------------------
|
|
|
|
| | 8.75                 |                                                    |                                                    |                                                    | 7,536                                              |                                                                               |                                                                              
| | 10.00                |                                                    |                                                    |                                                    | 235,216                                            |                                                                               |                                                                              
| | 14.88                |                                                    |                                                    |                                                    | 291,783                                            |                                                                               |                                                                              
| | 15.55                |                                                    |                                                    |                                                    | 600,000                                            |                                                                               |                                                                              
| | 18.55                |                                                    |                                                    |                                                    | 422,500                                            |                                                                               |                                                                              
| | 18.56                |                                                    |                                                    |                                                    | 810,584                                            |                                                                               |                                                                              
| | 21.86                |                                                    |                                                    |                                                    | 176,556                                            |                                                                               |                                                                              
| | 23.02                |                                                    |                                                    |                                                    | 197,378                                            |                                                                               |                                                                              
| | 23.19                |                                                    |                                                    |                                                    | 129,767                                            |                                                                               |                                                                              
| | 24.46                |                                                    |                                                    |                                                    | 194,090                                            |                                                                               |                                                                              
| | 26.00                |                                                    |                                                    |                                                    | 26,000                                             |                                                                               |                                                                              
| |                      |                                                    |                                                    |                                                    |                                                    |                                                                               |                                                                              
| |                      |                                                    |                                                    |                                                    | 3,091,410                                          |                                                                               |                                                                              
| |                      |                                                    |                                                    |                                                    |                                                    |                                                                               |                                                                              

| | *
Based on the Companys share last known closing price at the Nasdaq Global Select
Market as at December 31, 2006, of $16.29 per share.
| | ----------------------------------------------------------------------------------------------------------------------------------------

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

| | The
weighted average exercise price of the total 3,091,410 outstanding options under the
Companys plans as of December 31, 2006, was $18.05.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Stock
option plan of subsidiaries:
| | -- | ----------------------------------

| | a) | On
December 4, 2000, a subsidiarys board of directors approved an           employee
stock option plan (the Subsidiary Plan). Pursuant to the           Subsidiary
Plan, 270,000 Ordinary shares, of NIS 0.01 par value, of the           subsidiary are
reserved for issuance upon the exercise of 270,000 options to be           granted to
some of the Companys and of the subsidiarys employees. In           addition,
within the context of an investment agreement signed on December 31,           2000, an
additional 90,000 options to purchase 90,000 shares of NIS 0.01 par           value each
were granted to an investor. Virtually all of the above mentioned           options
except those granted to the investor vest as follows: 33.33% after the           first
year,  another
33.33% after the second year and another 33.33% after the third year, (in cases where the
optionee is an employee of the Company or its subsidiary  provided that the employee
is still the subsidiarys or the Companys employee). In addition, all the above
options including those granted to the investor are not exercisable prior to: (1) the
consummation of an IPO of the subsidiarys securities, (2) a merger of the subsidiary
or (3) seven years from the date of grant. The rights conferred by Ordinary shares
obtained upon exercise of the options will be identical to those of the other Ordinary
shares of the subsidiary. Any option not exercised within 10 years of grant date, will
expire.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---



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

NOTE
9  SHAREHOLDERS EQUITY (continued):

