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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 20-F

|                                                                                                      |                                                  
|----------------------------------------------------------------------------------------------------- | -------------------------------------------------
|oREGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR;
|                                                                                                      |                                                  
|xANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                
|                                                                                                      | For the fiscal year ended
  December 31, 2005 OR;
|                                                                                                      |                                                  
|oTRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR;        
|________For the
  transition period from_______ to_______                                            
|                                                                                                      |                                                  
|oSHELL COMPANY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934         

Date
of event requiring this shell company report _________________

Commission file No. 0-29742

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

ISRAEL
(Jurisdiction of incorporation or organization)

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

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

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: None

Indicate the number of
outstanding shares of each of the issuers classes of capital or common stock
as of the close of the period covered by the annual report: 19,409,003
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:

YESoNOx

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:

YESoNOx

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

YESxNOo

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

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

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

ITEM 17
o
ITEM 18
x

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

YESoNOx

1

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TABLE OF CONTENTS

|       |                                                               |      
|------ | ------------------------------------------------------------- | -----
|       |                                                               | Page 
|       |                                                               |      
|PART I |                                                               |      
|       |                                                               |      
|       | Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 5    
|       |                                                               |      
|       | Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE               | 5    
|       |                                                               |      
|       | Item 3. KEY INFORMATION                                       | 6-16 
|       |                                                               |      
|       | A. Selected Financial Data                                    | 6-7  
|       |                                                               |      
|       | B. Capitalization and Indebtedness                            | 7    
|       |                                                               |      
|       | C. Reasons for the Offer and Use of Proceeds                  | 7    
|       |                                                               |      
|       | D. Risk Factors                                               | 7-16 
|       |                                                               |      
|       | Item 4. INFORMATION ON THE COMPANY                            | 17-40
|       |                                                               |      
|       | A. History and Development of the Company                     | 17   
|       |                                                               |      
|       | B. Business Overview                                          | 17-39
|       |                                                               |      
|       | C. Organizational Structure                                   | 40   
|       |                                                               |      
|       | D. Property, Plants and Equipment                             | 40   
|       |                                                               |      
|       | Item 4A. UNRESOLVED STAFF COMMENTS                            | 40   
|       |                                                               |      
|       | Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 41-57
|       |                                                               |      
|       | A. Operating Results                                          | 41-53
|       |                                                               |      
|       | B. Liquidity and Capital Resources                            | 53-55
|       |                                                               |      
|       | C. Research and Development, Patents and Licenses, Etc.       | 55-56
|       |                                                               |      
|       | D. Trend Information                                          | 57   
|       |                                                               |      
|       | E. Off -Balance Sheet Arrangements                            | 57   
|       |                                                               |      
|       | F. Tabular Disclosure of Contractual Obligations              | 57   
|       |                                                               |      
|       | Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 58-66
|       |                                                               |      
|       | A. Directors and Senior Management                            | 58-59

2

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| |                                                           |      
| | --------------------------------------------------------- | -----
| | B. Compensation                                           | 59-60
| |                                                           |      
| | C. Board Practices                                        | 60-62
| |                                                           |      
| | D. Employees                                              | 63   
| |                                                           |      
| | E. Share Ownership                                        | 63-66
| |                                                           |      
| | Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | 67-68
| |                                                           |      
| | A. Major Shareholders                                     | 67   
| |                                                           |      
| | B. Related Party Transactions                             | 68   
| |                                                           |      
| | C. Interests of Expert and Counsel                        | 68   
| |                                                           |      
| | Item 8. FINANCIAL INFORMATION                             | 68-69
| |                                                           |      
| | Item 9. THE OFFER AND LISTING                             | 70-72
| |                                                           |      
| | A. Offer and Listing Details                              | 70-71
| |                                                           |      
| | B. Plan of Distribution                                   | 71   
| |                                                           |      
| | C. Markets                                                | 71   
| |                                                           |      
| | D. Selling Shareholders                                   | 72   
| |                                                           |      
| | E. Dilution                                               | 72   
| |                                                           |      
| | F. Expenses of the Issue                                  | 72   
| |                                                           |      
| | Item 10. ADDITIONAL INFORMATION                           | 72-86
| |                                                           |      
| | A. Share Capital                                          | 72   
| |                                                           |      
| | B. Memorandum and Articles of Association                 | 72-77
| |                                                           |      
| | C. Material Contracts                                     | 77   
| |                                                           |      
| | D. Exchange Controls                                      | 77-78
| |                                                           |      
| | E. Materiel Tax Consideration                             | 78-85
| |                                                           |      
| | F. Dividends and Paying Agents                            | 86   

