---

---

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



---

FORM 20-F/AAmendment No. 1

oREGISTRATION 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
1934For the fiscal year ended December 31, 2004

OR

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

Commission file No.0-29742

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

ISRAEL
(Jurisdiction of incorporation or organization)

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



---

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

Not Applicable

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

Ordinary Shares, nominal value NIS 1.0 per
share

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

Not Applicable

Indicate the number of outstanding shares of
each of the issuers classes of capital or common stock as of the close of the
period covered by the annual report:

17,577,432
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
xNO
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
oITEM
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
oNO
x

---

---





EXPLANATORY NOTE

We are filing this Amendment No. 1 to
our Annual Report on Form 20-F/A to reflect a restatement of our consolidated financial
statements for the year ended December 31, 2004. These restatements correct revenue
recognized in the fourth quarter of 2004 in connection with a certain multi- element
transaction involving a software license and a maintenance arrangement, where the amount
allocated to maintenance revenues were previously recognized based on deployment
progression. The impact of this restatement, is a reduction of revenues from product sales
and a reduction of tax expense related to the above correction. The primary effects of the
restatement are to reduce our previously reported net income for 2004 of $5.96 million to
$4.84 million and our previously reported retained earnings of $36.03 million to $34.91
million (see Note 1a to our consolidated financial statements included elsewhere in
this annual report for further discussion of the changes).

In
addition to the restated consolidated financial statements, which begin on page
F-1 hereof, we have also revised Items 3, 5, 15, 18 and 19, in order to reflect
the effects of this restatement.  Except
with respect to these matters, this amended report does not reflect events
occurring after the filing of the original Form 20-F on March 22, 2005.  The filing of this Form 20-F/A shall not be
deemed an admission that the original Form 20-F, when filed, included any
untrue statement of a material fact or omitted to state a material fact
necessary to make a statement not misleading.

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
March 21, 2005, the exchange rate between the NIS and the dollar, as quoted by
the Bank of Israel, was NIS 4.318 to $1.00.

Statements
in this annual report concerning our business outlook or future economic
performance; anticipated revenues, expenses or other financial items;
introductions and advancements in development of products, and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters,
are forward-looking statements as that term is defined under the Private
Securities Litigation Reform Act and U.S.
Federal Securities Laws.
Forward-looking statements address matters that are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those in these statements.
Factors that could cause or contribute to these differences include, but
are not limited to, those set forth under Item 3D - Risk Factors in this
annual report as well as those discussed elsewhere in this annual report and in
our other filings with the Securities and Exchange Commission, or SEC.

1

---

---



TABLE OF CONTENTS

|         |                                                         |     
|-------- | ------------------------------------------------------- | ----
|         |                                                         | Page
|         |                                                         |     
|PART I   |                                                         | 1   
|         |                                                         |     
|         | Item 3. KEY INFORMATION                                 | 1   
|         |                                                         |     
|         | A. Selected Financial Data                              | 1   
|         |                                                         |     
|         | B. Capitalization and Indebtedness                      | 2   
|         |                                                         |     
|         | C. Reasons for the Offer and Use of Proceeds            | 2   
|         |                                                         |     
|         | D. Risk Factors                                         | 2   
|         |                                                         |     
|         | Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS    | 14  
|         |                                                         |     
|         | A. Operating Results                                    | 14  
|         |                                                         |     
|         | B. Liquidity and Capital Resources                      | 21  
|         |                                                         |     
|         | C. Research and Development, Patents and Licenses, Etc. | 25  
|         |                                                         |     
|         | D. Trend Information                                    | 27  
|         |                                                         |     
|         | E. Off -Balance Sheet Arrangements                      | 27  
|         |                                                         |     
|         | F. Tabular Disclosure of Contractual Obligations        | 27  
|         |                                                         |     
|PART III |                                                         | 28  
|         |                                                         |     
|         | Item 15. CONTROLS AND PROCEDURES                        | 28  
|         |                                                         |     
|         | Item 18. FINANCIAL STATEMENTS                           | 28  
|         |                                                         |     
|         | Item 19. EXHIBITS                                       | 28  

1

---

---



PART I

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, 2000, 2001, 2002, 2003 and 2004
and the selected consolidated balance sheet data as of December 31, 2000,
2001, 2002, 2003 and 2004 set forth below have been derived from our
consolidated financial statements that were audited by Kesselman &
Kesselman, a member of PricewaterhouseCoopers International Limited, and
reflects the restatement of our results of operations for the year ended
December 31, 2004. 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 2002, 2003 and 2004 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,               |        
|                                                                                 |  |                                       |        
|                                                                                 |  | 2000                                  |         | 2001 |   | 2002    |   | 2003 |         | 2004* |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |  
|                                                                                 |  | (in thousands, except per share data) |        
|                                                                                
|Consolidated
  statement of income data                                          |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Revenues:                                                                        |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Product sales                                                                    |  | $                                     | 22,457  |      | $ | 34,333  |   | $    | 47,280  |       | $ | 58,432  |   | $ | 77,494  |  
|Services and projects                                                            |  |                                       | 13,613  |      |   | 24,953  |   |      | 29,173  |       |   | 33,625  |   |   | 45,460  |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Total revenues                                                                   |  |                                       | 36,070  |      |   | 59,286  |   |      | 76,453  |       |   | 92,057  |   |   | 122,954 |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Cost of revenues:                                                                |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Cost of product sales                                                            |  |                                       | 4,916   |      |   | 7,135   |   |      | 11,970  |       |   | 16,576  |   |   | 23,246  |  
|Cost of services and projects                                                    |  |                                       | 4,328   |      |   | 8,781   |   |      | 10,141  |       |   | 12,440  |   |   | 18,890  |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Total cost of revenues                                                           |  |                                       | 9,244   |      |   | 15,916  |   |      | 22,111  |       |   | 29,016  |   |   | 42,136  |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Gross profit                                                                     |  |                                       | 26,826  |      |   | 43,370  |   |      | 54,342  |       |   | 63,041  |   |   | 80,818  |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Operating expenses:                                                              |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Research and development
  expenses-net                                          |  |                                       | (12,063 | )    |   | (14,571 | ) |      | (17,036 | )     |   | (18,344 | ) |   | (34,096 | )
|Selling and marketing expenses                                                   |  |                                       | (9,864  | )    |   | (14,506 | ) |      | (18,111 | )     |   | (21,542 | ) |   | (24,798 | )
|General and administrative
  expenses                                            |  |                                       | (6,881  | )    |   | (12,017 | ) |      | (12,455 | )     |   | (13,345 | ) |   | (15,944 | )
|Other general income
  (expenses)net                                            |  |                                       | 20      |      |   | 17      |   |      | 1,043   |       |   | (62     | ) |   | 15      |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Total operating expenses                                                         |  |                                       | (28,788 | )    |   | (41,077 | ) |      | (46,559 | )     |   | (53,293 | ) |   | (74,823 | )
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Income (loss) from operations                                                    |  |                                       | (1,962  | )    |   | 2,293   |   |      | 7,783   |       |   | 9,748   |   |   | 5,995   |  
|Financial income (expenses)-net                                                  |  |                                       | 140     |      |   | (365    | ) |      | (499    | )     |   | (95     | ) |   | 85      |  
|Gain arising from issuance of
  shares by a subsidiary and an associated company |  |                                       |        |      |   | 2,877   |   |      |        |       |   | 1,068   |   |   | 200     |  
|Other expenses                                                                   |  |                                       |        |      |   | (501    | ) |      |        |       |   |        |   |   |        |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Income (loss) before taxes on income                                             |  |                                       | (1,822  | )    |   | 4,304   |   |      | 7,284   |       |   | 10,721  |   |   | 6,280   |  
|Taxes on income                                                                  |  |                                       | (124    | )    |   | (706    | ) |      | (2,103  | )     |   | (2,639  | ) |   | (1,553  | )
|Share in losses of an associated company                                         |  |                                       |        |      |   |        |   |      |        |       |   | (90     | ) |   | (137    | )
|Minority interests in losses of subsidiaries                                     |  |                                       | 145     |      |   | 166     |   |      | 524     |       |   | 288     |   |   | 247     |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Net income (loss)                                                                |  | $                                     | (1,801  | )    | $ | 3,764   |   | $    | 5,705   |       | $ | 8,280   |   | $ | 4,837   |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Earnings (loss) per share:                                                       |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Basic                                                                            |  | $                                     | (0.16   | )    | $ | 0.33    |   | $    | 0.48    |       | $ | 0.67    |   | $ | 0.31    |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Diluted                                                                          |  | $                                     | (0.16   | )    | $ | 0.31    |   | $    | 0.46    |       | $ | 0.63    |   | $ | 0.29    |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|                                                                                 |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Weighted average number of
  shares used in computation:                         |  |                                       |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Basic                                                                            |  |                                       | 10,916  |      |   | 11,472  |   |      | 11,902  |       |   | 12,323  |   |   | 15,746  |  
|Diluted                                                                          |  |                                       | 10,916  |      |   | 12,153  |   |      | 12,395  |       |   | 13,083  |   |   | 16,552  |  

|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|* | Restated, see note 1a to our restated consolidated financial statements included elsewhere in this
amendment to annual report on Form 20-F/A.

1

---

---



|                                  |  |                         |        |      |   |        |  |      |        |       |   |         |  |   |         | 
|--------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ----- | - | ------- |  | - | ------- | 
|                                  |  | Year ended December 31, |       
|                                  |  |                         |       
|                                  |  | 2000                    |        | 2001 |   | 2002   |  | 2003 |        | 2004* |  
|                                  |  |                         |        |      |   |        |  |      |        |       |  
|                                  |  | (U.S. $ in thousands)   |       
|                                 
|Consolidated
  balance sheet data |  |                         |        |      |   |        |  |      |        |       |   |         |  |   |         | 
|Cash and cash equivalents         |  | $                       | 14,546 |      | $ | 9,200  |  | $    | 28,410 |       | $ | 46,093  |  | $ | 91,413  | 
|Working capital                   |  |                         | 28,989 |      |   | 29,101 |  |      | 27,250 |       |   | 45,786  |  |   | 97,963  | 
|Total assets                      |  |                         | 72,942 |      |   | 92,749 |  |      | 98,296 |       |   | 121,122 |  |   | 209,952 | 
|Total debt                        |  |                         | 19,003 |      |   | 19,942 |  |      | 15,913 |       |   | 13,745  |  |   | 13,859  | 
|Shareholders equity              |  |                         | 41,829 |      |   | 48,779 |  |      | 56,528 |       |   | 75,646  |  |   | 156,171 | 

|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|* | Restated, see note 1a to our restated consolidated financial statements included elsewhere in this
amendment to annual report on Form 20-F/A.

B. Capitalization and Indebtedness

Not
applicable.

C. Reasons for Offer and Use of Proceeds

Not
applicable.

D. Risk Factors

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

Risks Related To Our
Business

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

Our future
growth is critically dependent on increased sales to customers in the retail
food industry. We derive the substantial majority of our revenues from the sale
of software products and the performance of related services to the retail food
industry worldwide, including supermarkets, convenience stores and restaurants.
The success of our customers is directly linked to economic conditions in the
retail food industry, which in turn are subject to intense competitive
pressures and are affected by overall economic conditions. The general
deterioration of the economy worldwide has resulted in a curtailment of capital
investment by our existing and potential customers. The attacks on the United
States on September 11, 2001 and subsequent terror attacks worldwide have
caused a further decline in the global economy. As a result, many companies,
including our existing and potential customers, have indicated that they plan
to postpone or decrease further capital investment. A continued decline in
capital expenditures by our existing and potential customers would reduce our
sales and could result in pressure on our product prices, each of which would
have a material adverse effect on our operating results.

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

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

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

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

2

---

---



|                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                    | the deferral
  of customer orders in anticipation of new software products or services from
  us or our competitors;                                                          
|                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                    | changes in
  pricing by us or our competitors;                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                    | the
  uncertainty regarding the adoption of our current and future products,
  including our relatively new Application Service Provider, or ASP, and
  e-market applications;
|                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                    | technical
  difficulties with respect to the use of software solutions and services
  developed by us; and                                                                    
|                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                    | seasonality
  in customer purchasing and deployment patterns.                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                               
|Based
  upon these and other factors, our quarterly operating results could fluctuate
  significantly in the future. This fluctuation might cause our quarterly
  operating results in future periods to be below the expectations of
  securities analysts and investors. If that occurs, the market price of our
  ordinary shares could decline.

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

Although
in 2004, none of our customers accounted for more then 5% of our revenues,
sales to national supermarket and convenience store chains typically are large
in size and represent a significant portion of our revenues. Two of our customers
each accounted for more than 5% each of our revenues during 2002. Two of our
customers (including one of the two mentioned in regard to 2002) accounted for
more than 5% each of our revenues during 2003. We anticipate that sales to a
few customers in any given reporting period will continue to contribute
materially to our revenues in the foreseeable future. A significant reduction
in sales to these large chains could significantly reduce our revenues.

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

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

Our business will
suffer to the extent 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 ability
  of the new platforms to support the multiple sites and heavy data traffic of
  our largest customers;                                                       
| |                                                                                                                                                                           
| | the ability
  of our development staff to learn how to efficiently and effectively develop
  products using the new platforms;                                            
| |                                                                                                                                                                           
| | our ability
  to transition our customer base to the products based on new platforms when
  these are available;                                                          
| |                                                                                                                                                                           
| | the ability
  of the new platforms achieve market acceptance; and                                                                                                         
| |                                                                                                                                                                           
| | the
  continued commitment of suppliers to enhancing and marketing the new
  platforms.                                                                                   

3

---

---



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 these platforms do not achieve market acceptance, it likely will have a
material adverse effect on our business, operating results and financial
condition.

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

Any
changes to third-party hardware and software platforms and applications that
our products work with could require us to modify our products and could cause
us to delay releasing a product until the updated version of that hardware and
software platform or application has been released. As a result, customers
could delay purchases until they determine how our products will operate with
these updated platforms or applications, which could inhibit sales of our
products and harm our business. In addition, developing and maintaining
consistent software product performance across various technology platforms
could place a significant strain on our resources and software product release
schedules, which could adversely affect our results of
operations. We must continually evaluate new technologies and implement into
our products advanced technology. For example, in 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 they typically:

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

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

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

In
January 2004, we acquired OMI International, Inc., or OMI based in the United
States, as well as DemandX Ltd., an Israeli corporation. Shortly thereafter we
acquired the supply chain management distribution activities of OMI
International Ltd. based in the United Kingdom. In August 2004, we acquired
UNIT S.p.A. based in Italy. We intend to make future strategic acquisitions of
complementary companies, products or technologies. These acquisitions could
disrupt our business. In addition, your holdings in our company would be
diluted if we issue equity securities in connection with any acquisition, as we
did in the transactions involving OMI and the activities of OMI International
Ltd. 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;

4

---

---



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | risks
  associated with entering markets in which we have no or limited prior
  experience; and
| |                                                                                                
| | potential
  loss of key employees, particularly those of the acquired organizations.           

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

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

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

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

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

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

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

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

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

5

---

---



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

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

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

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

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

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

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

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

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

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

6

---

---



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

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

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

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

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

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

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

Our
software products are complex and may contain errors that could be detected at
any point in the life of the product. We cannot assure you that errors will not
be found in new products or releases after shipment. This could result in
diminished demand for our products, delays in market acceptance and sales,
diversion of development resources, injury to our reputation or increased
service and warranty costs. If any of these were to occur, our operating
results could be adversely affected.