| | Some
of the options under the Subsidiary Plan are subject to the terms stipulated by Section
102 of the Israeli Income Tax Ordinance. Among other things, the Ordinance provides that
the subsidiary will be allowed to claim as an expense for tax purposes the amounts
credited to the employees as a benefit, when the related tax is payable by the employee.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2001, the subsidiary granted the said 270,000 options partly at an exercise price per
share of NIS 0.01, and to two employees at an exercise price of $5.55. Through December
31, 2006, 112,101 of these options were forfeited and 76,023 were regranted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 23, 2004, the above subsidiarys board of directors approved an additional
employee stock option plan (the Subsidiary 2004 Plan). Pursuant to the
Subsidiary 2004 Plan, options to purchase 36,000 ordinary shares, of NIS 0.01 par value
each, were granted on December 31 2004, to certain employees of the subsidiary all
subject to the taxation route for grants under Section 102 of the Income Tax Ordinance
[New Version], 1961. All options granted under the Subsidiary 2004 Plan bear an exercise
price of $5.55 and vest as follows: 33.33% after the first year, another 33.33% after the
second year and another 33.33% after the third year (in cases where the optionee is an
employee of the Company or its subsidiary  provided that the employee is still
employed by the subsidiary or the Company at the date of vesting). In addition, the
options are not exercisable prior to: (1) the consummation of an IPO of the subsidiarys
securities, (2) a merger of the subsidiary or (3) seven years from the date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | On
December 1, 2004, the board of directors of another Subsidiary approved an
          employee stock option plan (the Additional Subsidiary Plan).
          Pursuant to the Additional Subsidiary Plan, up to 1,500,000 options to purchase
          up to 1,500,000 shares of the Additional Subsidiary, can be granted to its
          employees, officers and other service provider providing services to the
Company           or any affiliate. In addition, the Additional Subsidiary Plan
stipulates that           options granted pursuant to it, are not to be exercised prior
to: (1) the           conversion of the corporate entity of the Additional Subsidiary
from a Limited           Liability Company, to a C corporation or (2) the consummation of
an IPO of the           Additional Subsidiarys securities, (3) a merger or a
significant change of           control in the Additional Subsidiary or (4) five years
from the date of grant.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly, on December 14, 2004,
the Additional Subsidiary granted options to acquire 1,169,000 of its shares, of which
639,000 options were granted to its employees, and 530,000 options were granted to
employees of affiliates. The options granted bear an exercise price of $0.3748, which
reflects the market value per share according to an independent valuation. Through
December 31, 2006, 14,000 of these options were forfeited. In addition, on July 31, 2006
additional options to acquire 84,000 of the Additional Subsidiarys shares were
granted to its employees at an exercise price of $0.9422 a share, which reflects the
market value per share according to the management valuation. All of these Additional
Subsidiary options vest seven years from grant and have full vesting upon an Initial
Public Offering or change of control or upon the administrating committee discretion,
accelerated vesting in the event of merger, sale, disposition, or initial public offering
of the majority interest of the subsidiary. The plan shall terminate ten years from the
grant date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---



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

NOTE
9  SHAREHOLDERS EQUITY (continued):

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

| | 1) | In
the event that cash dividends are declared by the Company, such dividends           will
be paid in Israeli currency. Under current Israeli regulations, any cash
          dividend in Israeli currency paid in respect of ordinary shares purchased by
          non-residents of Israel with non-Israeli currency may be freely repatriated in
          such non-Israeli currency, at the rate of exchange prevailing at the time of
          conversion.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not intend to pay cash dividends in the foreseeable future. The Companys
board of directors is authorized to declare dividends, subject to applicable law.
Dividends may be paid only out of profits and other surplus, as defined in the Israeli
Companies Law, as of the end of the most recent financial statements or as accrued over a
period of two years,
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | whichever
is higher. Alternatively, if the Company does not have sufficient profits or other
surplus, then permission to effect a distribution can be granted by order of an Israeli
court. In any event, a distribution is permitted only if there is no reasonable concern
that the dividend will prevent the Company from satisfying the Companys existing
and foreseeable obligations as they become due.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Tax-exempt
income attributable to the Approved Enterprise cannot be
          distributed to shareholders without subjecting the Company to taxes except upon
          complete liquidation of the Company. Out of the Companys retained
earnings           as of December 31, 2006 and 2005, approximately $15,800,000 and
$14,800,000 are           tax-exempt respectively. If such tax-exempt income is
distributed in a manner           other than upon the complete liquidation of the
Company, it would be taxed at           the reduced corporate tax rate applicable to such
profits (25%) and an income           tax liability of up to approximately $3,950,000 and
$3,700,000 would be incurred           as of December 31, 2006 and 2005, respectively.
The Companys board of           directors has determined that it will not
distribute any amounts of its           undistributed tax exempt income as dividend. The
Company intends to reinvest the           amount of its tax-exempt income. Accordingly,
no deferred income taxes have been           provided on income attributable to the
Companys Approved           Enterprise as the undistributed tax exempt
income is essentially permanent           in duration. See also notes 10b and 10g(5).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---