3

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|         |                                                                                         |      
|-------- | --------------------------------------------------------------------------------------- | -----
|         | G. Statement by Experts                                                                 | 86   
|         |                                                                                         |      
|         | H. Documents on Display                                                                 | 86   
|         |                                                                                         |      
|         | I. Subsidiary Information                                                               | 86   
|         |                                                                                         |      
|         | Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     | 86-88
|         |                                                                                         |      
|         | Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 88   
|         |                                                                                         |      
|PART II  |                                                                                         |      
|         |                                                                                         |      
|         | Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                | 88   
|         |                                                                                         |      
|         | Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
  USE OF PROCEEDS | 88   
|         |                                                                                         |      
|PART III |                                                                                         |      
|         |                                                                                         |      
|         | Item 15. CONTROLS AND PROCEDURES                                                        | 89   
|         |                                                                                         |      
|         | Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                              | 89   
|         |                                                                                         |      
|         | Item 16B. CODE OF ETHICS                                                                | 89   
|         |                                                                                         |      
|         | Item 16C. PRINCIPAL ACCOUNANT FEES AND SERVICES                                         | 89-90
|         |                                                                                         |      
|         | Item 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES                        | 90   
|         |                                                                                         |      
|         | Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
  PURCHASERS      | 90   
|         |                                                                                         |      
|         | Item 17. FINANCIAL STATEMENTS                                                           | 90   
|         |                                                                                         |      
|         | Item 18. FINANCIAL STATEMENTS                                                           | 90   
|         |                                                                                         |      
|         | Item 19. EXHIBITS                                                                       | 91   

4

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PART I

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

Our
consolidated financial statements are prepared in United States dollars and in
accordance with generally accepted accounting principles in the United States.
All references to dollars or $ in this annual report are to United States
dollars, and all references to Shekels or NIS are to New Israeli Shekels.
On July 21, 2006, the exchange rate between the NIS and the dollar, as quoted
by the Bank of Israel, was NIS 4.461 to $1.00.

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

ITEM 1    IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS

Not
applicable.

ITEM 2    OFFER STATISTICS AND EXPECTED
TIMETABLE

Not applicable.