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

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

7

---

---



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

Our
rapid expansion has placed, and is likely to continue to place, a strain on our
senior management team and other resources, such as our management information
systems and operating, administrative, financial and accounting systems. We are
undergoing rapid growth in the number of our employees, the size of our
physical facilities and the scope of our operations, due, in part, to several
acquisitions we made in 1999, 2000, 2001 and 2004. For example, we had 178
employees on January 1, 1999 and 920 employees on December 31, 2004. As a
result of our 2004 acquisitions, we have added an additional 160 employees. Any
failure to manage growth effectively could disrupt our business and harm operating
results.

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

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

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

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

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

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

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

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

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

8

---

---



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 have not yet
evaluated our internal controls over financial reporting in compliance with
Section 404 of the Sarbanes-Oxley Act.

We
are required to comply with internal control evaluation and certification
requirements of Section 404 of the Sarbanes-Oxley Act by no later then the end
of our 2006 fiscal year. We have only recently begun to evaluate whether our
existing internal controls over financial reporting systems is compliant with
Section 404. As a result of this evaluation, we may be required to implement
new internal control procedures over financial reporting. We estimate that this
process may take between six to twelve months to complete. We may experience
higher then anticipated operating expenses and fees in this context and we may
need to hire additional qualified personnel in order to achieve compliance with
Section 404. If we are unable to implement these changes effectively or
efficiently, it could harm our operations, financial reporting or financial
results and could result in our being unable to obtain an unqualified report on
internal controls from our independent auditors.

Risks Related To Our
Location In Israel

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

Our
principal offices are located in Israel. Accordingly, political, economic and
military conditions in Israel directly affect our operations. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors. A state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Since October 2000, there has been an increase in hostilities between
Israel and the Palestinians, which has negatively influenced Israels
relationship with its Arab citizens and several Arab countries. Such ongoing
hostilities may hinder Israels international trade relations and may limit the
geographic markets where we can sell our products. Furthermore, certain parties
with whom we do business have declined to travel to Israel during this period,
forcing us to make alternative arrangements where necessary, and the United
States Department of State has issued advisories regarding travel to Israel,
impeding the ability of travelers to attain travel insurance. Any hostilities
involving Israel or threatening Israel, or the interruption or curtailment of
trade between Israel and its present trading partners, could adversely affect
our operations.

9

---

---



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 strengthening or weakening of the dollar compared to
these other currencies.

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

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

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

Since
a considerable portion of our expenses such as employees salaries are linked
to an extent to the rate of inflation in Israel, the dollar cost of our
operations is influenced by the extent to which any increase in the rate of
inflation in Israel is or is not offset by the devaluation of the NIS in
relation to the dollar. As a result, we are exposed to the risk that the NIS,
after adjustment for inflation in Israel, will appreciate in relation to the
dollar. In that event, the dollar cost of our operations in Israel will
increase and our dollar-measured results of operations will be adversely
affected. In 2001 and 2002, the inflation adjusted NIS devalued against the
dollar, which lowered the dollar cost of our Israeli operations. During 2003
and 2004, however, the inflation adjusted NIS appreciated against the dollar,
which raised the dollar cost of our Israeli operations. We cannot predict
whether in the future the NIS will appreciate against the dollar or vice versa.
Any increase in the rate of inflation in Israel, unless the increase is offset
on a timely basis by a devaluation of the NIS in relation to the dollar, will
increase labor and other costs, which will increase the dollar cost of our
operations in Israel and harm our results of operations.

10

---

---



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

We
receive tax benefits under the Israeli Law for Encouragement of Capital
Investments, 1959, in respect of our production facilities that are designated
as Approved Enterprises, the cessation of which could adversely affect our
results of operations. Our cumulative tax benefits resulting from our Approved
Enterprises for the years 2002, 2003 and 2004, net of other tax effects, were
approximately $443,000, $365,000 and $592,000, respectively. For more
information on this law and our Approved Enterprises, see Item 10E  Taxation
of this annual report under the caption Israeli TaxationLaw for the
Encouragement of Capital Investments, 1959. To maintain our eligibility for these
tax benefits, we must continue to meet several conditions, including among
others, making required investments in property, plant and equipment, and
continuing to manufacture in Israel. If we fail to comply with these conditions
in the future, the tax benefits we received could be cancelled or reduced and
we could be required to pay increased taxes or refund the amounts of the
benefits received with interest and penalties. In addition, an increase in our
manufacturing outside of Israel may be construed as a failure to comply with
these conditions. The Israeli government has reduced the benefits available
under this program in recent years and has indicated that it may reduce or
eliminate these benefits in the future. These tax benefits may not continue in
the future at their current levels or at any level. The applicable law
regarding Approved Enterprise programs will expire on March 31, 2005.
Accordingly, requests for new programs or expansions that are not approved on
or before March 31, 2005 will not confer any tax benefits, unless the term
of the law will be extended beyond March 31, 2005. On January 12, 2005, a bill
was submitted to the Israeli parliament providing for certain changes to the
applicable law regarding Approved Enterprise programs. Among others, the bill
proposes certain changes to both the criteria and procedure for obtaining
Approved Enterprise status for an investment program, and changes to the grants
and tax benefits afforded in certain circumstances to Approved Enterprises
under such law. The proposed amendment is expected to apply to new investment
programs following the enactment of the bill into law. In order to enact the
bill as legislation, the bill must be approved by the Israeli parliament and
published. We cannot predict whether the bill will eventually be enacted into
law and what changes it might implement. From time to time, we submit requests
for expansion of our Approved Enterprise programs or for new programs. These
requests might not be approved in the future. The termination or reduction of
these tax benefits could harm our results of operations, or our inability to
get approvals for expanded or new programs, could adversely affect our results
of operations.

We may be required to
pay stamp duty on agreements executed by us on or after June 1, 2003. This
would increase our taxes.

The
Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law, provides that
most documents signed by Israeli companies are subject to a stamp duty,
generally at a rate of between 0.4% and 1% of the value of the subject matter
of such document. It has been common practice in Israel not to pay such stamp
duty unless a document is filed with a governmental authority or with the
courts. As a result of an amendment to the Stamp Duty Law that came into effect
on June 1, 2003, the Israeli tax authorities have approached many companies in
Israel and requested disclosure of all agreements signed after June 1, 2003
with the aim of collecting stamp duty on such agreements. The legitimacy of this
amendment to the Stamp Duty Law and of the actions by the Israeli tax
authorities are currently under review by the Israeli High Court of Justice.
Based on advice from our Israeli counsel, we believe that we may only be
required to pay stamp duty on documents signed on or after August 2004.
However, we cannot assure you that the tax authorities or the courts will
accept such view. Although it is not yet possible to evaluate the effect, if
any, on us of the amendment to the Stamp Duty Law, there could be a material
adverse affect on our results of operations.

In
January 2005, an order was signed that cancelled the requirement to pay stamp
duty as of January 1, 2008. Furthermore, pursuant to such order, as of
January 1, 2005, stamp duty is no longer chargeable on, among others, loan
agreements.

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

We
have received royalty-bearing grants from the Office of the Chief Scientist of
the Ministry of Industry, Trade and Labor of the Government of Israel in an
aggregate amount of approximately $4.1 million through December 31, 2004.
According to Israeli law, any products developed with grants from the Office of
the Chief Scientist are required to be manufactured in Israel, unless we obtain
prior approval of a governmental committee. As a condition to obtaining this
approval, we may be required to pay the Office of the Chief Scientist up to
300% of the grants we received and to repay such grants at a quicker rate. In
addition, we are prohibited from transferring to third parties in Israel the
technology developed with these grants without the prior approval of a
governmental committee and we are prohibited from transferring such technology
to third parties outside Israel. Any non-Israeli who becomes a holder of 5% or
more of our outstanding ordinary shares will be required to notify the Office
of the Chief Scientist and to undertake to observe the law governing the grant
programs of the Office of the Chief Scientist, the principal restrictions of
which are the transferability limits described above in this paragraph.

11

---

---



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

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

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

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

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

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

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

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

Provisions
of Israeli corporate law may have the effect of delaying, preventing or making
more difficult a merger with, or acquisition of, us. The Israeli Companies Law
 1999, or the Companies Law, generally provides that a merger be approved by
the board of directors and a majority of the shares present and voting on the
proposed merger at a meeting called upon at least 21 days notice. A merger may
not be completed unless at least 70 days have passed since the filing of the
merger proposal with the Israeli Registrar of Companies. The Companies Law also
provides that an acquisition of shares in a public company must be made by
means of a tender offer if as a result of the acquisition the purchaser would
become a 25% or greater shareholder of the company, unless there is already
another 25% or greater shareholder of the company. Similarly, an acquisition of
shares must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 45% or greater shareholder of the
company, unless there is already a majority shareholder of the company. In any
event, if as a result of an acquisition of shares the acquirer will hold more
than 90% of a companys shares, the acquisition must be made by means of a
tender offer for all of the shares. Finally, Israeli tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and
a foreign company, less favorably than U.S. tax laws. For example, Israeli tax
law may, under certain circumstances, subject a shareholder who
exchanges his ordinary shares for shares in another corporation to taxation
prior to the sale of the shares received in such stock-for-stock swap.

12

---

---



Risks Related to Our
Ordinary Shares

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

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

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

In
addition, trading in shares of companies listed on The Nasdaq National Market
in general and trading in shares of technology companies in particular have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to operating performance. 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 of purchasers that 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 April
2004, we registered on a shelf registration statement with the SEC 4,100,000
of our ordinary shares, of which we sold 3,450,000 in a public offering in May
2004. Any substantial sales of our ordinary shares in the public market also
might make it more difficult for us to sell equity or equity related securities
in the future at a time and in a place we deem appropriate.

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

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

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

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

13

---

---



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

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

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

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

During
2004, we continued our strategy of focusing on Tier 1 and Tier 2 supermarkets,
large convenience store chains and major fuel retailers. In addition, we
expanded our focus on Tier 3 and Tier 4 food retailers, through our StoreNext
USA joint venture with Fujitsu Transaction Solutions, through which our
products are sold to such market sector. We also continued to market our
Connected Services for these market sectors.

Highlights
since the beginning of 2004 include:

          We
acquired OMI, a provider of supply chain execution and warehouse management
systems for the retail food industry, for aggregate consideration of
approximately $19.5 million, including related transaction expenses. This
acquisition was concluded on January 2, 2004. As part of the acquisition,
we retained 67 of OMIs employees. The purpose of the acquisition of OMI 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 incurred significant expenses in developing a
next-generation, web-based version of OMIs applications and in integrating
these applications with ReMA, our web-based enterprise application suite.

14

---

---



          We
announced numerous new customer agreements, including French-based
Mousquetaires-Intermarche, Tesco (BackOffice systems for sites across the
United Kingdom, Europe and Asia), Alon USA, Drug-Eleven in Japan and Lotus
Supermarkets in China. These new customers in Europe and Asia represent the
realization of our strategy to expand our business to new retail markets around
the globe.


          We continued to
expand our sales in the United States, where revenues grew by 27% in 2004 as
compared to 2003. International sales (all other countries, excluding Israel)
were $33.1 million in 2004, a growth of 85% in comparison to 2003, as we
added new customers and continued to penetrate new international markets.

          We
increased our investment in research and development, net by 86% to
$34.1 million in 2004, reflecting significant investments in integrating
our recently acquired warehouse management systems into the ReMA suite of
applications, as well as in developing next-generation applications and
web-based architectures targeted to the needs of both large supermarket and
convenience store chains and independent retailers. This increase is also a
result of our efforts in developing new versions of our products and solutions
based on new platforms such as the Microsoft .Net platform and the J2EE
platform. 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
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.

          We
acquired UNIT, a supplier of specialized software and hardware solutions for
the food and petrol retail industries in Italy and Europe. As part of the
acquisition, we retained UNITs 59 employees.

Restatement of financial statements

We
have restated our consolidated financial statements for the year ended December
31, 2004 to correct revenue recognized in connection with a certain
multi- element transaction involving software license and a maintenance
arrangement, where maintenance revenues were previously recognized based on
deployment progression. The impact of this correction is a reduction of
revenues from product sales of $1,406,000. The restatement also includes the
tax effect of the above correction which is a reduction of tax expense
amounting $285,000.

The
effect of the restatement on the Companys net income for the year ended
December 31, 2004 and retained earnings as of December 31, 2004, is shown
below:

| |                            |  |                                                |        |                                |  |        |  
| | -------------------------- |  | ---------------------------------------------- | ------ | ------------------------------ |  | ------ | -
| |                            |  | Year endedDecember 31, 2004                    |        | Year ended
  December 31, 2004 | 
| |                            |  |                                                |        |                                | 
| |                            |  | U.S. $ in
  thousands(except per
  share data) |       
| |                            |  |                                                |       
| | Net income  as reported   |  |                                                | 5,958  |                                |  | 2,058  |  
| | Effect of restatement, net |  |                                                | (1,121 | )                              |  | (1,121 | )
| |                            |  |                                                |        |                                |  |        |  
| | Net income  as restated   |  |                                                | 4,837  |                                |  | 937    |  
| |                            |  |                                                |        |                                |  |        |  
| |                            |  |                                                |        |                                |  |        |  
| | Earnings
  per share:      |  |                                                |        |                                |  |        |  
| | Basic  as reported        |  |                                                | 0.38   |                                |  | 0.12   |  
| | Effect of restatement, net |  |                                                | (0.07  | )                              |  | (0.07  | )
| |                            |  |                                                |        |                                |  |        |  
| | Basic - restated           |  |                                                | 0.31   |                                |  | 0.05   |  
| |                            |  |                                                |        |                                |  |        |  
| |                            |  |                                                |        |                                |  |        |  
| | Diluted  as reported      |  |                                                | 0.36   |                                |  | 0.11   |  
| | Effect of restatement, net |  |                                                | (0.07  | )                              |  | (0.07  | )
| |                            |  |                                                |        |                                |  |        |  
| | Diluted - restated         |  |                                                | 0.29   |                                |  | 0.04   |  
| |                            |  |                                                |        |                                |  |        |  

15

---

---



|                                                         |  |                       |  
|-------------------------------------------------------- |  | --------------------- | -
|                                                         |  | December 31, 2004     |  
|                                                         |  |                       |  
|                                                         |  | U.S. $ in
  thousands |  
|                                                         |  |                       |  
|Shareholders equity  retained earnings 
  as reported |  | 36,031                |  
|Effect of restatement, net                               |  | (1,121                | )
|                                                         |  |                       |  
|Shareholders equity  retained earnings 
  as restated |  | 34,910                |  
|                                                         |  |                       |  

Sources of Revenue

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

Our
relationships with our Tier 1 and Tier 2 supermarket and convenience store
chains and major fuel retailers are long term in nature, as they involve the
supply of products that require considerable customer commitment, attention and
investment of financial and human resources. No single customer accounted for
5% or more of our revenues in 2004.

Product Sales

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

Services and Projects

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

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

16

---

---



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

          any
undelivered products or services are not essential to the functionality of the
delivered products or services;

          payment
for the delivered products or services is not contingent upon delivery of the
remaining products or services;

          we
have an enforceable claim to receive the amount due in the event we do not
deliver the undelivered products or services; and

          there
is evidence of the fair value of each of the undelivered products or services.