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

# NOTE
10  TAXES ON INCOME:

| | a. | Corporate
taxation in Israel:
| | -- | -----------------------------

| | Tax
rates:
| | ----------

| | 1) | The
income of the company and its Israeli subsidiaries (other than income           fromapproved
enterprises, see c. below) is taxed at the regular           rate. Through December 31,
2003, the corporate tax was 36%. In July 2004,           Amendment No. 140 to the
Income Tax Ordinance was enacted. One of the           provisions of this amendment is
that the corporate tax rate is to be gradually           reduced from 36% to 30%. In
August 2005, a further amendment (No. 147) was           published, which makes a
further revision to the corporate tax rates prescribed           by Amendment No. 140.
As a result of the aforementioned amendments, the           corporate tax rates for 2004
and thereafter are as follows: 2004  35%,           2005  34%, 2006  31%,
2007  29%, 2008  27%, 2009           26% and for 2010 and thereafter
 25%.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the changes in the tax rates, the Company adjusted  in each of the
years 2004 and 2005  at the time the aforementioned amendments were made, its
deferred tax balances, in accordance with the tax rates expected to be in effect in the
coming years; the effect of the change has been carried to income on a current basis.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Subsidiaries
outside Israel:
| | -- | ----------------------------

| | Subsidiaries
that are incorporated outside of Israel are assessed for tax under the tax laws in their
countries of residence. Our U.S. subsidiaries are taxed on a consolidated basis. The
inacted statutory tax rates applicable to our primary subsidiaries outside Israel are as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Company
incorporated in Australia - tax rate of 30%.
| | ----------------------------------------------------

| | Company
incorporated in the U.K. - tax rate of 30%.
| | ---------------------------------------------------

| | b. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959                (thelaw)
| | -- | -------------------------------------------------------------------------------------------------------

| | Some
production facilities of the Company as well as facilities of one of its Israeli
subsidiaries (the Companies) have been granted approved enterprise status
under the above law including its amendment that came into effect in April, 2005, which
is discussed below.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is entitled to additional tax benefits as companies of foreign investors,
as defined by the law.
| | --------------------------------------------------------------------------------------------------------------

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

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

| | In
respect of income derived from their approved enterprises, the Companies are entitled to
benefits under the laws reduced tax rates during a period of ten years from the
year in which such enterprises first earn taxable income (limited to twelve years from
commencement of production or fourteen years from the date of approval, whichever is
earlier).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has seven approved enterprises and one of its Israeli subsidiaries has one
approved enterprise.
| | -----------------------------------------------------------------------------------------------------------

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

F - 37

---

---



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

NOTE 10  TAXES ON
INCOME(continued):

| | As
of December 31, 2006, the periods of benefits relating to five of the approved
enterprises of the Company have already expired. The periods of benefits relating to
other two approved enterprise programs will expire in 2008 and 2012. The period of
benefits relating to the approved enterprises of the Company Israeli subsidiary has
not yet commenced (it is restricted to the year 2013).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of distribution of cash dividends from income which was tax exempt as above,
the companies would have to pay the 25% income taxes in respect of the amount distributed
(the amount distributed for this purpose includes the amount of the income taxes that
applies as a result of the distribution (see 10g(5) below and note 9c(2)).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Companies are entitled to claim accelerated depreciation in respect of equipment used by
approved enterprises during the first five tax years of the operation of these assets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the companies fulfillment of
the conditions stipulated by the above law, the regulations published thereunder and the
certificates of approval for the specific investments in approved enterprises. In the
event that the Companies fail to comply with these conditions, the benefits may be
cancelled and the companies may be required to refund the amount of the benefits, in
whole or in part, with interest and adjustments for inflation based on the Israeli
Consumer Price Index (Israeli CPI).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the 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. The
amendment does not apply to investment programs approved prior to December 31, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | However,
the amendment will apply to programs in which the year of election under the Investments
Law is 2004 or later, 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. Therefore, the Companys
existing Approved Enterprise will generally not be subject to the provisions of the
amendment. Tax-exempt income that will be generated under the provisions of the new Law,
will subject the Company to taxes upon distribution or liquidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
proportion of the companys taxable income entitled to benefits of reduced tax rates
is calculated on the basis of the ratio between the turnover attributed to the approved
enterprise or benefited enterprise and the whole turnover of the
company. The turnover attributed to the approved enterprise or to the benefited
enterprise is calculated, as a general rule, by taking the increase resulting from
the comparison of the companys turnover with its baseturnover, which is
the turnover attributed to the last year before the activation of the approved
enterprise or the benefited enterprise, or by applying such other basis
as is stipulated in the instrument of approval.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the companies fulfilling the
conditions stipulated by the law, regulations published thereunder and the instruments of
approval for the specific investments in approved enterprises. In the event of failure to
comply with these conditions, the benefits may be cancelled and the Company may be
required to refund the amount of the benefits, in whole or in part, with the addition of
interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---