5

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ITEM 3    KEY
INFORMATION

A. Selected
Financial Data

The selected consolidated statement of income data set forth below with
respect to the years ended December 31, 2001, 2002, 2003 and 2004 and the
selected consolidated balance sheet data as of December 31, 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. The selected consolidated
statement of income data set forth below with respect to the year ended
December 31, 2005 and the selected consolidated balance sheet data as of
December 31, 2005 set forth below have been derived from our consolidated
financial statements that were audited by Kost, Forer, Gabbay & Kasierer, a
member of Ernst & Young Global. The selected consolidated financial data
set forth below should be read in conjunction with Item 5 -- Operating and
Financial Review and Prospects and our consolidated financial statements and notes
to those statements for the years 2003, 2004 and 2005 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,                         |       
|                                                                                 |  |                                                 |       
|                                                                                 |  | 2001                                            |        | 2002 |   | 2003   |   | 2004 |        | 2005 |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |  
|                                                                                 |  | (in thousands, except share and per share data) |       
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Consolidated statement of income data                                            |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Revenues:                                                                        |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Product sales                                                                    |  | $                                               | 34,333 |      | $ | 47,280 |   | $    | 58,432 |      | $ | 77,494  |   | $ | 91,692  |  
|Services and projects                                                            |  |                                                 | 24,953 |      |   | 29,173 |   |      | 33,625 |      |   | 45,460  |   |   | 95,679  |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Total revenues                                                                   |  |                                                 | 59,286 |      |   | 76,453 |   |      | 92,057 |      |   | 122,954 |   |   | 187,371 |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Cost of revenues:                                                                |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Cost of product sales                                                            |  |                                                 | 7,135  |      |   | 11,970 |   |      | 16,576 |      |   | 23,246  |   |   | 31,521  |  
|Cost of services and projects                                                    |  |                                                 | 8,781  |      |   | 10,141 |   |      | 12,440 |      |   | 18,890  |   |   | 34,465  |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Total cost of revenues                                                           |  |                                                 | 15,916 |      |   | 22,111 |   |      | 29,016 |      |   | 42,136  |   |   | 65,986  |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Gross profit                                                                     |  |                                                 | 43,370 |      |   | 54,342 |   |      | 63,041 |      |   | 80,818  |   |   | 121,385 |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Operating expenses:                                                              |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Research and development
  expenses-net                                          |  |                                                 | 14,571 |      |   | 17,036 |   |      | 18,344 |      |   | 34,096  |   |   | 44,683  |  
|Selling and marketing expenses                                                   |  |                                                 | 14,506 |      |   | 18,111 |   |      | 21,542 |      |   | 24,798  |   |   | 33,382  |  
|General and administrative
  expenses                                            |  |                                                 | 12,017 |      |   | 12,455 |   |      | 13,345 |      |   | 15,944  |   |   | 23,131  |  
|Other general income
  (expenses)  net                                          |  |                                                 | 17     |      |   | 1,043  |   |      | (62    | )    |   | 15      |   |   |         |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Total operating expenses                                                         |  |                                                 | 41,077 |      |   | 46,559 |   |      | 53,293 |      |   | 74,823  |   |   | 101,196 |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Income from operations                                                           |  |                                                 | 2,293  |      |   | 7,783  |   |      | 9,748  |      |   | 5,995   |   |   | 20,189  |  
|Financial income (expenses)-net                                                  |  |                                                 | (365   | )    |   | (499   | ) |      | (95    | )    |   | 85      |   |   | 202     |  
|Gain arising from issuance of
  shares by a subsidiary and an associated company |  |                                                 | 2,877  |      |   |       |   |      | 1,068  |      |   | 200     |   |   | 83      |  
|Other expenses                                                                   |  |                                                 | (501   | )    |   |       |   |      |       |      |   |        |   |   |        |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Income before taxes on income                                                    |  |                                                 | 4,304  |      |   | 7,284  |   |      | 10,721 |      |   | 6,280   |   |   | 20,474  |  
|Taxes on income                                                                  |  |                                                 | 706    |      |   | 2,103  |   |      | 2,639  |      |   | 1,553   |   |   | 5,912   |  
|Share in losses of an associated
  company                                       |  |                                                 |       |      |   |       |   |      | (90    | )    |   | (137    | ) |   | (130    | )
|Minority interests in losses of
  subsidiaries                                   |  |                                                 | 166    |      |   | 524    |   |      | 288    |      |   | 247     |   |   | 189     |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Net income                                                                       |  | $                                               | 3,764  |      | $ | 5,705  |   | $    | 8,280  |      | $ | 4,837   |   | $ | 14,621  |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Earnings per share:                                                              |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Basic                                                                            |  | $                                               | 0.33   |      | $ | 0.48   |   | $    | 0.67   |      | $ | 0.31    |   | $ | 0.78    |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Diluted                                                                          |  | $                                               | 0.31   |      | $ | 0.46   |   | $    | 0.63   |      | $ | 0.29    |   | $ | 0.74    |  
|                                                                                 |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|                                                                                
|Weighted average number of
  shares used in computation:                         |  |                                                 |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Basic                                                                            |  |                                                 | 11,472 |      |   | 11,902 |   |      | 12,323 |      |   | 15,746  |   |   | 18,710  |  
|Diluted                                                                          |  |                                                 | 12,153 |      |   | 12,395 |   |      | 13,083 |      |   | 16,552  |   |   | 19,659  |  