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

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

Cost of Revenues

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

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

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

Operating Expenses

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

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

17

---

---



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

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

An
additional factor which affected our general and administrative expenses in
recent years, and in 2002 in particular, was the worldwide economic recession,
which contributed to an increase in our bad debt write-offs and allowance for
doubtful accounts and to the expenses associated with such debts. Our allowance
for doubtful accounts increased from 2.6% of the gross amount of trade
receivables in 2001 to 6.7% in 2002. These increases were primarily
attributable to the global recession, especially the recession in Israel, where
we had to increase the allowance for doubtful accounts for a number of smaller
Israeli customers. In determining the allowance for doubtful accounts, we
considered, among other things, our past experience with such customers, the
economic environment, the industry in which such customers operate and
financial information available on such customers. In addition, in 2002, one of
our customers declared bankruptcy and we wrote off $650,000 in accounts
receivable attributable to that customer. In light of this write-off and the
continuing economic recession, we re-examined our trade receivables balances
and increased our allowance for doubtful accounts. In 2003, our allowance for
doubtful accounts increased by $1.4 million to 11.7% of the gross amount of
trade receivables, due in part to a decrease in our bad debt write-offs from
$940,000 in 2002 to $411,000 in 2003. In 2004, our allowance for doubtful
accounts increased slightly, primarily due to bad debt write-offs of $0.9
million. As percentage of gross receivables our 2004 allowance for doubtful
accounts amounted to 10.7% primarily due to the growth of customer balances in
parallel to the growth of revenues and as a result of the bad debt write-offs
in 2004.

Other General Income (Expenses), Net

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

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

In March 2003 we, through our subsidiary StoreNext Israel, together
with Lipman Electronic Engineering Ltd. and Dai Telecom Ltd. established
Cell-Time Ltd.. or Cell-Time. Cell-Time is a provider of on-line services that
enables retailers and cellular communication providers in Israel to sell
on-line pre-paid cellular air-time at retail points of sale. Each of the three
parties holds an equal share in Cell-Time.

According
to the agreement between the parties, Dai has committed to invest $1.25 million
in consideration for its share in Cell-Time and the other parties have
committed to grant Cell-Time rights to use certain of their technologies.

During
2004, an amount of $600,000 was invested by Dai in Cell-Time. As a result we
recorded a gain of $200,000 representing StoreNext Israels portion in
Cell-Time.

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

18

---

---



Financial Income (Expenses), Net

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.

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 of Subsidiaries

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

Operating Results

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

|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|-------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | -- |  | ----- | --
|                                                                                 |  | Year ended December 31, |      
|                                                                                 |  |                         |      
|                                                                                 |  | 2002                    |       | 2003 |  | 2004* |   
|                                                                                 |  |                         |       |      |  |       |   
|Revenues:                                                                        |  |                         |       |      |  |       |    |  |       |   
|Product sales                                                                    |  |                         | 61.8  | %    |  | 63.5  | %  |  | 63.0  | % 
|Services and projects                                                            |  |                         | 38.2  |      |  | 36.5  |    |  | 37.0  |   
|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|Total revenues                                                                   |  |                         | 100.0 | %    |  | 100.0 | %  |  | 100.0 | % 
|Cost of revenues:                                                                |  |                         |       |      |  |       |    |  |       |   
|Cost of product sales                                                            |  |                         | 15.7  | %    |  | 18.0  | %  |  | 18.9  | % 
|Cost of services and projects                                                    |  |                         | 13.2  |      |  | 13.5  |    |  | 15.4  |   
|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|Total cost of revenues                                                           |  |                         | 28.9  | %    |  | 31.5  | %  |  | 34.3  | % 
|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|Gross profit                                                                     |  |                         | 71.1  | %    |  | 68.5  | %  |  | 65.7  | % 
|Operating expenses:                                                              |  |                         |       |      |  |       |    |  |       |   
|Research and development expenses, net                                           |  |                         | (22.3 | )%   |  | (19.9 | )% |  | (27.7 | )%
|Selling and marketing expenses                                                   |  |                         | (23.7 | )    |  | (23.4 | )  |  | (20.1 | ) 
|General and administrative expenses                                              |  |                         | (16.3 | )    |  | (14.5 | )  |  | (13.0 | ) 
|Other general income (expenses) 
net                                            |  |                         | 1.4   |      |  | (0.1  | )  |  |       |   
|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|Total operating expenses                                                         |  |                         | 60.9  | %    |  | 57.9  | %  |  | 60.8  | % 
|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|Income from operations                                                           |  |                         | 10.2  |      |  | 10.6  |    |  | 4.9   |   
|Financial income (expenses), net                                                 |  |                         | (0.7  | )    |  | (0.1  | )  |  |       |   
|Gain arising from issuance of shares by a
  subsidiary and an associated company |  |                         |       |      |  | 1.1   |    |  | 0.2   |   
|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|Income before taxes on income                                                    |  |                         | 9.5   | %    |  | 11.6  | %  |  | 5.1   | % 
|Taxes on income                                                                  |  |                         | (2.7  | )    |  | (2.9  | )  |  | (1.3  | ) 
|Share in losses of an associated company                                         |  |                         |       |      |  | (0.1  | )  |  | (0.1  | ) 
|Minority interests in losses of
  subsidiaries                                   |  |                         | 0.7   |      |  | 0.3   |    |  | 0.2   |   
|                                                                                 |  |                         |       |      |  |       |    |  |       |   
|Net income                                                                       |  |                         | 7.5   | %    |  | 8.9   | %  |  | 3.9   | % 
|                                                                                 |  |                         |       |      |  |       |    |  |       |   

|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|* | Restated, see note 1a to our restated consolidated financial statements included elsewhere in this
amendment to annual report on Form 20-F/A.

19

---

---



Comparison of 2002,
2003 and 2004

Revenues

|                      |  |                           |      |          |   |          |  |                 |       |                 |  |  |    |   |  |  |  |    |   | 
|--------------------- |  | ------------------------- | ---- | -------- | - | -------- |  | --------------- | ----- | --------------- |  |  | -- | - |  |  |  | -- | - | 
|                      |  | Year ended
  December 31, |      | % Change |   | % Change | 
|                      |  | 2002                      |      | 2003     |   | 2004*    |  | 2003 vs.
  2002 |       | 2004 vs.
  2003 | 
|                      |  | (U.S. $  in
  millions)   |     
|                      |  |                           |      |          |   |          |  |                 |       |                 |  |  |    |   |  |  |  |    |   | 
|Product sales         |  | $                         | 47.3 |          | $ | 58.5     |  | $               | 77.5  |                 |  |  | 24 | % |  |  |  | 33 | % | 
|Services and projects |  |                           | 29.2 |          |   | 33.6     |  |                 | 45.5  |                 |  |  | 15 | % |  |  |  | 35 | % | 
|                      |  |                           |      |          |   |         
|                      |  |                           |      |          |   |          |  |                 |       |                 |  |  |    |   |  |  |  |    |   | 
|Total revenues        |  | $                         | 76.5 |          | $ | 92.1     |  | $               | 123.0 |                 |  |  | 20 | % |  |  |  | 34 | % | 
|                      |  |                           |      |          |   |         

|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|* | Restated, see note 1a to our restated consolidated financial statements included elsewhere in this
amendment to annual report on Form 20-F/A.

During
2004, our revenues increase resulted from an increase in sales to U.S. and international
customers in Europe and Asia, both in the grocery and convenience store sectors. The
increase in revenue from sales to U.S. customers constituted 55% of the total increase in
sales during 2004 in comparison to 2003. The increase in revenue from sales to
international customers constituted 45% of the total increase in sales during 2004 in
comparison to 2003. Revenues from sales in the Israeli market were consistent with those
achieved during 2003. Our international revenues could fluctuate from period to period in
the near term, as these sales are still affected to a great extent by a small number of
relatively large customers.

During
2003, our revenue increase resulted primarily from an increase in sales to
customers in the United States in both the supermarket and convenience store
sectors, where revenues increased from $48.8 million in 2002 to
$62.6 million in 2003, an increase of approximately 28%. Revenues from
international customers, including those in Europe, South Africa, Canada, Australia
and the Far East, amounted to $18.0 million in both 2002 and 2003.
International sales in 2002 consisted, in significant part, of several large
sales.

Cost of Revenues

|                              |  |                           |      |          |   |          |  |                 |      |                 |  |  |    |   |  |  |  |    |   | 
|----------------------------- |  | ------------------------- | ---- | -------- | - | -------- |  | --------------- | ---- | --------------- |  |  | -- | - |  |  |  | -- | - | 
|                              |  | Year ended
  December 31, |      | % Change |   | % Change | 
|                              |  | 2002                      |      | 2003     |   | 2004     |  | 2003 vs.
  2002 |      | 2004 vs.
  2003 | 
|                              |  | (U.S. $  in
  millions)   |     
|                              |  |                           |      |          |   |          |  |                 |      |                 |  |  |    |   |  |  |  |    |   | 
|Cost of product sales         |  | $                         | 12.0 |          | $ | 16.6     |  | $               | 23.2 |                 |  |  | 38 | % |  |  |  | 40 | % | 
|Cost of services and projects |  |                           | 10.1 |          |   | 12.4     |  |                 | 18.9 |                 |  |  | 23 | % |  |  |  | 52 | % | 
|                              |  |                           |      |          |   |         
|                              |  |                           |      |          |   |          |  |                 |      |                 |  |  |    |   |  |  |  |    |   | 
|Total cost of revenues        |  | $                         | 22.1 |          | $ | 29.0     |  | $               | 42.1 |                 |  |  | 31 | % |  |  |  | 45 | % | 
|                              |  |                           |      |          |   |         

The
increase in cost of product sales as a percentage of product sales in 2004,
2003 and 2002, resulted primarily from an increase in hardware associated sales
attributable to our StoreNext USA initiative. In July of 2002, we began to
consolidate the results of StoreNext USA into our financial statements.
Although historically we generated revenues primarily from the sale of software
and related services, StoreNext USA also generates revenues from the sale of
third party POS hardware, which generally has a higher associated cost of
revenues and lower gross margins. As a result, our gross margins in 2004 and
2003, each including four quarters of results of StoreNext USA, were lower than
our gross margins in 2002, which included only two quarters of results of
StoreNext USA. We expect our gross margins for future periods to be lower than
our historical gross margins as a result of both the consolidation of the
StoreNext USA results and our acquisition of OMI , which generates a larger
portion of revenues from services, with a lower associated gross margin.

Operating Expenses

|                              |  |                           |      |          |   |          |  |                 |      |                 |  |  |    |   |  |  |  |    |   | 
|----------------------------- |  | ------------------------- | ---- | -------- | - | -------- |  | --------------- | ---- | --------------- |  |  | -- | - |  |  |  | -- | - | 
|                              |  | Year ended
  December 31, |      | % Change |   | % Change | 
|                              |  | 2002                      |      | 2003     |   | 2004     |  | 2003 vs.
  2002 |      | 2004 vs.
  2003 | 
|                              |  | (U.S. $  in
  millions)   |     
|                              |  |                           |      |          |   |          |  |                 |      |                 |  |  |    |   |  |  |  |    |   | 
|Research and development, net |  | $                         | 17.0 |          | $ | 18.3     |  | $               | 34.1 |                 |  |  | 8  | % |  |  |  | 86 | % | 
|Selling and marketing         |  |                           | 18.1 |          |   | 21.6     |  |                 | 24.8 |                 |  |  | 19 | % |  |  |  | 15 | % | 
|General and administrative    |  |                           | 12.5 |          |   | 13.4     |  |                 | 15.9 |                 |  |  | 7  | % |  |  |  | 19 | % | 
|                              |  |                           |      |          |   |         
|                              |  |                           |      |          |   |          |  |                 |      |                 |  |  |    |   |  |  |  |    |   | 
|Total operating expenses      |  | $                         | 46.6 | *        | $ | 53.3     |  | $               | 74.8 |                 |  |  | 14 | % |  |  |  | 40 | % | 
|                              |  |                           |      |          |   |         

|  |                                                 
|- | ------------------------------------------------
|* | Including
  $1.0 million in other general income

20

---

---



Research and Development Expenses, Net.
During 2004, we increased our
research and development expenses by 86% in comparison to 2003. As a percentage
of revenues, these expenses rose to 28% in 2004 compared to 20% and 22% in 2003
and 2002, respectively. This significant growth reflects our considerable
investments in integrating our recently acquired warehouse management systems
into the ReMA suite of applications, and in developing next-generation
applications and web-based architectures targeted to the needs of large
supermarket and convenience store chains as well as independent retailers. This
increase is also a result of our efforts in developing new versions of our
products and solutions based on new platforms such as the Microsoft .Net
platform and the J2EE platform. In 2003 and 2002 the growth of these expenses
was primarily attributable to the development of our new ReMA applications.
Although we believe that in 2004 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, we invested significant marketing efforts in increasing awareness of our
new offerings in the supply chain management area and in establishing a
presence in new markets in Europe and Asia. During 2002 and 2003, we focused
primarily on the strengthening of our sales and marketing force in the United
States by recruiting highly experienced industry personnel, in order to better
target the U.S. grocery sector. We anticipate that selling and marketing
expenses will continue to increase in absolute dollars as we expand our
operations.

General and Administrative Expenses. In
2004, our general and administrative expenses continued to decrease as a
percentage of sales, continuing the trend from 2003 and 2002, largely because
we were able to rely on our existing infrastructure to support our growth in
revenues.

Financial Expenses, Net

Financial
income (expenses), net, totaled income of $ 85,000 for 2004, compared to
expenses of $95,000 for 2003 and $ 499,000 for 2002. The net income in 2004
resulted primarily from interest earned on deposits and securities, net of
financial expenses incurred on bank loans, expenses resulting from sale of receivables and other bank charges.
The net expense in 2003 and 2002 resulted primarily from financial expenses
incurred on bank loans used to finance acquisitions of fixed assets, and in
2002 in particular, from the devaluation of net financial non-dollar assets as
a result of the strengthening of the U.S. dollar compared to the NIS and the
British Pound Sterling.

Corporate Tax Rate

The
general corporate tax rate in Israel is 35% for the 2004 tax year, 34% for the
2005 tax year, 32% for the 2006 tax year and 30% for the 2007 tax year and
thereafter. Our effective tax rate, however, was 24.6% in 2004, 24.6% in 2003,
and 28.9% in 2002. We enjoy these lower effective tax rates primarily because of
tax reductions to which we are entitled under Israels Law for Encouragement of
Capital Investments, 1959, with respect to our investment programs that were
granted the status of approved enterprise under this law. Under our approved
enterprise investment programs, we are entitled to reductions in the tax rate
normally applicable to Israeli companies with respect to income generated from
our approved enterprise investment programs. We expect to continue to derive a
portion of our income from our approved enterprise investment programs. We are
also entitled to certain tax exemptions in connection with our approved
enterprise investment programs. We cannot assure you that such tax benefits
will be available to us in the future at their current levels or at all.

B. Liquidity and Capital Resources

We
had cash and cash equivalents of approximately $91.4 million,
$46.1 million and $28.4 million, as of December 31, 2004, 2003
and 2002, respectively. Our total cash and cash equivalents, short-term bank
deposits and short- and long-term marketable securities amounted to
approximately $111.9 million as of December 31, 2004, compared to
$54.6 million as of December 31, 2003 and $34.0 million as of
December 31, 2002. This increase of financial resources is primarily
attributable to 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. In January 2004, we
acquired OMI for approximately $19.1 million, including related transaction
expenses, of which approximately $13.7 million was paid in cash and the
balance was paid in the form of our ordinary shares. In addition, during 2004
we acquired UNIT S.p.A. in Italy, DemandX Ltd., the distributor of OMIs
products in Israel, and the operations of OMIs European distributor. Total
cash spent on these additional acquisitions amounted to approximately $2.6
million.

21

---

---



Net Cash Provided by Operating Activities.
Net
cash provided by operating activities was approximately $6.2 million in 2004,
primarily the result of net income of $4.8 million . Net cash provided by operating
activities was approximately $11.7 million in 2003, primarily the result of net
income of $8.3 million and an increase of $5.0 million in accounts payable and
accruals, offset by a $2.9 million increase in accounts receivable due to growing
sales and a $2.4 million decrease in deferred income taxes. Net cash provided by
operating activities in 2002, was approximately $10.1 million, primarily the result
of net income of $5.7 million and an increase of $4.5 million in accounts
payable and accruals.