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

NOTE 10  TAXES ON
INCOME (continued):

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

| | Under
the Inflationary Adjustments law, results for tax purposes are measured in real terms,
having regard to the changes in the Israeli CPI. The Israeli companies in the Group are
taxed under this law. These financial statements are presented in dollars. The difference
between the changes in the Israeli CPI and the exchange rate of the dollar, both on an
annual and a cumulative basis causes a difference between taxable income and income
reflected in these financial statements. Paragraph 9(f) of FASB Statement No. 109, Accounting
for Income Taxes, prohibits the recognition of deferred tax liabilities or assets
that arise from differences between the financial reporting and tax bases of assets and
liabilities that are remeasured from the local currency into dollars using historical
exchange rates, and that result from changes in exchange rates or indexing for tax
purposes. Consequently, the abovementioned differences were not reflected in the
computation of deferred tax assets and liabilities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company is an industrial company as defined by this law and as such is
entitled to certain tax benefits, consisting mainly of accelerated depreciation and the
right to claim expenses in connection with issuance of its shares to the public, as well
as the amortization of patents and certain other intangible property rights, as a
deduction for tax purposes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Tax
rates applicable to income from other sources:
| | -- | --------------------------------------------------

| | Income
of the Company and its Israeli subsidiaries, not eligible for approved enterprise
benefits for each of the years ended December 31, 2006, 2005 and 2004, is taxed at the
regular rate of 31%, 34% and 35%, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Carryforward
tax losses:
| | -- | ------------------------

| | Carryforward
tax losses of certain subsidiaries as of December 31, 2006 and 2005 aggregate
approximately $48,642,000 and $51,111,000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Inflationary Adjustments Law, carryforward tax losses related to the Israeli
subsidiaries are linked to the Israeli CPI.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Carryforward
tax losses in Israel may be utilized indefinitely.
| | ---------------------------------------------------------------

| | As
of December 31, 2006, the Companys U.S. subsidiaries (which are taxed on a
consolidated basis) have U.S. federal net operating loss carryforwards of approximately
$40,300,000, which includes approximately $5,600,000 relating to excess stock option
deductions received upon option exercise that when realized will be recorded in
additional paid-in capital. Federal net operating loss carryforwards of the U.S.
subsidiaries expire at various dates from 2008 through 2025. The U.S. subsidiaries have
state net operating loss carryforwards of approximately $43,600,000, which includes
approximately $5,600,000 relating to excess stock option deductions discussed above.
State net operating loss carryforwards of the U.S. subsidiaries expire at various dates
from 2008 through 2025. Utilization of the U.S. subsidiaries federal and state net
operating losses attributable to acquired subsidiaries, of approximately $30,900,000 and
$14,800,000, respectively, are subject to an annual limitation under Internal Revenue
Code (IRC) section 382 determined by multiplying the value of the acquired
entitys stock at the time of acquisition by the applicable long-term tax exempt
rate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---



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

NOTE 10  TAXES ON
INCOME (continued):

| | At
December 31, 2005, one of the Companys U.S. subsidiaries (which are taxed on a
consolidated basis) have U.S. federal net operating loss carryforwards of approximately
$46,700,000, which includes approximately $5,200,000 relating to excess stock option
deductions received upon option exercise that when realized will be recorded in
additional paid-in capital. Federal net operating loss carrryforwards expire at various
dates from 2007 through 2025. The U.S. subsidiaries have state net operating loss
carryforwards of approximately $30,500,000, which includes approximately $5,200,000
relating to excess stock option deductions discussed above. State net operating loss
carryforwards expire at various dates from 2006 through 2025. Utilization of the Companys
federal and state net operating losses attributable to acquired subsidiaries,
approximately $32,500,000 and $16,300,000, respectively, are subject to an annual
limitation under Internal Revenue Code (IRC) section 382 determined by
multiplying the value of the subsidiary stock at the time of acquisition by the
applicable long-term tax exempt rate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2006, the Companys U.S. subsidiaries utilized in
federal and state jurisdictions approximately $2,500,000 and $1,600,000, respectively, of
the acquired net operating loss carryforwards and consequently, released the related
valuation allowance of $960,000 with an offsetting reduction to goodwill.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Deferredincometaxes:
| | -- | --------------------