6

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|                                |  |                         |        |      |   |        |  |      |         |      |   |         |  |   |         | 
|------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                |  | Year ended December 31, |       
|                                |  |                         |       
|                                |  | 2001                    |        | 2002 |   | 2003   |  | 2004 |         | 2005 |  
|                                |  |                         |        |      |   |        |  |      |         |      |  
|                                |  | (U.S. $ in thousands)   |       
|                                |  |                         |        |      |   |        |  |      |         |      |   |         |  |   |         | 
|Consolidated balance sheet data |  |                         |        |      |   |        |  |      |         |      |   |         |  |   |         | 
|Cash and cash equivalents       |  | $                       | 9,200  |      | $ | 28,410 |  | $    | 46,093  |      | $ | 91,413  |  | $ | 55,692  | 
|Working capital                 |  |                         | 29,101 |      |   | 27,250 |  |      | 45,786  |      |   | 97,963  |  |   | 68,216  | 
|Total assets                    |  |                         | 92,749 |      |   | 98,296 |  |      | 121,122 |      |   | 209,952 |  |   | 271,656 | 
|Total debt                      |  |                         | 19,942 |      |   | 15,913 |  |      | 13,745  |      |   | 13,859  |  |   | 5,288   | 
|Shareholders equity            |  |                         | 48,779 |      |   | 56,528 |  |      | 75,646  |      |   | 156,171 |  |   | 204,417 | 
|Capital Stock                   |  |                         | 32,691 |      |   | 34,735 |  |      | 45,568  |      |   | 120,994 |  |   | 155,174 | 

B. Capitalization
and Indebtedness

Not applicable.

C. Reasons for
Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

Risks Related To Our
Business

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

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

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

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

|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
| | the size, timing, terms and fluctuations of
  customer orders and rollout schedules;                              
|  |                                                                                                                   
| | the long sales cycle associated with
  certain of our software products;                                          
|  |                                                                                                                   
| | the deferral of customer orders in
  anticipation of new software products or services from us or our competitors;
|  |                                                                                                                   
| | changes in pricing by us or our competitors;                                                                      

7

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|  |                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;                                                                        
|  |                                                                                                                                                                             
| | seasonality in customer purchasing and
  deployment patterns; and                                                                                                           
|  |                                                                                                                                                                             
| | the profitability of our professional services business, and the
  percent of our total business that this constitutes.                                                     

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

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

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

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

In March 2006, we acquired an additional
45% of StoreNext Retail Technologies, LLC and increased our holdings in this
entity to 95%. In February 2006, we acquired substantially all of the assets of
Base Products, Inc. In April 2005, we acquired 73.4% of the issued and
outstanding shares (on an as-converted-to-common-stock basis) of TCI Solutions,
Inc., or TCI Solutions, and substantially all of the assets of Integrated
Distribution Solutions, L.L.C., or IDS. In November 2005, we acquired the rest
of the issued and outstanding shares of TCI Solutions. In August 2004, we
acquired 51% of UNIT S.p.A. (the name of which was later changed to Retalix
Italia, S.p.A.), or Retalix Italia, based in Italy. In December 2004 we
acquired the remaining 49% of Retalix Italia. In January 2004, we acquired OMI
International. We intend to make future strategic acquisitions of complementary
companies, products or technologies. Such acquisitions could disrupt our
business. In addition, your holdings in our company would be diluted if we
issue equity securities in connection with any acquisition, as we did in the
transactions involving the acquisition of TCI Solutions and the acquisition of
the assets of IDS. Acquisitions involve numerous risks, including:

|  |                                                                                              
|- | ---------------------------------------------------------------------------------------------
| | problems combining the acquired operations,
  technologies or products;                      
|  |                                                                                              
| | unanticipated costs or liabilities;                                                          
|  |                                                                                              
| | diversion of managements attention;                                                         
|  |                                                                                              
| | adverse effects on existing business
  relationships with suppliers and customers;           
|  |                                                                                              
| | risks associated with entering markets in
  which we have no or limited prior experience; and
|  |                                                                                              
| | potential loss of key employees,
  particularly those of the acquired organizations.         