Net Cash Provided by/Used in Investing Activities.
Net cash used in investing activities in 2004 was approximately
$28.5 million, primarily attributable to cash spent on acquisitions of
subsidiaries which amounted to approximately $16.3 million as well as
investments in marketable debt securities held to maturity, net of maturity of
such securities which amounted to approximately $10.0 million. Net cash used in
investing activities in 2003 was approximately $3.2 million, primarily
attributable to investments in marketable securities and acquisitions of fixed
assets. Net cash provided by investing activities in 2002 was approximately
$11.1, primarily attributable to the maturity of short-term bank deposits and
proceeds from the sale of a portion of the dealership activity of one of our
subsidiaries in the United States, net of investments in marketable securities
and acquisitions of fixed assets.

Our
capital expenditures (consisting of the purchase of fixed assets) were $1.8
million, $1.0 million and $1.7 in 2004, 2003 and 2002, respectively.

Net Cash Provided by/Used in Financing Activities.
Net cash provided by financing activities in 2004 amounted 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. Net
cash provided by financing activities in 2003 was approximately
$9.2 million, primarily attributable to the issuance of ordinary shares
upon the exercise of options by employees, long-term bank loans and short-term
bank credit received and proceeds from the investment of Isracard in StoreNext
Israel, net of the repayment of long-term bank loans. Net cash used in
financing activities in 2002 was approximately $1.9 million, primarily
attributable to the repayment of long-term bank loans net of proceeds from the
issuance of ordinary shares upon the exercise of options by employees.

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. To date, these proceeds have been invested in
short-term bank deposits and investment-grade, interest-bearing securities.

Bank Debt

As
of December 31, 2004, we had the following outstanding bank debt
obligations, most of the proceeds of which were incurred to finance acquisitions:

|                    |  |                       |  |                 |  |                           |      |                                     |      |                 |   |                 |  |                      |  |  |  |  | 
|------------------- |  | --------------------- |  | --------------- |  | ------------------------- | ---- | ----------------------------------- | ---- | --------------- | - | --------------- |  | -------------------- |  |  |  |  | 
|Lender              |  | Currency              |  | Date of
  Loan  |  | Original 
  Loan
  Amount |      | Outstanding
  
  Principal
  Amount |      | Maturity
  Date |   | Interest
  Rate | 
|                    |  | (U.S. $  in millions) | 
|                    |  |                       |  |                 |  |                           |      |                                     |      |                 |   |                 |  |                      | 
|Bank Leumi*         |  | USD                   |  | August
  2000   |  |                           | 10.0 |                                     |      | 1.5             |   | August
  2005   |  | LIBOR
  + 0.500 %    | 
|United Mizrahi Bank |  | USD                   |  | September 2000  |  |                           | 5.0  |                                     |      | 0.8             |   | September 2005  |  | LIBOR
  + 0.500 %    | 
|Bank Hapoalim       |  | NIS                   |  | December
  2003 |  |                           | 2.3  |                                     |      | 2.3             |   | December
  2005 |  | Prime
  Rate - 0.6 % | 
|Bank Sanpaolo       |  | Euro                  |  | **              |  |                           | 1.9  |                                     |      | 1.5             |   | July
  2011     |  | 2.0 %                | 
|                    |  |                       |  |                 |  |                          
|                    |  |                       |  |                 |  |                           |      |                                     |      |                 |   |                 |  |                      |  |  |  |  | 
|Total               |  |                       |  |                 |  |                           |      | $                                   | 19.2 |                 | $ | 6.1             |  |                      |  |  |  |  | 
|                    |  |                       |  |                 |  |                          



---

*          This loan was
assigned to Retalix USA on December 29, 2003. To secure the loan, we
pledged securities that we hold in one of our bank accounts with Bank Leumi.


**         The
loan was granted in three installments: On February 2002, $755,000, on February
2003, $677,000, and on December 2003, $447,000.

22

---

---



Subsidiaries Short-Term Bank Credit. As
of December 31, 2004, one of our subsidiaries in the United States had
unsecured lines of credit totaling $3.0 million from which, at that date,
it had drawn down $2.0 million. The funds borrowed under this line of
credit bear interest at the prime rate (5.25% as of December 31, 2004).

Credit Risk

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

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

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

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

During
2003, we entered into one foreign currency forward contract for conversion of
British Pounds Sterling into a notional amount of U.S. dollars of approximately
$2.9 million. We renewed this contract three times during 2003 and four
times during 2004. This contract was still outstanding as of December 31, 2004.
During 2004, we entered into two foreign currency forward contracts for
conversion of Euros into a notional amount of U.S. dollars of approximately
$500,000 each. One of these two contracts was renewed and was still outstanding
as of December 31, 2004. In addition, during 2004, we entered into a foreign
currency forward contract for conversion of New Israeli Shekels into a notional
amount of U.S. dollars of approximately $2.5 million, which was still
outstanding as of December 31, 2004. The fair value of these outstanding
contracts as of December 31, 2004 reflects a liability in the amount of
$130,000, which was charged to financial expenses.

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

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

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

23

---

---



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

|                          |  |                             |  |                                                        |   |                                                                                               |  |  |      |   |  |  |  |      |   | 
|------------------------- |  | --------------------------- |  | ------------------------------------------------------ | - | --------------------------------------------------------------------------------------------- |  |  | ---- | - |  |  |  | ---- | - | 
|Year Ended
  December 31, |  | Israeli
  Inflation
  Rate% |  | NIS Devaluation 
  Rate against the 
  U.S. dollar
  % |   | Israel Inflation
  Adjusted for the 
  Devaluation of
  the NIS against
  the U.S. dollar
  % | 
|                          |  |                             |  |                                                        |   |                                                                                               |  |  |      |   |  |  |  |      |   | 
|2000                      |  |                             |  | 0.0                                                    |   |                                                                                               |  |  | (2.7 | ) |  |  |  | 2.7  |   | 
|2001                      |  |                             |  | 1.4                                                    |   |                                                                                               |  |  | 9.3  |   |  |  |  | (7.9 | ) | 
|2002                      |  |                             |  | 6.5                                                    |   |                                                                                               |  |  | 7.3  |   |  |  |  | (0.8 | ) | 
|2003                      |  |                             |  | (1.9                                                   | ) |                                                                                               |  |  | (7.6 | ) |  |  |  | 5.7  |   | 
|2004                      |  |                             |  | 1.2                                                    |   |                                                                                               |  |  | (1.6 | ) |  |  |  | 2.8  |   | 

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

Application of
Critical Accounting Policies and Use of Estimates

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

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

Revenue recognition

Our
revenue recognition policy is critical because our revenue is a key component
of our results of operations. In addition, our revenue recognition policy
determines the timing of certain expenses, such as commissions and royalties.
We follow very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue recognition policy.
Revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause our operating results to vary significantly
from quarter to quarter and could result in future operating losses. Should
changes in conditions cause management to determine that these guidelines are
not met for certain future transactions, revenue recognized for any reporting
period could be adversely affected (see Note 1.k to our consolidated
financial statements included elsewhere in this annual report).

24

---

---



Bad debt and allowance for doubtful
accounts

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

Tax provision

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

Our Functional
Currency

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

The
functional currency of UNIT and Cell-Time is their local currency (Euro and New
Israeli Shekel, respectively). The financial statements of UNIT are included in
our consolidated financial statements translated into dollars in accordance
with FAS 52  Foreign Currency Translation of the FASB, or FAS 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 FAS 52;
the resulting translation adjustments are presented under shareholders equity,
in the item Accumulated other comprehensive income.

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

Research and
Development

We believe
that our research and development efforts are essential to our ability to
successfully develop innovative products that address the needs of our
customers as the market for enterprise-wide software solutions evolves. In
particular, we intend to continue to invest significant resources in developing
new ReMA applications for use in our enterprise solution as well as our growing
ASP and e-marketplace initiatives, in upgrading our existing applications to be
web-browser enabled based on a thin client architecture, similar to our
StoreLine.Net solution, and in developing a next generation, web-based version
of OMIs warehouse management applications and integrating these applications
with ReMA. As of December 31, 2004, our research and development staff
consisted of 424 employees, of whom 246 were located in Israel and the
remaining 178 primarily in the United States.

25

---

---



Proprietary Rights

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

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

Grants from the Office of the Chief
Scientist

From
time to time we receive grants under programs of the Office of the Chief
Scientist of the Ministry of Industry, Trade and Labor of the Government of
Israel. The amount of grants
of the Office of the Chief Scientist recognized in our statement of operations
for the year ended December 31, 2004 was approximately $298,000. This governmental support
is conditioned upon our ability to comply with certain applicable requirements
and conditions specified in the Chief Scientists program and with the
provisions of the Law for the Encouragement of Research and Development in the
Industry, 1984, and the regulations promulgated thereunder, or the Research and
Development Law.

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

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

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

26

---

---



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

Draft
legislation was submitted in December 2004 by the Israeli government proposing
an amendment to the Research and Development Law to make it more compatible
with the global business environment by, among other things, relaxing
restrictions on the transfer of manufacturing rights outside Israel and on the
transfer of Chief Scientist funded know-how outside of Israel. As described
above, currently, the Research and Development Law permits the Chief Scientist
to approve the transfer of manufacturing rights outside Israel, in
consideration of payment of higher royalties. The proposed amendments further
permit the Chief Scientist, among other things, to approve the transfer of
manufacturing rights outside Israel in exchange for substitute manufacturing of
other products being performed in Israel, in lieu of the increased royalties.
The proposed amendment further enables, under certain circumstances and subject
to the Chief Scientists prior approval, the transfer of Chief Scientist-funded
know-how outside Israel, in consideration of payment of a portion of the sale
price (according to a formula calculated in proportion to the Chief Scientists
investment in the grantee minus depreciation), or in exchange for know-how
and cooperation in research and development with non-Israeli companies, without
any additional payment to the Chief Scientist. Currently, the proposed
amendment is awaiting discussion in the Finance Committee of the Israeli
parliament and there can be no certainty as to if and when such proposed
legislation will actually be finalized into law and what provisions will be
contained in any law that is adopted.

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

D. Trend Information

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

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, 2004:

|                                                                                            |  |       |     |                     |   |           |  |                               |     |                       |   |     |  |     |  | 
|------------------------------------------------------------------------------------------- |  | ----- | --- | ------------------- | - | --------- |  | ----------------------------- | --- | --------------------- | - | --- |  | --- |  | 
|Contractual Obligations (U.S. $  in
  millions)*                                            |  | Total |     | Less than 
  1 year |   | 1-3 years |  | 4-5 years 
  and
  thereafter |     | More
  then
  5 years |  
|                                                                                            |  |       |     |                     |   |           |  |                               |     |                       |   |     |  |     |  | 
|Long-term
  debt obligations (including current maturities)                                 |  | $     | 6.3 |                     | $ | 4.8       |  | $                             | 0.7 |                       | $ | 0.5 |  | 0.3 | 
|Capital
  lease obligations with regard to offices and facilities                           |  |       | 7.7 |                     |   | 2.1       |  |                               | 4.3 |                       |   | 1.3 |  |     |  | 
|Liabilities
  with regard to unfavorable executory contracts (including current maturities) |  |       | 1.3 |                     |   | 1.0       |  |                               | 0.3 |                       |   |     |  |     |  | 



---

*          See also the notes
to our consolidated financial statements included elsewhere in this annual
report, and in particular, Notes 6, 7 and 9 thereto.


27

---

---



PART III

ITEM 15  CONTROLS AND PROCEDURES

In
our initial Annual Report on Form 20-F for the year ended December 31, 2004, we reported
that our chief executive officer and our chief financial officer concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act) were effective as of
December 31, 2004. Subsequent to the filing of our initial Annual Report on Form 20-F for
the year ended December 31, 2004, we determined that we were required to restate our
previously issued financial statements for the year ended December 31, 2004 to correct the
accounting treatment of revenue recognized in connection with a certain multi-element
transaction involving a software license and a maintenance arrangement where maintenance revenues were previously recognized
 based on deployment
progression. As a result of the review in 2006 that led to this restatement, we concluded
that we did not properly recognize revenues in connection with this certain transaction.

In
connection with the restatement, our key corporate senior members of our management,
including our chief executive officer and our chief financial officer, re-evaluated our
disclosure controls procedures as of December 31, 2004. Based upon the re-evaluation, our
chief executive officer and our chief financial officer have concluded that our disclosure
controls and procedures were not effective as of December 31, 2004 because at that time we
did not have effective controls designed and in place to ensure that revenues relating to
the multi-element transactions involving a software license and maintenance arrangement
based on deployment progression were properly recognized 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 have implemented stricter
controls to insure more detailed reporting in advance to management and review by
management of transactions with lower minimums of volume. We have also subsequently begun
recruitment of additional qualified accounting personnel as well is improving our
documentation of procedures, policies and controls as well as their actual implementation.

There
is no assurance that the disclosure controls and procedures 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 will be effective 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.

There
were no changes during the period covered by this annual report in our internal control
over financial reporting that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. However, as discussed above in this
Item 15, after the year ended December 31, 2004, in 2006, we began implementing new
internal controls as described above.

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.

ITEM 19  EXHIBITS

|    |                                                                     
|--- | --------------------------------------------------------------------
|(a) | Financial Statements                                                
|    |                                                                     
|    | 1. Report 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. Exhibit  Details of
  subsidiaries and associated company       
|    |                                                                     
|    | 8. Reports
  of Independent Auditors of Certain Associated Companies

28

---

---



(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.                                                                                                           
|*****8.1    |  | 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.
|13.1        |  | Certification
  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                
|13.2        |  | Certification
  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                
|15.1        |  | Consent of
  Kesselman & Kesselman, a member of PricewaterhouseCoopers International
  Limited.                                           
|15.2        |  | Consents of
  Mayer Hoffman McCann P.C.                                                                                                   
|15.3        |  | Consents of
  Nation Smith Hermes Diamond.                                                                                                
|15.4        |  | Consent of
  Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.                                                              

|                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                             
|*             Previously
  filed as an exhibit to Retalixs annual report on Form 20-F for the fiscal
  year ended December 31, 2001,
  and incorporated herein by reference.
|                                                                                                                                                                             
|**           Previously
  filed as an exhibit to Retalixs annual report on Form 20-F for the fiscal
  year ended December 31, 1999,
  and incorporated herein by reference. 
|                                                                                                                                                                             
|***         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 an exhibit to Retalixs annual report on Form 20-F for the fiscal
  year ended December 31, 2004,
  and incorporated herein by reference.    

29

---

---



SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant hereby
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 20-F/A and has duly caused and authorized the
undersigned to sign this Amendment No. 1 to this annual report on its behalf.

|                    |                                                    |                      
|------------------- | -------------------------------------------------- | ---------------------
|RETALIX LTD.       
|                    |                                                    |                      
|                    | By:                                                | /s/ Barry
  Shaked   
|                    |                                                   
|Date: July 21, 2006 | Barry
  Shaked, President, Chief Executive Officer
|                    | and Chairman
  of the Board of Directors          
|                    |                                                    |                      
|                    | By:                                                | /s/ Danny
  Moshaioff
|                    |                                                   
|Date: July 21, 2006 | Danny
  Moshaioff, Chief Financial Officer        

30

---

---



# RETALIX LTD.CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2004

TABLE OF CONTENTS

|                                                         | 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 financial statements                            | F-10-F-47
|EXHIBIT - DETAILS OF SUBSIDIARIES AND ASSOCIATED COMPANY | F-48     

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



---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

# RETALIX LTD.

We have audited the consolidated
balance sheets of Retalix Ltd. (the Company) and its subsidiaries as of
December 31, 2004 and 2003 and the related consolidated statements of income, changes
in shareholders equity and cash flows for each of the three years in the period
ended December 31, 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.