| | The
deferred tax asset in respect of the balances of temporary differences (mostly in respect
of carryforward losses) and the related valuation allowance, are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                               | December 31
| | --------------------------------------------- | -----------
|
|
|
|
| | 1)      Provided in respect of the following: |            
| | Provisions for employee rights                |            
| | Share issuance expenses                       |            
| | Carryforward tax losses                       |            
| | Doubtful accounts                             |            
| | Research and development                      |            
| | Employee stock options                        |            
| | Non employee stock options                    |            
| | Other                                         |            
| |                                               |            
| |                                               |            
| | Depreciable fixed assets                      |            
| | Goodwill                                      |            
| |                                               |            
| |                                               |            
| | L e s s- valuation allowance                  |            
| |                                               |            
| |                                               |            
| |                                               |            

F - 40

---

---



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

NOTE 10  TAXES ON
INCOME (continued):

| | 1) | The
deferred taxes are presented in the balance sheets as follows:
| | -- | ------------------------------------------------------------------

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

| | 3) | Realization
of the deferred tax assets is conditional upon earning a sufficient           amount of
taxable income in the coming years. The value of the deferred tax           assets,
however, could decrease in future years if estimates of future taxable           income
are reduced.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | The
deferred taxes are computed at the tax rates of 21%- 40%.
| | -- | -------------------------------------------------------------

| | 5) | As
stated in b. above, part of the income of the Companys and a
          certain Israeli subsidiarys income is tax exempt due to the approved
          enterprise status granted to most of their production facilities. The Company
          has decided to permanently reinvest the amount of such tax exempt ncome, and
not           to distribute it as dividends (see note 9c). Accordingly, no deferred taxes
have           been provided in respect of such income in these financial statements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amount of income taxes that would have been payable had such tax exempt income, earned
through December 31, 2006, been distributed as dividends is approximately $3,950,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 41

---

---



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

NOTE 10  TAXES ON
INCOME (continued):

| | 3) | Following
is a reconciliation of the theoretical tax expense, assuming all           income is
taxed at the regular tax rate applicable to companies in Israel           (2006-31%,
2005-34% and 2004-35%) and the actual tax expense:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                        | Year ended December 31
| | ---------------------------------------------------------------------- | ----------------------
|
|
|
|
| | Income before taxes on income, as reported in the income statements    |                       
| |                                                                        |                       
| | Theoretical tax expense                                                |                       
| |                                                                        |                       
| | L e s s - tax benefits arising from approved enterprise status         |                       
| |                                                                        |                       
| |                                                                        |                       
| |                                                                        |                       
| | Increase (decrease) in taxes resulting from permanent differences:     |                       
| | Disallowable deductions                                                |                       
| | Tax exempt income                                                      |                       
| | Increase (decrease) in taxes resulting from different tax              |                       
| | rates applicable to non - Israeli subsidiaries                         |                       
| | Changes in valuation allowance                                         |                       
| | Differences between the basis of measurement of income reported for    |                       
| | tax purposes and the basis of measurement of income for                |                       
| | financial reporting purposes - see c. above                            |                       
| | Increase in taxes on income resulting from the computation of deferred |                       
| | taxes at a rate which is different from the theoretical rate           |                       
| | Other                                                                  |                       
| |                                                                        |                       
| | Taxes on income for the reported years                                 |                       
| |                                                                        |                       

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

| | The
Company has received final tax assessments through the year ended December 31, 2002.
Tamar Industries M.R Electronics 1985 Ltd. received a final assessment through the year
ended December 31, 2002. Kochav Orion Advertising and Information Ltd, Orlan Orion
Systems Ltd and PRS received final assessments through the year ended December 31, 1999.
Retalix Italia received final assessments through the year ended December 31, 1999.
Retalix Holdings, Inc. received final tax assessments through the year ended December 31,
2002. The other subsidiaries have not been assessed since incorporation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---



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

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

| |             | December 31, 2006
| | ----------- | -----------------
|
|
|
|
| | Assets      |                  
| |             |                  
| | Liabilities |                  
| |             |                  

# NOTE 12  SUPPLEMENTARY
BALANCE SHEET INFORMATION:

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

| | b. | Marketable
securities:
| | -- | ----------------------

| | 1) | Held
to maturity bond securities  the amortized cost basis, aggregate           fair
value and the gross unrealized holding gains and losses are as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                 | Amortized
cost | Unrealized
gains | Unrealized
Losses | Aggregate
fair value
| | --------------- | -------------- | ---------------- | ----------------- | --------------------
|
|
|
|
| | At December 31: |                |                  |                   |                     
| | 2006            |                |                  |                   | 2,990               
| |                 |                |                  |                   |                     
| | 2005            |                |                  |                   | 7,160               
| |                 |                |                  |                   |                     