Further, products that we acquire from
third parties often require significant expenditures of time and resources to
upgrade and integrate with our existing product suite. Specifically, if we fail
to integrate TCI Solutions applications into our retail product offering, or
IDSs applications into our supply chain management product offering in a
timely manner, we may be unable to fully realize the expected benefits of the
related acquisitions. We may not be able to successfully integrate any
business, technologies or personnel that we have acquired or that we might
acquire in the future, and this could harm our financial condition and
operating results.

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

Our rapid expansion has placed, and is
likely to continue to place, a strain on our senior management team and other
resources, such as our management information systems and operating,
administrative, financial and accounting systems. We are undergoing rapid
growth in the number of our employees, the size and locations of our physical
facilities and the scope of our operations, due, in part, to several
acquisitions we have made. For example, we had 178 employees on January 1, 1999
and 1,343 employees on December 31, 2005. Any failure to manage growth
effectively could disrupt our business and harm operating results.

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

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

|  |                                                                                                  
|- | -------------------------------------------------------------------------------------------------
| | rapid technological advances in hardware
  and software development;                             
|  |                                                                                                  
| | evolving standards in computer hardware,
  software technology and communications infrastructure;

8

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

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

Two of our customers each accounted for
more than 5% of our revenues during 2003. During 2004, none of our customers
accounted for more than 5% of our revenues and during 2005 one of our customers
accounted for more than 5% of our revenues. Sales to national supermarket and
convenience store chains as well as large suppliers are typically large in size
and represent a significant portion of our revenues. A significant reduction in
sales to these large customers could significantly reduce our revenues. We
anticipate that sales to a few customers in any given reporting period will
continue to contribute materially to our revenues in the foreseeable future.

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

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

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

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

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

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

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

In 2003 and 2004, we began developing new
versions of our products based on new platforms such as the Microsoft .Net
platform and the J2EE platform. The risks of our commitment to these relatively
new platforms include the following:

|  |                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the possibility that prospective customers will refrain from
  purchasing the current versions of our products because they are waiting for
  the new platform versions;
|  |                                                                                                                                                                         
| | the possibility that our beta customers with products based on new
  platforms will not become favorable reference sites;                                               
|  |                                                                                                                                                                         
| | the possibility that the new platforms will not be able to support
  the multiple sites and heavy data traffic of our largest customers;                                
|  |                                                                                                                                                                         
| | the possibility that our development staff will not be able to learn
  how to efficiently and effectively develop products using the new platforms;                     
|  |                                                                                                                                                                         
| | the possibility that we will not be able to transition our customer
  base to the products based on the new platforms when these are available;                         

9

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|  |                                                                                                
|- | -----------------------------------------------------------------------------------------------
| | the possibility that the new platforms will not be able to achieve
  market acceptance; and    
|  |                                                                                                
| | the possibility that our suppliers will not continue to enhance and
  market the new platforms.

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

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

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

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

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

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

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

Our ASP
business model and our Retalix InSync products are in varying stages of
development and, if unsuccessful, our revenue growth could be adversely
affected.