We did not audit the financial
statements of certain consolidated subsidiaries whose assets constitute approximately
28.9% and 26.9% of total consolidated assets as of December 31, 2004 and 2003,
respectively, and whose revenues constitute approximately 65.2%, 68.0% and 35.2% of total
consolidated revenues for the years ended December 31, 2004, 2003 and 2002,
respectively. We did not audit the financial statement of a certain associated company,
the companys interest in which, as reflected in the balance sheets are approximately
$119,000 and $53,000 as of December 31, 2004 and 2003, respectively, and the
Companys share of excess of loss over profits of which is a net amounts of
approximately $ 137,000 and $90,000 for the years ended December 31, 2004 and 2003,
respectively. 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), and
those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Companys Board of Directors and management, as
well as evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other independent auditors provide a reasonable basis for
our opinion.

In our opinion, based on our audits
and the reports of the other independent auditors, the financial statements referred to
above present fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2004 and 2003 and the consolidated
results of their operations, changes in shareholders equity and their cash flows for
each of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in note 1a. to the
consolidated financial statements, the Company has restated its 2004 consolidated
financial statements

|Tel-Aviv, Israel                                      
         March 21, 2005,                              
         Except for Note 1a., as to which the date is
         July 21, 2006 |  | /s/ Kesselman & KesselmanCertified Public Accountants (Isr.)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------

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 (note 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 12d)                  |            
|Amounts funded in respect of employee rights upon |            
|retirement (note 7)                               |            
|Other                                             |            
|                                                  |            
|                                                  |            
|                                                  |            
|PROPERTY, PLANT AND EQUIPMENT,net (note 3):       |            
|                                                  |            
|GOODWILL(note 4)                                  |            
|                                                  |            
|OTHER INTANGIBLE ASSETS,net of accumulated        |            
|amortization (note 4):                            |            
|                                                  |            
|                                                  |            
|                                                  |            

|* | Restated Note 1a
|- | ----------------

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

F - 3

---

---



|                                                         | December 31
|-------------------------------------------------------- | -----------
|
|
|
|
|Liabilities and shareholders' equity                     |            
|CURRENT LIABILITIES(note 11):                            |            
|Short-term bank credit                                   |            
|Current maturities of long-term bank loans (note 5)      |            
|Accounts payable and accruals:                           |            
|Trade                                                    |            
|Employees and employee institutions                      |            
|Current maturities of other liabilities (note 6)         |            
|Other                                                    |            
|Deferred revenues                                        |            
|                                                         |            
|T o t a l    current liabilities                         |            
|                                                         |            
|LONG-TERM LIABILITIES(note 11):                          |            
|Long-term bank loans, net of current maturities (note 5) |            
|Employee rights upon retirement (note 7)                 |            
|Other liabilities, net of current maturities (note 6)    |            
|                                                         |            
|T o t a l    long-term liabilities                       |            
|                                                         |            
|T o t a l    liabilities                                 |            
|                                                         |            
|COMMITMENTS AND CONTINGENT LIABILITIES(note 8):          |            
|                                                         |            
|MINORITY INTERESTS                                       |            
|                                                         |            
|SHAREHOLDERS' EQUITY(note 9):                            |            
|Share capital - ordinary shares of NIS 1.00              |            
|par value (authorized: 25,000,000                        |            
|shares; issued and outstanding:                          |            
|December 31, 2004 - 17,577,432 shares;                   |            
|December 31, 2003 - 12,976,695 shares)                   |            
|Additional paid in capital                               |            
|Retained earnings                                        |            
|Accumulated other comprehensive income                   |            
|                                                         |            
|T o t a l    shareholders' equity                        |            
|                                                         |            
|                                                         |            
|                                                         |            

|* | Restated, Note 1a
|- | -----------------

The
accompanying notes are an integral part of the 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 INCOME (EXPENSES):                      |                       
|Research and development expenses - net           |                       
|Selling and marketing expenses                    |                       
|General and administrative expenses  (note 15a)   |                       
|Other general income (expenses) - net  (note 15c) |                       
|                                                  |                       
|T o t a l    operating expenses                   |                       
|                                                  |                       
|INCOME FROM OPERATIONS                            |                       
|FINANCIAL INCOME (EXPENSES),net (note 15b):       |                       
|GAIN ARISING FROM ISSUANCE OF SHARES BY           |                       
|A SUBSIDIARY AND AN ASSOCIATED                    |                       
|COMPANY(note 2f and 2g)                           |                       
|                                                  |                       
|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 OF                   |                       
|SUBSIDIARIES                                      |                       
|                                                  |                       
|NET INCOME                                        |                       
|                                                  |                       
|EARNINGS PER SHARE(note 15d):                     |                       
|Basic                                             |                       
|                                                  |                       
|Diluted                                           |                       
|                                                  |                       
|WEIGHTED AVERAGE NUMBER OF SHARES USED            |                       
|IN COMPUTATION OF EARNINGS PER                    |                       
|SHARE - in thousands (note 15d):                  |                       
|Basic                                             |                       
|                                                  |                       
|Diluted                                           |                       
|                                                  |                       

|* | Restated
 Note 1a.
|- | -------------------

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

F - 5

---

---



RETALIX LTD. 
STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

|                                                                                             | Share capital |  |  |        | 
|-------------------------------------------------------------------------------------------- | ------------- |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2002                                                                   |               |  |  | 11,721 | 
|CHANGES DURING 2002:                                                                         |               | 
|Net income                                                                                   |               |  |  |        | 
|Issuance of share capital in respect of acquisition of minority                              |               | 
|interest in a subsidiary                                                                     |               |  |  | 5      | 
|Issuance of share capital to employees resulting from exercise of options                    |               |  |  | 267    | 
|                                                                                             |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2002                                                                 |               |  |  | 11,993 | 
|CHANGES DURING 2003:                                                                         |               | 
|Net income                                                                                   |               |  |  |        | 
|Differences from translation of non dollar currency                                          |               | 
|financial statements of an associated company                                                |               |  |  |        | 
|                                                                                             |               |  |  |        | 
|Comprehensive income                                                                         |               |  |  |        | 
|                                                                                             |               |  |  |        | 
|Surplus arising from issuance of options granted to non-employee                             |               |  |  |        | 
|Gain on issuance of share capital of a newly  formed associated                              |               | 
|company to a third party                                                                     |               |  |  |        | 
|Issuance of share capital in respect of acquisition of minority                              |               | 
|interest in a subsidiary                                                                     |               |  |  | 13     | 
|Issuance of share capital to employees resulting from exercise of options                    |               |  |  | 971    | 
|Tax benefits relating to employees and other option grants                                   |               |  |  |        | 
|                                                                                             |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2003                                                                 |               |  |  | 12,977 | 
|CHANGES DURING 2004:                                                                         |               | 
|Net income                                                                                   |               |  |  |        | 
|Differences from translation of non dollar currency                                          |               | 
|financial statements of a subsidiary and associated company                                  |               |  |  |        | 
|                                                                                             |               |  |  |        | 
|Comprehensive income                                                                         |               |  |  |        | 
|                                                                                             |               |  |  |        | 
|Surplus arising from issuance of options granted to non-employee                             |               |  |  |        | 
|Issuance of share capital in respect of acquisition of a subsidiary                          |               |  |  | 254    | 
|Issuance of share capital to employees resulting from exercise of options                    |               |  |  | 896    | 
|Issuance of share capital in a public offering net of $3,243,000 shares
       issuance cost |               |  |  | 3,450  | 
|                                                                                             |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2004, as restated                                                    |               |  |  | 17,577 | 
|                                                                                             |               |  |  |        | 

*   Net of share issuance expenses.** Restated - Note 1a

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

F - 6

---

---



(Continued) 
1

RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                 | Year ended
December 31
|---------------------------------------------------------------- | ----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                            |                       
|Net income                                                       |                       
|Adjustments required to reconcile net income to                  |                       
|net cash provided by operating activities:                       |                       
|Minority interests in losses of subsidiaries                     |                       
|Depreciation and amortization, net                               |                       
|Gain arising from issuance of shares by a subsidiary             |                       
|and an associated company                                        |                       
|Share in losses of an associated company                         |                       
|Capital gain from sale of dealership activity                    |                       
|Tax benefits relating to employee and other option grants        |                       
|Compensation expenses resulting from shares and                  |                       
|options granted to employees and non employees                   |                       
|Changes in accrued liability for employee                        |                       
|rights upon retirement                                           |                       
|Losses (gains) on amounts funded in respect of                   |                       
|employee rights upon retirement                                  |                       
|Deferred income taxes - net                                      |                       
|Net decrease (increase) in marketable securities                 |                       
|Amortization of discount (premium) 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                         |                       
|                                                                 |                       
|Net cash provided by operating activities - forward              |                       
|                                                                 |                       

* Restated - Note 1a.

The
accompanying notes are an integral part of these 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:                       |                       
|Proceeds from disposal of an investment in long-term        |                       
|bank deposit                                                |                       
|Short-term bank deposits - net                              |                       
|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                      |                       
|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                      |                       
|Long-term bank loans received from banks                    |                       
|Proceeds from issuance of shares of subsidiary to a         |                       
|third party                                                 |                       
|Repayment of long-term bank loans                           |                       
|Issuance of share capital to employees resulting            |                       
|from exercise of options                                    |                       
|Short-term bank credit - net                                |                       
|Investment in a subsidiary                                  |                       
|                                                            |                       
|Net cash provided by financing activities                   |                       
|                                                            |                       
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                     |                       
|                                                            |                       
|NET INCREASE IN CASH AND CASH EQUIVALENTS                   |                       
|BALANCE OF CASH AND CASH EQUIVALENTS                        |                       
|AT BEGINNING OF PERIOD                                      |                       
|                                                            |                       
|BALANCE OF CASH AND CASH EQUIVALENTS                        |                       
|AT END OF PERIOD                                            |                       
|                                                            |                       

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

F - 8

---

---



(Concluded)  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 -     |                       
|assets and liabilities of the subsidiaries at the date of   |                       
|acquisition:                                                |                       
|Working capital (excluding cash and cash equivalents)       |                       
|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                                              |                       
|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                                                    |                       
|                                                            |                       
|Income tax                                                  |                       
|                                                            |                       

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

| | 1) | 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | In
the years ended December 31, 2003 and 2002, the Company acquired shares from
          minority shareholders of a subsidiary in consideration for the issuance of
share           capital of the Company in the total amount of approximately $ 138,000
and           $ 66,000, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In
the year ended December 31, 2003, the Company recorded $ 79,000 as           capital
surplus resulting from issuance of share capital of a newly formed           associated
company to a third party.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 9

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES:

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

| | Retalix Ltd. (the
Company) has restated its consolidated financial statements for the year ended
December 31, 2004 to correct revenue recognized in connection with a certain multi-
element transaction involving software license and a maintenance arrangement, where
maintenance revenues were previously recognized based on deployment progression. The
Company has determined that the amount deferred should have been computed using the
predetermined contractual maintenance renewal rate regardless of the deployment status.
The impact of this correction is a reduction of revenues from product sales of $1,406,000.
The restatement also includes the tax effect of the above correction which is a reduction
of tax expense amounting $285,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effect of the restatement on the Companys net income for the year ended December 31,
2004 and retained earnings as of December 31, 2004, is shown below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | Year ended
December 31, 2004
|------------------------ | ----------------------------
|
|
|
|Net income - as reported |                             
|Effect of restatement    |                             
|                         |                             
|Net income - as restated |                             
|                         |                             
|                         |                             
|Earnings per share:      |                             
|Basic - as reported      |                             
|Effect of restatement    |                             
|                         |                             
|Basic - restated         |                             
|                         |                             
|                         |                             
|Diluted - as reported    |                             
|Effect of restatement    |                             
|                         |                             
|Diluted - restated       |                             
|                         |                             

|                                           | December 31, 2004
U.S. $ in thousands
|------------------------------------------ | -------------------------------------
|                                           |                                      
|Shareholder's equity - retained earnings - |                                      
|as reported                                |                                      
|Effect of restatement                      |                                      
|                                           |                                      
|Shareholder's equity - retained earnings - |                                      
|as restated                                |                                      
|                                           |                                      

F - 10

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES:

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

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

| | a) | The Company, an Israeli corporation whose shares are listed on the Nasdaq
          National 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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  see
Exhibit.
| | -- | ------------------------------------------------------------------------------------------------------

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

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

| | The
financial statements have been prepared in accordance with accounting principles
generally accepted (GAAP) in the United States 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 are in dollars or in Israeli currency linked to the dollar (see note 14a). The
Groups financing is mostly in dollars. Thus, the functional currency of the Group
is the dollar.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
and balances originally denominated in dollars are presented at their original amounts.
Balances in non-dollar currencies are translated into dollars using historical and
current exchange rates for non-monetary and monetary balances, respectively. For
non-dollar transactions and other items (stated below) reflected in the statements of
income, 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | The
functional currency of one subsidiary and of the associated company is their local
currency (Euro and New Israeli Shekel) (NIS). The financial
statements of the said subsidiary are included in the consolidation based on translation
into dollars in accordance with Statement of Financial Accounting Standards (FAS)
52  Foreign Currency Translation of the Financial Accounting Standards Board
of the United States (FASB): 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 by 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

| | Investment
in marketable bonds  which are to be held to maturity - 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | g. | Inventories
| | -- | -----------

| | Inventories
 purchased products  are valued at the lower of cost or market. Cost is
determined on first-in, first-out basis.
| | --------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



RETAX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

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

|                                   | %
|---------------------------------- | -
|
|
|
|
|Computers and peripheral equipment |  
|Vehicles                           |  
|Office furniture and equipment     |  
|Building                           |  

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

| | i. | 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 three to seven years. As for software
development costs see m. below.
| | ----------------------------------------------------------------------------------------------------------------------------

| | The
Company conducts the required annual review at December 31 of each year.
| | ----------------------------------------------------------------------------

| | j. | Impairment
of assets:
| | -- | ---------------------

| | 1) | As
to the Companys test for impairment of goodwill, see note 4.
| | -- | ----------------------------------------------------------------

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

F - 13

---

---



RETAX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | k. | Income
taxes:
| | -- | -------------

| | 1) | 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. As to the main                factors in respect of which deferred income
taxes have been included  see                note 10g.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 14