F - 43

---

---



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

NOTE
12  SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):

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

| |      | U.S. $ in
thousands
| | ---- | -------------------
|
|
|
|
| | 2007 |                    
| | 2008 |                    
| | 2009 |                    
| | 2010 |                    
| |      |                    
| |      |                    
| |      |                    

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

| |                                  | December 31
| | -------------------------------- | -----------
|
|
|
|
| | Among current assets:            |            
| | Trading                          |            
| | Held to maturity bond securities |            
| |                                  |            
| |                                  |            
| | As a non-current asset           |            
| | Held to maturity bond securities |            
| |                                  |            
| |                                  |            
| |                                  |            

| | 3) | As
to pledges on securities, see note 8c.
| | -- | -----------------------------------------

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

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

| |                                | December 31,
2006
| | ------------------------------ | -----------------
|
|
|
|
| | Long-term loans to employees * |                  
| | Long-term trade receivables    |                  
| | Less - Unamortized discount**  |                  
| |                                |                  
| |                                |                  
| |                                |                  

| | * | Long-term
loans to employees granted by the Company are linked to the Israeli CPI and bear interest
at an annual rate of 4%. Repayment dates are up to four years from the date of grant.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# NOTE
13  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS:

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

| | Financial
instruments, which potentially subject the Company to credit risk, consist principally of
trade receivables and interest bearing investments. The cash and cash equivalents as of
December 31, 2006 are deposited mainly with leading Israeli and U.S. banks. Therefore, in
the opinion of the Company, the credit risk inherent in these balances is remote. In
addition, the Company performs on-going credit evaluations of its clients and generally
does not require collateral. Securities invested in by the Group represent mainly highly
rated corporations. The Group is of the opinion that the credit risk in respect of these
balances is remote.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---



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

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

| | As
to trade receivables, most of the Groups revenues are derived from a large number of
customers. Consequently, the exposure to credit risks relating to trade receivables is
limited. The Group performs ongoing credit evaluations of its customers and generally does
not require collateral. An appropriate allowance for doubtful accounts is included in
accounts receivable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
fair value of the financial instruments included in the working capital of the Group is
usually identical or close to their carrying value. The fair value of long-term
receivables, long-term loans and other long-term liabilities also approximates the
carrying value, since they bear interest at rates close to the prevailing market rates.
The amounts funded in respect of employee rights are stated at fair value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | 1) | The
carrying amount of cash and cash equivalents, trade receivables and trade
          payables approximates their fair values due to the short-term maturities of
          these instruments.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
fair value of short and long-term marketable securities and bank deposits           with
quoted market prices is based on quoted market prices.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The
fair value of derivative instruments is estimated by obtaining quotes from
          brokers.
| | -- | -------------------------------------------------------------------------------------------------

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

| | c. | Derivative
financial instruments:
| | -- | ---------------------------------

| | The
Company has only limited involvement with derivative financial instruments. The Company
carries out transactions involving foreign exchange derivative financial instruments
(forward exchange contracts). These transactions do not qualify for hedge accounting
under FASB Statement No. 133  Accounting for Derivative Instruments and
Hedging Activities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, the Company entered into several foreign currencies forward contracts for
conversion of Pounds Sterling, Euro, Australian dollar and Israeli currency into a
notional amount in dollars, all short term contracts of up to three months. Most of these
contracts were rolled over a few times since their original closure in recent years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, the Company had ten open contracts of this nature for the
conversion of such foreign currencies into a total of approximately $14.6 million, the
fair value of which as of December 31, 2006 is $(336,000), which reflects the estimated
amounts that the Group would pay to terminate the contracts at the reporting date and
which was charged to financial expenses. As of December 31, 2005, the Company had four
open contracts of this nature for the conversion of such foreign currencies into a total
of approximately $5.4 million, the fair value of which as of December 31, 2006 is $71,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---