We are in the early stages of rolling-out
our ASP application services to small chains and single store retailers through
our two StoreNext initiatives, StoreNext Retail Technology LLC, which we refer
to as StoreNext USA, and Store Alliance.com Ltd., which we refer to as
StoreNext Israel. These applications have not been traditionally used by smaller
retailers and if they do not accept them, our ASP initiatives may not succeed.
Our services include head-office and back-office applications delivered via the
Internet based on an ASP subscription fee pricing model. We have not long ago
begun charging users of our ASP services a subscription fee for reporting,
analysis and merchandising services. In the future, we plan to offer additional
services for a fee. We cannot assure you that these users will accept our
pricing model. In addition, in September 2005, we announced the introduction of
Retalix InSync, our new platform and solution portfolio. Our Retalix InSync
solution portfolio is intended to tightly integrate our enterprise solution
portfolio with our in-store back-office solutions and synchronize the flow of
information between the two. We are in the process of migrating our acquired
enterprise resource planning, or ERP, retail, supply chain execution and
warehouse management systems into the new Retalix InSync platform, but cannot
assure you that this migration will be successful or that customers will
purchase these new products. If we are unsuccessful in selling and marketing
our ASP services and Retalix InSync products to retailers and distributors, our
revenue growth could be adversely affected.

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

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

10

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

11

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

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

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

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

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

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

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

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

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

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

We have not yet
completed the evaluation of our internal control 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 are in
the process of evaluating whether our existing internal control over financial
reporting systems are 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 an additional
several months to complete. We may experience higher than 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.

12

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Following
the implementation of SFAS No. 123R, we are required to record a compensation
expense in connection with share-based compensation, and, as a result, our
profitability may be reduced significantly.

On December 16, 2004, the Financial
Accounting Standards Board, or FASB, issued Statement No. 123 (revised 2004),
Share-Based Payment, or SFAS No. 123R, which is a revision of SFAS No. 123.
Generally, the approach in SFAS No. 123R is similar to the approach described
in SFAS No. 123. However, SFAS No. 123 permitted, but did not require,
share-based payments to employees to be recognized based on their fair values
while SFAS No. 123R requires, as of the first quarter of 2006, all share-based
payments to employees to be recognized as a compensation expense based on their
fair values. SFAS No. 123R also revises, clarifies and expands guidance in
several areas, including measuring fair value, classifying an award as equity
or as a liability and attributing compensation cost to reporting periods. The
impact of the adoption of SFAS No. 123R cannot be predicted at this time
because it will depend also on levels of share-based compensation granted in
the future. Had we adopted this standard in prior periods, however, we would
have recorded a material amount as compensation expense, which would have had a
material adverse effect on our results of operations. The adoption of this
standard could have a significant adverse impact on our results of operations,
although we do not expect it will have any impact on our overall financial
position. In addition, if as a result of SFAS No. 123R we would stop or limit
the use of stock options as an incentive and retention tool, it could have an
adverse effect on our ability to recruit and retain employees.

Risks Related To Our
Location In Israel

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

Our principal offices and headquarters
are located in Israel. Accordingly, political, economic and military conditions
in Israel directly affect our operations. Since the establishment of the State
of Israel in 1948, a number of armed conflicts have taken place between Israel
and its Arab neighbors. Since September 2000, there has been a marked increase
in hostilities between Israel and the Palestinians, characterized by terrorist
attacks on civilian targets, suicide bombings and military incursions by the
Israeli army into areas under the control of the Palestinian Authority. The
future of relations between the Palestinian Authority and Israel is uncertain.
Israels disengagement from the Gaza Strip and some parts of the West Bank in
2005 may serve to further disrupt the balance within the Palestinian Authority
and affect the overall stability of the region. The newly-formed Palestinian
Authority government controlled by Hamas, a militant Islamic organization, is
widely considered to be an obstacle to relations between Israel and the
Palestinian Authority, as well as to stability in the Middle East as a whole.

In
recent weeks Israel has been involved in an armed conflict with the Hizb-alla movement in
Lebanon. This conflict is the most extremely violent event in which Israel was involved
in recent years.