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | l. | Revenue
recognition
| | -- | -------------------

| | The
Group derives its revenues from the following primary sources: Sales of products which
include software license and software licenses with hardware, maintenance, other services
which include customer software change requests, communication services, data analysis
and supply chain information and projects.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sales of products (i.e.: (1) software
licenses and, (2) software licenses and hardware) are recognized when delivery has
occurred, persuasive evidence that an arrangement exists, the sales price is fixed or
determinable, collectibility is probable and the Group has no material obligations
remaining under the selling agreements. Revenues from transactions involving resellers are
recognized when the products are delivered to the resellers, and if in a specific case a
right of return was granted to the reseller , revenue is recognized when the products are
delivered to end users. Sales of products under long-term arrangements for the sale of a
limited number of software licenses over a limited term are recognized over the
arrangement term.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Services
are primarily comprised of revenues from maintenance, communication services, data
analysis and supply chain information.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Maintenance
arrangements provide for technical support for the Groups software products. Data
analysis and supply chain information involve data the Group provides to its customers
for which the Group receives fees.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from rendering services (such as maintenance services, communication services, data
analysis and supply chain information) are recognized as services are performed or over
the service period depending on the terms of the arrangements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Short-term
projects relates mainly to specific customer software change requests, that are
subsequent to the delivery of the software license. The consideration for the work
performed is predetermined as a fixed fee, and the revenues from these projects are
recognized upon completion.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from projects that are comprised of rendering significant customization, integration and
development services over a long period of time are recognized based on the percentage
of completion method, provided that the following conditions are met: collection of
the revenues is expected, revenues and costs can be estimated reasonably, and there is a
reasonable likelihood that the project will be completed and that contractual obligations
to customers will be met. Percentage of completion is determined by the ratio of actual
labor days incurred to total labor days estimated to be incurred over the duration of the
contract.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
project computed percentage of completion (weighting the appropriate components) is
applied to the total estimated project revenues and total project costs to determine the
amount of revenues and costs to be recognized, on a cumulative basis.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in estimates for revenues, costs and profits are recognized in the period in which they
are determinable using the cumulative catch-up method of accounting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses
are identified in the amount of the estimated loss on the entire contract. As of December 31,
2004 and 2003, no such estimated losses were identified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | The
Group recognizes revenues related to the delivered products and services only if: (1) the
revenue recognition criteria are met, as above; (2) any undelivered products or services
are not essential to the functionality of the delivered products or services; (3) payment
for the delivered products or services is not contingent upon delivery of the remaining
products or services; (4) the Group has an enforceable claim to receive the amount due in
the event it does not deliver the undelivered products or services; and (5) there is
evidence of the fair value for each of the undelivered products or services.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
respect to multiple element arrangements, the Group generally use the residual
method to recognize revenues when evidence of the fair value of all undelivered
elements exists. Under the residual method, the fair value of the undelivered elements
(the service elements, such as customer software change requests and maintenance) based
on vendor-specific objective evidence (VSOE) is deferred and the remaining
portion of the arrangement fee is allocated to the delivered elements (i.e., software
license).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group determines VSOE of the fair value of the service elements revenues based upon its
recent pricing for those services when sold separately. VSOE of the fair value of
maintenance services may also be determined based on a substantive maintenance renewal
clause, if any, within a customer contract.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Whenever
the Groups payment terms in a certain transaction exceed the Groups normal
and customary payment terms, revenue is recognized when payments come due.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | m. | Research
and development:
| | -- | -------------------------

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

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

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

| | Capital
gains arising from the issuance of shares by investee companies to third parties are
carried to income on a current basis. Capital gains arising from the issuance of shares
by an investee company to the extent that the issuing company is a newly formed company
are carried to additional paid in capital.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | o. | Allowance
for doubtful accounts
| | -- | -------------------------------

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

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

| | Basic
EPS is computed by dividing net income by the weighted average number of shares
outstanding during the year. Diluted EPS reflects the increase in the weighted average
number of shares outstanding that would result from the assumed exercise of options,
calculated using the treasury-stock method. The options of a subsidiary have no effect on
the Companys diluted EPS since their effect on the subsidiaries EPS is
anti-dilutive. As to the data used in the per share computation, see note 15d.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Comprehensive
income
| | -- | --------------------

| | Comprehensive
income, presented in shareholders equity, includes, in addition to net income,
currency translation adjustments of non-dollar currency financial statements of a
subsidiary and of an associated company (accumulated balance at December 31, 2004 of
$267,000).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Stock
based compensation
| | -- | ------------------------

| | The
Group accounts for employee stock-based compensation in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees and related interpretations. In accordance with FAS 123, Accounting
for Stock-Based Compensation (FAS 123), the Group discloses pro-forma
information on the net income and earning (loss) per share assuming the Group had
accounted for employee stock option grants using the fair value-based method defined in
FAS 123. The Group accounts for equity awards issued to non-employees in accordance with
the provision of FAS 123, and EITF No 96-18, Accounting for Equity Instruments that
are Issued to other than Employee for Acquiring or in Conjunction with Selling Goods or
Services and related interpretations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

|                                    | Year ended December 31
|----------------------------------- | ----------------------
|
|
|
|
|Net income, as reported             |                       
|Add (deduct) - stock based employee |                       
|compensation expense (income),      |                       
|included in reported net income     |                       
|Deduct - stock based employee       |                       
|compensation expenses 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                 |                       
|                                    |                       

| | s. | Advertising
expenses
| | -- | --------------------

| | These
costs are charged to selling and marketing expenses as incurred. Advertising expenses
totaled $ 1,368,000, $ 938,000 and $ 456,000 in the years ended December 31, 2004, 2003
and 2002, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Derivative
financial instruments
| | -- | --------------------------------

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

| | u. | Sale
of receivables
| | -- | -------------------

| | The
Company factors some of its trade receivables. The factoring is effected through banks,
on a non-recourse basis. The transfer of accounts receivable was recorded by the Company
as a sales transaction under the provisions of FAS No.140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The resulting costs
are charged to financial expenses  net, as incurred. The expenses resulting from
these sales in the year ended December 31, 2004 and 2003 amounted to $658,000 and
$887,000 respectively and were charged as financial expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

| | 1. | FAS
123 (Revised 2004) share based payment
| | -- | ------------------------------------------

| | In
December 2004 FASB issued the revised FAS No. 123, Share-Based Payment (FAS 123R),
which addresses the accounting for share-based payment transactions in which the Company
obtains employee services in exchange for (a) equity instruments of the Company or (b)
liabilities that are based on the fair value of the Companys equity instruments or
that may be settled by the issuance of such equity instruments. This Statement eliminates
the ability to account for employee share-based payment transactions using APB Opinion
No. 25, Accounting for Stock Issued to Employees, and requires instead that such
transactions be accounted for using the grant-date fair value based method. This
Statement will be effective as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005 (July 1, 2005 for the Company). Early
adoption of FAS 123R is encouraged. This Statement applies to all awards granted or
modified after the Statements effective date. In addition, compensation cost for
the unvested portion of previously granted awards that remain outstanding on the Statements
effective date shall be recognized on or after the effective date, as the related
services are rendered, based on the awards grant-date fair value as previously
calculated for the pro-forma disclosure under FAS 123.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates that the cumulative effect of adopting FAS 123R as of its adoption date
by the Company (July 1, 2005), based on the awards outstanding as of December 31, 2004,
will be an income of approximately $0.3 million. This estimate does not include the
impact of additional awards, which may be granted, or forfeitures, which may occur
subsequent to December 31, 2004 and prior to adoption of FAS 123R. The Company
expects that upon the adoption of FAS 123R, the Company will apply the modified
prospective application transition method, as permitted by the Statement. Under such
transition method, upon the adoption of FAS 123R, the Companys financial statements
for periods prior to the effective date of the Statement will not be restated.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company expects that this statement will have material effect on its financial
position and results of operations.
| | -----------------------------------------------------------------------------------------------------------------------

F - 19

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | 2. | FAS
153 Exchanges of Nonmonetary Assets  An Amendment of APB Opinion No.
               29
| | -- | -------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued FAS No. 153, Exchanges of Nonmonetary Assets 
An Amendment of APB Opinion No. 29 (FAS 153).  FAS 153 amends APB
No. 29, Accounting for Nonmonetary Transactions (Opinion 29). The
amendments made by FAS 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the exception for nonmonetary exchanges of similar productive assets
and replace it with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. The provisions in FAS 153 are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005 (July 1, 2005 for the
Company).  Early application of FAS 153 is permitted. The provisions of FAS 153 shall
be applied prospectively. The Company does not expect the adoption of FAS 153 to have
a material effect on the Companys financial statements or its results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Reclassification
| | -- | ----------------

| | Certain current and comparative figures have been reclassified.
| | ---------------------------------------------------------------

# 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 acquisition of each company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | 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 $19.1 million, comprised of $13,700,000 in
          cash, including estimated direct costs and 226,040 of the Companys
          Ordinary shares valued at approximately $ 5,410,000. The value of the Ordinary
          shares issued was determined based on the average market price of the
          Companys shares over few 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 $ 1.7 million and included mainly
          acquired technology of approximately $ 1.2 million and customer base of
          approximately $ 0.4 million to be amortized over their estimated useful lives (3
          to 7 years)  see also note 4b. Goodwill arising on the acquisition
          amounted to approximately $ 16.8 million. The goodwill can be amortized for tax
          purposes over a period of fifteen years.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
January 2004, the Companys subsidiary, Store Alliance.com Ltd.                (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 base of approximately $ 66,000 to be amortized over their
               estimated useful lives (3 years)  see also note 4b. Goodwill arising
on the                acquisition amounted to approximately $ 84,000.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2  ACQUISITIONS(continued):

| | c. | 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 $ 1.5 million 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 few days before and
               after the acquisition was agreed and announced. The identified intangible assets
               acquired included mainly customer base of approximately $ 0.7 million to be
               amortized over their estimated useful lives (3 years)  see also note 4b.
               Goodwill arising on the acquisition amounted to approximately $ 0.8 million. The
               goodwill can be amortized for tax purposes over a period of five years.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In August 2004, the Company acquired 51% of the shares of Unit S.p.A.
               (Unit), from an unrelated party in consideration of $1.8million in cash. In December 2004, the Company acquired additional 49% of
               the shares of Unit and thus increased its holdings in Unit to 100%. This
               additional acquisition was made in consideration of $1.9 million in cash. The
               identified intangible assets acquired amounted to approximately $ 0.6 million and
               included mainly acquired technology of approximately $ 0.3 million and customer
               base of approximately $ 0.3 million to be amortized over their estimated useful
               lives (3 years)  see also note 4b. Goodwill arising on the acquisition amounted
               to approximately $ 2.8 million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
September 2004, the Companys subsidiary, 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.
As of December 31, 2004, an amount of $105,000 was invested in the company by the
parties, $70,000 by Store Alliance and $35,000 by other party.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | In
March 2003 the Company, through its subsidiary StoreAlliance together with
          Lipman Electronic Engineering Ltd. and Dai Telecom Ltd. (Dai)
          established Cell-Time Ltd. (Cell-Time). Cell-Time is a provider of
          on-line services that enables retailers and cellular communication providers in
          Israel, to sell on-line pre-paid cellular air-time at retail points of sale.
          Each of the three parties holds an equal share in Cell-Time.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the agreement between the parties, Dai has committed to invest $1.25 million in
consideration for its share in Cell-Time and the other parties have committed to grant
Cell-Time rights to use certain of their technologies.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2  ACQUISITIONS
(continued):

| | As
of December 31, 2004, Dai has invested $1,000,000 in Cell-Time. The remaining sum of
$250,000 is to be transferred to Cell-Time according to guidelines stipulated in the
formation agreement. In 2003 Cell-Time was considered to be a newly formed entity and
thus the gain arising from Dais investment in Cell-Time in the amount of $ 79,000
was carried to additional paid in capital. In 2004, being Cell-Time an operating entity,
the gain arising from Dais investment was carried to income on the current basis.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance of the investment in Cell-Time as of December 31, 2004 (after taking into account
the Groups share in its losses) is approximately $119,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | On
October 23, 2003 the Company and Store Alliance, signed an agreement with
          Isracard Ltd. (Isracard). According to the agreement, Store
Alliance           issued Isracard 454,590 of its shares representing 13% of its issued
and           outstanding share capital in consideration of $2,525,000 ($5.6 per share).
Under           the agreement Store Alliance also issued Isracard warrants to purchase up
to           305,973 shares representing post issuance of such shares, 8% of its issued
and           outstanding share capital, bearing an exercise price as stipulated in the
          agreement. These warrants were originally granted for twelve months from the
          closing date of the agreement and were extended on October 2004 by additional
          twelve months. The number of shares into which the warrant can be exercised is
          subject to the dilution of the Companys share in Store Alliance, which
          cannot be diluted to less than 50.01%. In case of a limited exercise due to the
          above dilution restrictions, Isracard would have an additional 12 months to
          exercise that part of the warrant that was not exercised, under the same terms.
          In case the Companys share in Store Alliance is diluted to less than
          50.01% as a result of the issuance of shares to a third party, Isracard would
be           able to exercise the warrant in full.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the Isracard investment, the Groups ownership in Store Alliance
decreased from 59.17% to 51.47% and the company recorded a gain in the amount of
$1,068,000 in the statement of income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the employee stock option plan of Store Alliance, see note 9b(2).
| | -----------------------------------------------------------------------

| | h. | In
2002, the Company acquired shares from minority shareholders in Palm-Point           Ltd.
(Palm Point) in consideration for the issuance of share capital           of
the Company at a total value of approximately $ 66,000. As a result, the
          Company held 96.18% of the shares of Palm-Point.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2003, the Company acquired all the remaining minority shareholders shares in
Palm-Point in consideration for the issuance of 13,339 shares of the Company at a total
value of approximately $ 138,000 (based on the fair market value of the Companys
shares). The excess of cost of investment in the amount of approximately $ 89,000 was
attributed to goodwill.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2  ACQUISITIONS
(continued):

| | i. | Following
are data relating to subsidiaries consolidated for the first time as           of the
acquisition date (including additional considerations resulting from           increase
in shareholding and from solving of contingent consideration issues):
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | OMI (1) | Unit (2) | DemandX | OEL    | Total
|------------------------------ | ------- | -------- | ------- | ------ | -----
|
|
|
|
|Current assets                 |         |          |         | 2,549  |      
|Non current assets             |         |          |         |        |      
|Deferred income taxes          |         |          |         | 750    |      
|Property and equipment, net of |         |         
|accumulated depreciation       |         |          |         | 482    |      
|Goodwill arising on            |         |         
|acquisition                    |         |          |         | 16,835 |      
|Identified intangible assets   |         |          |         | 1,715  |      
|Current liabilities            |         |          |         | (2,989 | )    
|Long-term liabilities          |         |          |         |        |      
|                               |         |          |         |        |      
|                               |         |          |         | 19,342 |      
|                               |         |          |         |        |      

| | (1) Including additional investment of approximately $ 449,000 (see note 2a).
(2) Including additional investment of approximately $ 1.9 million (see note 2d).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | As
described, in a-d above, in 2004, the Group acquired 100% of the shares of OMI, Unit,
DemandX and OEL. The following presents certain unaudited pro forma combined condensed
income statement information for the years ended December 31, 2004 and 2003, assuming that
those acquisitions had taken place on January 1 of each year, after giving effect to
certain adjustments, including amortization of identifiable intangible assets of $
1,005,000 and $175,000 in the years 2004 and 2003 respectively:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | 2004 | 2003
|------------------- | ---- | ----
|
|
|
|
|Revenues            |      |     
|                    |      |     
|Net income          |      |     
|                    |      |     
|Earnings per share: |      |     
|Basic               |      |     
|                    |      |     
|Diluted             |      |     
|                    |      |     

| | These
amounts are based on actual results of the companies mentioned above for the years ended
December 31, 2004 and 2003.
| | --------------------------------------------------------------------------------------------------------------------------

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

F - 23

---

---



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 and building                   |            
|Vehicles                            |            
|Office furniture and equipment      |            
|Leasehold improvements              |            
|                                    |            
|                                    |            
|Less - accumulated depreciation and |            
|amortization                        |            
|                                    |            
|                                    |            
|                                    |            

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

| | c. | Depreciation
and amortization expenses totaled $ 2,207,000, $ 1,966,000 and $           2,244,000, in
the years ended December 31, 2004, 2003 and 2002, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 4  GOODWILL
AND OTHER INTANGIBLE ASSETS:

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

| | The
changes in the carrying amount of goodwill are as follows:
| | --------------------------------------------------------------

|                                     | U.S. | Israel | Europe | Total 
|------------------------------------ | ---- | ------ | ------ | ------
|
|
|
|
|Balance as of January 1, 2003        |      |        |        | 15,626
|Goodwill attributed to business      |      |       
|unit acquired during 2003            |      |        |        |       
|Goodwill attributed to business      |      |       
|unit of which the Company's          |      |       
|investment in one of its             |      |       
|subsidiaries was diluted during 2003 |      |        |        |       
|                                     |      |        |        |       
|Balance as of December 31, 2003      |      |        |        | 15,626
|Goodwill attributed to new           |      |       
|subsidiaries acquired during 2004    |      |        |        | 16,835
|Differences from translation of      |      |       
|non dollar currencies                |      |        |        |       
|                                     |      |        |        |       
|Balance as of December 31, 2004      |      |        |        | 32,461
|                                     |      |        |        |       

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

F - 24

---

---



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 | Original amount | Amortized balance
|---------------------------------- | ---------------- | --------------- | -----------------
|
|
|
|
|Software development costs         |                  |                 |                  
|Software rights and web site       |                  |                
|development costs                  |                  |                 |                  
|Customer base                      |                  |                 |                  
|Maintenance agreements             |                  |                 |                  
|Acquired technology                |                  |                 |                  
|Distribution rights                |                  |                 |                  
|Other identified intangible assets |                  |                 |                  
|                                   |                  |                 |                  
|Total                              |                  |                 |                  
|                                   |                  |                 |                  

| | 2) | Intangible
assets amortization expenses totaled $ 2,610,000, $ 2,148,000 and           $1,972,000 in
2004, 2003 and 2002, respectively. Projected annual           amortization expenses are
approximately $2,314,000, $1,657,000, $ 480,000, $           94,000 and $ 54,000 in 2005,
2006, 2007, 2008 and 2009 respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 5  LONG-TERM
BANK LOANS:

| | a. | Classified
by currency of repayment as follows:
| | -- | -----------------------------------------------

|                                       | Interest rate as of
December 31, 2004 | December 31
|-------------------------------------- | ------------------------------------- | -----------
|
|
|
|
|U.S Dollars                            |                                       |            
|EURO                                   |                                       |            
|Israeli currency                       |                                       |            
|Loan from shareholders of a subsidiary |                                       |            
|                                       |                                       |            
|                                       |                                       |            
|Less - current maturities              |                                       |            
|                                       |                                       |            
|                                       |                                       |            
|                                       |                                       |            

| | * | The
$ LIBOR rate as of December 31, 2004 2.56%.
| | - | ------------------------------------------------

| | ** | The
Prime rate as of December 31, 2004 - 5.2 %.
| | -- | -----------------------------------------------

F - 25

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

|                                           | December 31
|------------------------------------------ | -----------
|
|
|
|
|Second year                                |            
|Third year                                 |            
|Fourth year and thereafter  (through 2011) |            
|No maturity specified                      |            
|                                           |            
|                                           |            
|                                           |            

# NOTE 6  OTHER
LIABILITIES

| | These
liabilities are associated with unfavorable executory contracts assumed in the
acquisition of three of the Companys subsidiaries.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | These
liabilities are to be amortized in the following years, based on the contracts terms, as
follows:
| | -------------------------------------------------------------------------------------------------------

|                                | December 31,
2004
|------------------------------- | -----------------
|
|
|
|
|First year - current maturities |                  
|Second year                     |                  
|                                |                  
|                                |                  
|                                |                  

# NOTE 7  EMPLOYEE
RIGHTS UPON RETIREMENT:

| | a. | Israeli
and Italian labor law generally requires 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. | Most
of the Companys non-Israeli subsidiaries provide defined           contribution
plans for the benefit of their employees. Under these plans,           contributions are
based on a specified percentage of pay.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  EMPLOYEE RIGHTS UPON
RETIREMENT(continued):

| | c. | The
severance expenses amounted $1,399,000, $ 1,249,000 and $ 958,000 in the           years
ended December 31, 2004, 2003 and 2002, respectively. The defined           contribution
plans expenses as mentioned in b. above amounted $ 449,000, $           319,000 and $
172,000 in the years ended December 31, 2004, 2003 and 2002,           respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
profits (losses) on the amounts funded totaled $ 166,000, $ 311,000 and $
          (121,000) in 2004, 2003 and 2002, 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, 2005, $
               1,187,000 to the insurance companies in respect of its severance pay
obligation.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
Company expects to pay $932,000 future benefits to its employees during the
          year 2005 to 2014 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | U.S. $
in thousands
|------------------------ | -------------------
|
|
|
|
|Year ending December 31: |                    
|2005                     | 115                
|2006                     | 158                
|2007                     | 121                
|2008                     | 16                 
|2009                     | 229                
|Thereafter               | 293                
|                         |                    
|                         | 932                
|                         |                    

F - 27

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# 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 July 2010.
| | --------------------------------------------------------------------------------------------------------------------

| | The
projected payments under the above leases are mainly denominated in U.S. $, at rates in effect
as of December 31, 2004, are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------

|                         | U.S. $
in thousands
|------------------------ | -------------------
|
|
|
|
|Year ending December 31: |                    
|2005                     | 2,126              
|2006                     | 1,882              
|2007                     | 1,352              
|2008                     | 1,048              
|2009                     | 858                
|Thereafter               | 485                
|                         |                    
|                         | 7,751              
|                         |                    

| | Office
lease expenses totaled $1,922,000, $1,504,000 and $ 1,237,000 in the years ended
December 31, 2004, 2003 and 2002, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Effective
April 1, 1998, the Companys Chief Executive Officer (the           CEO), a related party and shareholder, was 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 was entitled to a bonus           of $ 65,000
and for every subsequent $ 1,000,000 of net income           -$ 5,000 less than
the entitlement in respect of the previous $1,000,000,           but not less than a
bonus of $ 35,000 for every million over the seventh           million of net
income.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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 - 28

---

---



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
the 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
2%-3.5% are payable on sales of products developed under such funding programs, up to
100%-150% of the amount of funding received (dollar linked and bearing annual interest at
the LIBOR rate). Payment of royalties on account of development projects funded as above
is conditional upon the ability to generate revenues from products developed under such
projects. Accordingly, the Group is not obligated to pay any royalties on account of
funded projects, which fail to generate revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the maximum royalty amount payable by the Group on account of
projects funded under the Office of the Chief Scientist is $3,864,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 1) | In
August 2000, the Company, together with its subsidiary P.O.S. (Restaurant
          Solutions) Ltd. (PRS), filed a claim with the Tel-Aviv District
          Court for injunctions, accounting records and damages (evaluated, for the
          purpose of computing court fees, at NIS 3,000,000, or approximately $660,000)
          against two former employees and directors of PRS who currently own the
minority           interest in PRS. This claim alleges that the defendants caused the
Company           severe damages due to the manner of their conduct as employees and
directors of           PRS and by developing software that infringed on the Companys
rights. In           January 2003, upon motion of the defendants, the District Court
transferred the           case to the Tel-Aviv District Labor Court. The Company has
filed an appeal with           the Supreme Court of Israel to reverse this decision. On
November 2004, the           Supreme Court ruled that some of the causes of action within
the claim are under           the Tel-Aviv District Court jurisdiction and some are under
the Tel-Aviv           District Labor Court Jurisdiction
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
parties have agreed on a joint proceeding arrangement according to which the
abovementioned suits would be filed only after a decision of the District Court would be
granted whether to recognize the claim described hereinafter as a derivative claim.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | In
April 2001, these minority shareholders of PRS filed a claim in the Tel-Aviv District
Court against PRS and against the Company in the amount of approximately $500,000 in
respect of sums they claim they are entitled to as shareholders of PRS. In addition, they
filed a motion that the claim be recognized as a derivative claim of PRS against the
Company for payment of an alleged debt in the amount of approximately $3,500,000. In
March 2003, the Company filed an amended statement of defense as well as a counterclaim.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Tel-Aviv District Court has ruled in October 2003 that initially a ruling should be made
in regard to the recognition of the minority shareholders claim as a derivative claim. In
March 2005, the Tel-Aviv District Court has ruled against the recognition of the above
claim as a derivative claim.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2002, directors of PRS appointed by the minority shareholders filed a motion in the
Tel-Aviv District Court against PRS and its other directors, requesting a court order to
disclose certain information that will enable them to establish the sum of a debt claimed
by the Company from PRS. Following the Companys motion to be added to this suit,
the District Court accepted the motion and added the Company. The Company filed a motion
to dismiss the suit, however a decision was not yet granted.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Another
claim filed by one of the minority shareholders in August 2000, in regard to compensation
and leave redemption is still pending in the Tel-Aviv District Labor Court.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys management is unable to estimate the outcome of these claims. No provision
has been made in these consolidated financial statements in respect of these claims.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In
1998, prior to the acquisition of Retail Control Systems Inc.           (R.C.S.)
by the Company, a legal claim was filed against R.C.S. by a           customer for an
amount of approximately $1,300,000, including consequential           damages and loss of
revenue. The claim alleges that R.C.S. breached its           contractual obligation to
the claimant and fraudulently misrepresented facts           concerning the product sold
to the claimant.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
additional legal claim filed against R.C.S. prior to its acquisition by the Company, by a
dealer who sold one of R.C.S.s products early in 1994, states that promised
features and enhancements were never delivered. The damages claimed in this suit are in
excess of $200,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
claims are handled by R.C.S.s Errors and Omissions insurers. The limit of liability
of the Companys relevant Errors and Omissions insurance was $1,000,000 per claim
and in aggregate. The management of R.C.S. is of the opinion that it has meritorious
defenses against these claims and believes that they will not have a material effect on
its financial statements. No provision has been made in these consolidated financial
statements in respect of these claims.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | 3) | In
December 2002, a legal claim for the total amount of approximately $240,000           was
filed against the Companys subsidiary PalmPoint, by a local customer.           The
claim alleges damages caused by services and products not duly provided by
          PalmPoint. In February 2003, PalmPoint filed a statement of defense that
rejects           the claim in its entirety.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
management of PalmPoint is of the opinion that PalmPoint has meritorious defenses against
the claims. No provision has been made in these consolidated financial statements in
respect of this claim.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In
October 2003, Leumi Card Ltd. (Leumi Card), by letters addressed           to
StoreAlliance and its directors, complained that StoreAlliance breached an
          understanding it allegedly had with Leumi Card in regard to the execution of a
          transaction involving an investment by Leumi Card in StoreAlliance and further
          business cooperation between the parties. To date, no legal procedures have
been           instituted against StoreAlliance in connection with this claim. Based on
the           advice of the Companys legal counsel, the management of the Company
is of           the opinion that the Company has meritorious defenses against the claim.
At this           stage the Companys management and legal counsel are unable to
estimate the           outcome of this complaint. Furthermore, the management of the
Company believes           that the claim will not have a material effect on its
financial statements. No           provision has been made in these consolidated
financial statements in respect of           this claim.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, in November, 2003, Leumi Card filed a legal claim against Cell-Time  an
associated company, alleging that Cell-Time has breached an understanding it had with the
claimant regarding business cooperation between the parties and in addition that
Cell-Time conducted negotiations in regard to the above cooperation with the claimant, in
an improper manner. Furthermore, Leumi Card requested the court to enforce a draft
contract exchanged between the parties as a binding agreement and to cancel an agreement
pursuant to such business cooperation signed by Cell-Time with a third party. In January
2004, the parties agreed in court to continue negotiations in regard to further business
cooperation and the claimant withdrew its claim without prejudice. To date, no additional
proceedings have been exercised against Cell-Time in this context.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | The
Company and its subsidiaries are parties to several other claims filed           against
them by former customers and service providers. These claims are of sums           which
are not material both individually and on a cumulative basis.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A
certain bank account containing marketable securities totaling as of December 31, 2004
approximately $ 3.7 million, is pledged to secure any bank credit, including but not
limited to loans, given by the bank in which this account is operated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 9 
SHAREHOLDERS EQUITY:

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

| | 1) | 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 in a public offering (the
offering), in the United States for $18 per share. The net proceeds to the
Company of $58,857,000 are net of 5.5% underwriting discount, and net of offering
expenses.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | 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 were to be granted to employees,
directors and consultants of the Company, to purchase ordinary shares of the Company.
Each option is exercisable into one ordinary share of the Company. The exercise price of
each option under this plan is to be at least equal to the fair value of one ordinary
share at grant date. Unless terminated earlier, the options will expire starting from
2005 through June 2008. These options vest over the period of 0  3.5 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, 786,156 options remained available for grant under the Second 1998
Plan.
| | -------------------------------------------------------------------------------------------------

| | Through
December 31, 2004, 2,165,825 options had been exercised under the Second 1998 Plan at
exercise prices ranging between $ 7.125 and $ 16.43.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 2004
through May 2014. These options vest over the period of 0  3.5 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the Company had granted 600,000 options under the Israeli Plan. Through
December 31, 2004, no options had been exercised under the Israeli Plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensation
expense in respect of the CEO entitlement to options as from July 1, 2002 through July
2004, due to the CEOs change in employment status from an employee to a service
provider, is determined based on the fair value of the options. Total expenses in 2004,
2003 and 2002 in respect of these options were $148,000, $ 307,000 and $ 65,000,
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SHAREHOLDERS
EQUITY(continued):

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

|                                | 2004 | 2003 | 2002
|------------------------------- | ---- | ---- | ----
|
|
|
|
|Options outstanding at          |      |      |     
|beginning of year               |      |      |     
|Changes during the year:        |      |     
|Granted - at market value       |      |      |     
|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
fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | Year ended December 31
|--------------------------- | ----------------------
|
|
|
|
|Dividend yield              | 0%                    
|Expected volatility         | 27.99%-42.62%         
|Risk free interest rate     | 2%-3%                 
|Expected holding period (in
|years)                      | 3-4                   

F - 33

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SHAREHOLDERS' EQUITY(continued):

| | The
following table summarizes information about options under the Company's plans
                            outstanding at December 31, 2004:
| | ------------------------------------------------------------------------------------------------------------------------------------------------

|Exercise
price
U.S.$ | Number
outstanding at
December 31,
2004 | Number exercisable
at December 31,
2004 | Weighted
average
remaining
contractual
life (in
years)
|-------------------- | --------------------------------------- | --------------------------------------- | ------------------------------------------------------
|
|
|
|
|8.75                 | 82,505                                  | 12,839                                  | 3.33                                                  
|9.01                 | 80,000                                  |                                         | 2.00                                                  
|10.00                | 252,766                                 | 252,766                                 | 3.33                                                  
|11.01                | 548,478                                 | 547,978                                 | 0.75                                                  
|11.53                | 30,000                                  | 20,000                                  | 1.25                                                  
|14.88                | 435,466                                 | 435,466                                 | 3.33                                                  
|16.43                | 39,037                                  |                                         | 1.00                                                  
|16.52                | 50,000                                  | 16,667                                  | 3.50                                                  
|18.56                | 1,000,000                               | 333,333                                 | 3.50                                                  
|23.19                | 129,767                                 |                                         | 3.00                                                  
|                     |                                         |                                         |                                                       
|                     | 2,648,019                               | 1,619,049                               |                                                       
|                     |                                         |                                         |                                                       

| | 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, 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,
          additional 90,000 options to purchase 90,000 NIS 0.01 par value, were granted
to           this investor. Virtually all of the above mentioned options vest as follows:
          33.33% after the first year, another 33.33% after the second year and another
          33.33% after the third year, (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, the options are
          not exercisable prior to: (1) the consummation of an IPO of the
          subsidiarys securities, (2) a merger of the subsidiary or (3) seven years
          from the date of grant.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
rights conferred by ordinary shares obtained upon exercise of the options will be
identical to those of the other ordinary shares of the subsidiary. Any option not
exercised within 10 years of grant date, will expire.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of each option grant is between $2-$4 estimated on the date of grant under the
Black-Scholes option-pricing model with the following weighted average assumptions:
dividend yield of 0%; expected volatility of 50%; risk free interest rate of 2.25%; and
weighted expected life of 3 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 $ 0.01, and to one employee at an exercise price of $5.55. Through December 31,
2004, 36,078 of these options were forfeited.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
compensation (income) expenses attributable to the Subsidiarys Plan  in
accordance with the provisions of APB 25  that have been charged against income in
the years ended December 31, 2004, 2003 and 2002 were $ 81,000, $ (63,000) and $ 53,000,
respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, NIS 0.01 par value,
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 an Additional 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SHAREHOLDERS
EQUITY(continued):

| | 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 the management valuation. In addition, these 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 2) | As
of December 31, 2004, the distribution of $ 15 million from the           retained
earnings as cash dividends would subject the Company to a 25%           income taxes
on the amount distributed. The retained earnings are otherwise           exempt from the
25% income taxes, due to the Companys approved enterprise           status.
Consequently, the amount of profits available for distribution will be           reduced
by the amount of the tax levied. See also note 10g(5).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 10  TAXES ON
INCOME:

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

| | 1) | Tax
rates:
| | -- | ----------

| | a) | The
income of the Company and its Israeli subsidiaries (other than income from
          approved enterprises, see b. below) is taxed at the regular rate.
          Through December 31, 2003, the corporate tax was 36%. In July 2004, an
          amendment 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 the following manner: the rate for 2004 will be 35%, in 2005
 34%,           in 2006  32%, and in 2007 and thereafter  30%. The
effect of the           change in the tax rates in the coming years, on the deferred tax
balances of the           amendment to the law, is included under the item taxes on
income in           the statements of income  see note h(2) below.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to another amendment to the Income Tax Ordinance, which became effective in 2003, capital
gains are taxed at a reduced rate of 25% from January 1, 2003, instead of the
regular corporate tax rate at which such gains were taxed until the aforementioned date.
The aforesaid amendment stipulates that with regard to the sale of assets acquired prior
to January 1, 2003, the reduced tax rate will be applicable only for the gain
allocated to capital gains earned after the implementation of the amendment, which will
be calculated, as prescribed by said amendment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

| | b. | Subsidiaries
outside Israel
| | -- | ---------------------------

| | Subsidiaries
that are incorporated outside of Israel are assessed for tax under the tax laws in their
countries of residence. The principal tax rates applicable to subsidiaries outside Israel
are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Company
incorporated in the U.S.  tax rate of 43%. 
Company incorporated in Italy  tax
rate of 33%.
| | -----------------------------------------------------------------------------------------------------

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

| | Some
production facilities of the Company as well as facilities of one of its Israeli
subsidiaries (the Companies) have been granted approved enterprise status
under the above law.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | As
of December 31, 2004, the periods of benefits relating to five of the approved
enterprises of the Company have already expired, The periods of benefits relating to its
other approved enterprises will expire in 2005 and 2009. The period of benefits relating
to the approved enterprises of the Company Israeli subsidiary has not yet commenced
(it is restricted 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 h(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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

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

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

| | Under
this law, results for tax purposes are measured in real terms, having regard to the
changes in the Israeli CPI. The Israeli companies in the Group are taxed under this law.
These financial statements are presented in dollars. The difference between the changes
in the Israeli CPI and the exchange rate of the dollar, both on an annual and a
cumulative basis, causes a difference between taxable income and income reflected in
these financial statements. Paragraph 9(f) of FAS 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 as
prescribed by regulations published under the Inflationary Adjustments Law, and the right
to claim expenses in connection with issuance of its shares to the public, as well as the
amortization of patents and certain other intangible property rights, as a deduction for
tax purposes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2004, 2003 and 2002, is taxed at the
regular rate of 35%, 36% and 36%, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Carryforward
tax losses of certain subsidiaries as of December 31, 2004 and 2003 aggregate
approximately $10,690,000 and $ 5,779,000, 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.
| | ---------------------------------------------------------------

F - 38

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

| | At
December 31, 2004, the U.S. subsidiary had net operating loss carryforwards of
approximately $ 4.5 million (federal) and approximately $ 3.6 million (state) available
to offset future taxable income, which expire, in varying amounts, beginning in 2024 and
2006 respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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                                              |            
|Other                                                                 |            
|                                                                      |            
|                                                                      |            
|L e s s- valuation allowance                                          |            
|Depreciable fixed assets                                              |            
|Tax deductible goodwill                                               |            
|                                                                      |            
|                                                                      |            
|                                                                      |            
|                                                                      |            
|2) The deferred taxes are presented in the balance sheets as follows: |            
|                                                                      |            
|
|
|
|
|
|As a current asset                                                    |            
|As a non-current asset                                                |            
|                                                                      |            
|                                                                      |            
|                                                                      |            

F - 39

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

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

| | 4) | The
deferred taxes are computed at the tax rates of 22%- 43%.
| | -- | -------------------------------------------------------------

| | 5) | The Company has amended its net operating loss for a certain subsidiary and accordingly has increased its
deferred tax assets and its valuation allowance by the same amount.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | As
stated in b. above, part of the income of the Companys and a certain
          Israeli subsidiary income is tax exempt due to the approved enterprise status
          granted to most of their production facilities. The Company has decided to
          permanently reinvest the amount of such tax exempt income, and not to
distribute           it as dividends (see note 9c). Accordingly, no deferred taxes have
been provided           in respect of such income in these financial statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amount of income taxes that would have been payable had such tax exempt income, earned
through December 31, 2004 and 2003, been distributed as dividends is approximately $
3.7 million and $ 3.5 million, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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                              |                       
|                                         |                       
|                                         |                       
|                                         |                       
|In respect of previous years             |                       
|Israeli                                  |                       
|Non- Israeli                             |                       
|                                         |                       
|                                         |                       
|                                         |                       
|Deferred:                                |                       
|Israeli                                  |                       
|Non-Israeli                              |                       
|                                         |                       
|                                         |                       
|                                         |                       
|                                         |                       
|                                         |                       

F - 40

---

---



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           (2004-35% and
2003, 2002-36%) 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 for non - Israeli subsidiaries                      |                       
|Changes in valuation allowance                            |                       
|Taxes on income adjustments from previous years           |                       
|Other, mainly differences between the basis of            |                       
|measurement of income reported for tax purposes and       |                       
|the basis of measurement of income for financial          |                       
|reporting purposes - net, see b. above                    |                       
|                                                          |                       
|Taxes on income for the reported years                    |                       
|                                                          |                       

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

| | The
Company has received final tax assessments through the year ended December 31, 2001.
Tamar Industries M.R Electronics 1985 Ltd. received a final assessment through the year
ended December 31, 2002. Kochav Orion Advertising and Information Ltd, Orlan Orion
Systems Ltd and PRS received final assessments through the year ended
December 31, 1999. Unit S.p.A. received final assessments through the year ended December
31, 1999. The other subsidiaries have not been assessed since incorporation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

|            | December 31, 2004
|----------- | -----------------
|
|
|
|
|Assets      |                  
|            |                  
|Liabilities |                  
|            |                  

# NOTE 12 
SUPPLEMENTARY BALANCE SHEET INFORMATION:

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

F - 42

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY BALANCE SHEET INFORMATION(continued):

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

| | 1) | 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: |                |                  |                   |                     
|2004            |                |                  |                   | 17,181              
|                |                |                  |                   |                     
|2003            |                |                  |                   | 7,570               
|                |                |                  |                   |                     

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

|                                   | U.S. $ in
thousands
|---------------------------------- | -------------------
|
|
|
|
|2005                               |                    
|2006                               |                    
|2007                               |                    
|2008 and thereafter (through 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           |            
|                                 |            
|                                 |            
|                                 |            

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

| | c. | Lines
of credit
| | -- | ---------------

| | The
Company, through its U.S. subsidiaries, has several lines of credit totaling $3,000,000.
Interest is payable monthly at the prime rate. The total amount drawn down under these
lines of credit, as of December 31, 2004, amounted to $ 2,000,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY BALANCE SHEET INFORMATION(continued):

| | d. | Long-term
receivables:
| | -- | ----------------------

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

|                             | December 31,
2004
|---------------------------- | -----------------
|
|
|
|
|Long-term loans to employees |                  
|Long-term trade receivables  |                  
|Less - Unamortized discount* |                  
|                             |                  
|                             |                  
|                             |                  

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

| | 2) | Long-term
loans to employees granted by the Company are linked to the Israeli           CPI and
bear interest at an annual rate of 2% to 4%. Repayment dates are up to           four
years from the date of grant.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans
granted by a U.S. subsidiary are granted and collected in dollars, bear an annual
interest of 4% and are payable up to five years from the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 13 
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS:

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

| | All
of the Groups cash and cash equivalents, and marketable securities as of December
31, 2004 and 2003 were deposited with major Israeli, U.K., U.S. ,Italian and Australian
banks and with an investment management firm. Such securities represent mainly highly
rated corporations. The Group is of the opinion that the credit risk in respect of these
balances is remote.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
allowance for doubtful debts is determined for specific debts doubtful of collection.
| | -----------------------------------------------------------------------------------------

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

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

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

F - 44

---

---



RETALIX LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)

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

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

| | The
Company has only limited involvement with derivative financial instruments. The Company
carries out transactions involving foreign exchange derivative financial instruments
(forward exchange contracts). These transactions do not qualify for hedge accounting
under FAS 133.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2004, the Company entered into three foreign currencies forward contracts for conversion
of pounds sterling, Euro and Israeli currency into a notional amount in dollars of
approximately $ 5.9 million. These contracts were rolled over few times during 2004 and
are still outstanding as of December 31, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the open contract as of December 31, 2004 is $130,000 and reflects the
estimated amounts that the Group would pay to terminate the contract at the reporting
date, which was charged to financial expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 14  SEGMENT
INFORMATION:

| | a. | The
Company conducts business globally and is managed geographically. The           Company
and its subsidiaries reportable segments are strategic business units,           which
are distinguished by the geographical areas in which they generate           revenues,
based on the location of customers. The Company evaluates performance           based on
the revenues presented for each geographical segment. Segment assets
          information is not given, since the Company does not evaluate performance based
          on such assets. Based on the criteria above, the Company has the following
          reportable segments: Israel, U.S. and International.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Summarized
financial information by geographic segment, for 2004, 2003 and 2002 is as follows:
| | ----------------------------------------------------------------------------------------------

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

F - 45

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14  SEGMENT
INFORMATION (continued):

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

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

|              | Depreciated
balance at
December 31
|------------- | ----------------------------------
|
|
|
|
|Israel        |                                   
|U.S.          |                                   
|International |                                   
|              |                                   
|              |                                   
|              |                                   

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

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

| | In
the years ending December 31, 2004, 2003 and 2002 no customer generated revenues in
excess of 10% of the Groups total revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------

# NOTE 15  SELECTED
INCOME STATEMENT DATA:

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

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

F - 46

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15  SELECTED INCOME
STATEMENT DATA(continued):

|                                                                                                                               | Year ended December 31
|------------------------------------------------------------------------------------------------------------------------------ | ----------------------
|
|
|
|
|b. Financial income (expenses) - net:                                                                                          |                       
|Realized gain on marketable                                                                                                    |                       
|securities - net                                                                                                               |                       
|Non-dollar currency gains (losses) - net                                                                                       |                       
|Interest and bank commissions - net                                                                                            |                       
|                                                                                                                               |                       
|                                                                                                                               |                       
|                                                                                                                               |                       
|c. Other general income (expenses) - net:                                                                                      |                       
|Gain (loss) on sale of property and equipment                                                                                  |                       
|Gain on sale of dealership activity                                                                                            |                       
|                                                                                                                               |                       
|                                                                                                                               |                       
|                                                                                                                               |                       
|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:
|                                                                                                                               |                       
|
|
|
|
|
|Weighted average number of shares                                                                                              |                       
|issued and outstanding- used in                                                                                                |                       
|computation of basic earning per share                                                                                         |                       
|Add incremental shares from assumed                                                                                            |                       
|exercise of options                                                                                                            |                       
|                                                                                                                               |                       
|Weighted average number of                                                                                                     |                       
|shares used in computation                                                                                                     |                       
|of  diluted earnings per share                                                                                                 |                       
|                                                                                                                               |                       

F - 47

---

---



Exhibit

# Retalix Ltd. 
Details of subsidiaries
and associated company 
As of December 31, 2004

Retalix Holdings Inc.  a U.S.
Corporation, wholly controlled and owned. Established in 2002.

Retalix U.S.A, Inc., formerly Store
Point Inc.  a U.S. Corporation, wholly controlled and owned, Established in 1996.

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

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

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

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

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

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

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

Store Alliance.Com Ltd. (Store
Alliance)  51.5% controlled and owned (from April 2001 through November
1,2003- 59.1%, from January 1, 2001 through April 2001  66.7%).

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

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

Store Next Ltd.  wholly
controlled and owned by Store Alliance. Established in November 2001.

TradaNet Electronic Commerce Services Ltd. ("Tradanet Ltd.") - wholly-controlled and owned by Store Alliance.
Acquired in April 2001.

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

Retalix (UK) Limited  a U.K.
Corporation, wholly controlled and owned. Established in May 2000 and commenced operations
in September 2000.

Retalix SA PTY Ltd.  a South
Africa Corporation, wholly controlled and owned. Established in March 2001.

Retalix Australia PTY Ltd- an
Australian corporation, wholly controlled and owned. Established in July 2001 and
commenced operations in April 2003.

Retalix France SARL  wholly
controlled and owned. Established in October 2004.

CellTime Ltd.  an Israeli corporation,
33% controlled and owned by Store Alliance Israel. Established in March 2003, and
commenced operations in April 2003.

OMI International Inc.  a U.S. Corporation, wholly
controlled and owned. Acquired in January 2004.

DemandX Ltd.  wholly
controlled and owned by Store Alliance. Acquired in January 2004.

Unit S.p.A.  wholly controlled
and owned. 51% acquired in September 2004 and another 49% acquired in December 2004.

Retail College StoreNext Ltd.  67% controlled and owned by Store Alliance. Established in September
2004.

F - 48

---

---

# Independent Auditors Repor

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

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

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

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

/s/ Nation Smith Hermes Diamond  
February 1, 2003
San Diego, California



---

---



Report of Independent
Registered Public Accounting Firm

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

We have audited the accompanying
consolidated balance sheet of Retalix Holdings, Inc. and Subsidiaries (the
Company) (see Note 1 to the consolidated financial statements) as of December 31,
2003, and the related consolidated statements of operations, stockholders equity,
and cash flows for the year then ended. The consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.

We 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 financial position of Retalix Holdings, Inc. and Subsidiariesas of December
31, 2003, and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in the United
States of America.

The 2003 financial statements have
been restated to correct for an error, in which the Company recorded approximately
$774,000 of interest expense to its parent, Retalix Ltd.

/s/ Mayer Hoffman McCann
P.C.July 21, 2006San Diego, California



---

---



# Report of Independent
Registered Public Accounting Firm

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

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

We 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 financial position of Retalix Holdings, Inc. and Subsidiariesas of
December 31, 2004, and the consolidated results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally accepted in
the United States of America.

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 21, 2006San Diego, California



---

---



# 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.
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 audit provides a reasonable basis
for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company 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



---

---