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

# NOTE
14  SEGMENT INFORMATION:

| | a. | The
Company conducts business globally and is managed geographically. The           Company
and its subsidiaries reportable segments are strategic business units,           which
are distinguished by the geographical areas in which they generate           revenues,
based on the location of customers.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company evaluates performance based on the revenues presented for each geographical
segment. Segment assets information is not given, since the Company does not evaluate
performance based on such assets. Based on the criteria above, the Company has the
following reportable segments: Israel, U.S. and International.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Summarized
financial information by geographic segment, for 2006, 2005 and 2004 is as follows:
| | ----------------------------------------------------------------------------------------------

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

| | b. | Enterprise-wide
disclosure:
| | -- | ---------------------------

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

| |               | Depreciatedbalance atDecember 31
| | ------------- | --------------------------------
|
|
|
|
| | Israel        |                                 
| | U.S.          |                                 
| | International |                                 
| |               |                                 
| |               |                                 
| |               |                                 

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

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

| | In
the years ended December 31, 2006 and December 31, 2004, no customer generated revenues
in excess of 10% of the Groups total revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | In
the year ended December 31, 2005, one customer in the international geographic segment
generated revenues in excess of 10% of the Groups total revenues. This customer
generated revenues of 10.2% of the Groups total revenues In the year ended December
31, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---



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

# NOTE
15  SELECTED INCOME STATEMENT DATA:

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

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

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

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

| | Following
are data relating to the nominal value of shares  basic and diluted used in the
purpose of computation of EPS:
| | -------------------------------------------------------------------------------------------------------------------------

| |                                                           | Year ended December 31
| | --------------------------------------------------------- | ----------------------
|
|
|
|
| | Weighted average number of shares issued and outstanding- |                       
| | used in computation of basic earnings per share           |                       
| |                                                           |                       
| | Add incremental shares from assumed exercise of options   |                       
| |                                                           |                       
| | Weighted average number of shares used in computation of  |                       
| | diluted earnings per share                                |                       
| |                                                           |                       

F - 47

---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

RETALIX
Ltd.

We
have audited the accompanying consolidated balance sheet of Retalix Ltd. (the
Company) and its subsidiaries as of December 31, 2005 and the related consolidated
statements of income, change in shareholders equity and cash flows for the year
then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes 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. We believe that our audit
provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of the Company and
subsidiaries as of December 31, 2005, and the consolidated results of their
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.

|                               |                                                                    
|------------------------------ | -------------------------------------------------------------------
|
|
|
|
|Tel Aviv, Israel
July 21, 2006 | /s/ KOST, FORER, GABBAY & KASIERER
A Member of Ernst & Young Global



---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
CELL-TIME LTD.

We
have audited the accompanying balance sheet of Cell-Time Ltd. (the
Company) as of December 31, 2004 and 2003, and the related statement of income, shareholders
equity and cash flows for the year ended December 31, 2004 and for the nine months ended December 31, 2003.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.

We
conducted our audits in accordance with the standards of the public company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for purpose of expressing an opinion on the effectiveness of the
companys internal control over financial reporting. Accordingly, we express no such
opinion. . An audit also includes examining on a test basis, evidence supporting the
amounts and disclosures in the financial statement assessing the accounting
principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provides a reasonable basis
for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company at December 31, 2004, , and the
results of its operations and its cash flows for the year ended December 31, 2004 and for
the nine months ended December 31, 2003, in conformity with U.S. generally accepted
accounting principles.

|                                  |                                                                    
|--------------------------------- | -------------------------------------------------------------------
|
|
|
|
|Tel-Aviv, Israel
January 23, 2005 | /s/ KOST, FORER, GABBAY & KASIERER
A Member of Ernst & Young Global



---

---



# Report of Independent
Registered Public Accounting Firm

To the Stockholder
Retalix Holdings, Inc. and SubsidiariesPlano, Texas

We have audited the accompanying
consolidated statements of operations, stockholders equity, and cash flows for the
year ended December 31, 2004, of Retalix Holdings, Inc. and Subsidiaries (the
Company) (see Note 1 to the consolidated financial statements). The consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated financial statements based on
our audit.

We conducted our audit in accordance
with auditing standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated results of their operations and their cash flows for the year ended December
31, 2004, of Retalix Holdings, Inc. and Subsidiaries, in conformity with accounting
principles generally accepted in the United States of America.

The 2004 financial statements have
been restated to correct for an error, in which the Company omitted approximately $1.3
million of additional interest expense to its parent, Retalix Ltd.

/s/ Mayer Hoffman McCann P.C.
July 17, 2006
San Diego, California



---

---