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

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

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

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

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

13

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

Since a considerable portion of our
expenses such as employees salaries are linked to an extent to the rate of
inflation in Israel, the dollar cost of our operations is influenced by the
extent to which any increase in the rate of inflation in Israel is or is not
offset by the devaluation of the NIS in relation to the dollar. As a result, we
are exposed to the risk that the NIS, after adjustment for inflation in Israel,
will appreciate in relation to the dollar. In that event, the dollar cost of
our operations in Israel will increase and our dollar-measured results of
operations will be adversely affected. In 2001 and 2002, the inflation adjusted
NIS devalued against the dollar, which lowered the dollar cost of our Israeli
operations. During 2003, 2004 and 2005, however, the inflation adjusted NIS
appreciated against the dollar, which raised the dollar cost of our Israeli
operations. We cannot predict whether in the future the NIS will appreciate
against the dollar or vice versa. Any increase in the rate of inflation in
Israel, unless the increase is offset on a timely basis by a devaluation of the
NIS in relation to the dollar, will increase labor and other costs, which will
increase the dollar cost of our operations in Israel and harm our results of
operations.

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

We receive tax benefits under the Israeli
Law for Encouragement of Capital Investments, 1959, or the Investments Law,
with respect to our production facilities that are designated as Approved
Enterprises. We believe that we are currently in compliance with these
requirements. However, if we fail to meet these requirements, we would be
subject to corporate tax in Israel at the regular statutory rate. We could also
be required to refund tax benefits, with interest and adjustments for inflation
based on the Israeli consumer price index. Our tax benefits resulting from our
Approved Enterprises for the years 2003, 2004 and 2005, net of other tax
effects, were approximately $365,000, $355,000 and $2,518,000 respectively. In
addition, an increase in our manufacturing outside of Israel may be construed
as a failure to comply with the Investments Law conditions. There can be no
assurance that new benefits will be available, or that existing benefits will
be continued in the future, at their current level or at any level.

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

On April 1, 2005, an amendment to the
Investments Law came into effect, which revised the criteria for investments
qualified to receive tax benefits. . An eligible investment program under the
amendment will qualify for benefits as a Privileged Enterprise (rather than the
previous terminology of Approved Enterprise). Among other things, the amendment
provides tax benefits to both local and foreign investors and simplifies the
approval process. The amendment does not apply to investment programs approved
prior to December 31, 2004.

As a result of the amendment, tax-exempt
income generated under the provisions of the new law will subject us to taxes
upon distribution or liquidation and we may be required to record deferred tax
liability with respect to such tax-exempt income. We are currently evaluating
the impact the amendment will have on us. This may materially increase our
provision for income taxes in 2006 and subsequent years.

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

We have received royalty-bearing grants
from the Office of the Chief Scientist, or OCS, of the Ministry of Industry,
Trade and Labor of the Government of Israel in an aggregate amount of
approximately $4,300,000 through December 31, 2005. We must pay royalties to
the OCS on the revenue derived from the sale of products and technologies, and
related services, developed with the grants from the OCS. The OCS budget has
been subject to reductions, which may affect the availability of funds for
grants in the future. As a result, we cannot be certain that we will continue
to receive grants at the same rate, or at all. In addition, the terms of any
future grant may be less favorable than our past grant. According to Israeli
law, any products developed with grants from the OCS are usually required to be
manufactured in Israel, unless we obtain prior approval of a governmental
committee. As a condition to obtaining this approval, we may be required to pay
the OCS up to 300% of the grants we received and to repay such grants at a
quicker rate. In addition, we are prohibited from transferring to third parties
the technology developed with these grants without the prior approval of a
governmental committee. Any non-Israeli who becomes a direct holder of 5% or
more of our outstanding ordinary shares will be required to notify the OCS and
to undertake to observe the law governing the grant programs of the OCS, the
principal restrictions of which are the transferability limits described above
in this paragraph.

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

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

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

14

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

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

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

Additionally, it may be difficult for you
to enforce civil liabilities under the Securities Act of 1933 and the
Securities Exchange Act of 1934, or the Exchange Act, in original actions
instituted in Israel. 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
  Israeli law applicable to the enforceability of foreign judgments or to
  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, other than in specified exceptions, a merger be
approved by the board of directors and a majority of the shares present and
voting on the proposed merger at a meeting called upon at least 21 days
notice. Upon the request of any creditor of a party to the proposed merger, a
court may delay or prevent the merger if it concludes that there is a
reasonable concern that as a result of the merger, the surviving company will
be unable to satisfy the obligations of the surviving company. Furthermore, a
merger may generally not be completed unless at least (i) 50 days have passed
since the filing of the merger proposal with the Israeli Registrar of Companies
and (ii) 30 days have passed since the merger was approved by the shareholders
of each of the parties. The Companies Law also provides that an acquisition of
shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 25% or greater
shareholder of the company, unless there is already another 25% or greater
shareholder of the company. Similarly, an acquisition of shares must be made by
means of a tender offer if as a result of the acquisition the purchaser would
become a 45% or greater shareholder of the company, unless there is already a
45% or greater shareholder of the company. In any event, if as a result of an
acquisition of shares the acquirer will hold more than 90% of a companys
shares, the acquisition must be made by means of a tender offer for all of the
shares. Finally, Israeli tax law treats some acquisitions, such as
stock-for-stock exchanges between an Israeli company and a foreign company,
less favorably than U.S. tax laws. For example, Israeli tax law may, under
certain circumstances, subject a shareholder who exchanges his ordinary shares
for shares in another corporation to taxation prior to the sale of the shares
received in such stock-for-stock swap. These laws may have the effect of
delaying or deterring a change in control of us, thereby limiting the
opportunity for shareholders to receive a premium for their shares and possibly
affecting the price that some investors are willing to pay for our securities.

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

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

15

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Risks Related to Our Ordinary Shares

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

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

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

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

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

If our shareholders sell substantial
amounts of our ordinary shares, including shares issued upon the exercise of
outstanding employee options, or if the perception exists that we or our
shareholders may sell a substantial number of our ordinary shares, the market
price of our ordinary shares may fall. In May 2004, we sold 3,450,000 of our
ordinary shares in a public offering. In addition, we issued an aggregate of
1,005,858 of our ordinary shares in connection with two acquisitions in April
2005, of which we registered for re-sale an aggregate of 876,762 shares. These
registered shares may be re-sold in part or whole, at any time, generally
without restrictions. If we issue additional shares in financings or
acquisitions, our shareholders will experience additional dilution and the existence
of more outstanding shares could reduce the amount purchasers are willing to
pay for our ordinary shares. Any substantial sales of our ordinary shares in
the public market also might make it more difficult for us to sell equity
securities.

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

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

16

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ITEM
4    INFORMATION ON THE COMPANY

A.
History and Development of the Company

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

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

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

Principal
Capital Expenditures

We had
capital expenditures of $3.1 million in 2005, $1.8 million in 2004 and $1.0
million in 2003. Our capital expenditures consist primarily of the purchase of
computers and peripheral equipment. We expect that our capital expenditures
will be approximately $4.0 million in 2006. We have financed our capital
expenditures with cash generated from operations.

B.
Business Overview

Overview

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

17

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

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

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

We believe
that we are unique within the retail and distribution food and fuel software
industries. We offer software solutions that can serve the needs of the entire
range of food and fuel retailers and U.S. grocery and convenience store
distributors, from multi-national supermarket chains, major food distributors
and major fuel retailers to local independent grocers. We are able to serve
such a diverse customer base because we have designed our applications to
include multiple levels of functionality that can be adapted to the various
sizes and forms of retail operations of our customers. To date, our software
solutions have been installed at more than 34,000 sites in 50 countries. Our
customers include leading supermarket and grocery chains such as A&P,
Hy-Vee, Kroger and Publix in the United States, Delhaize, Sainsburys and Tesco
in Europe, and large convenience stores and major fuel retailers such as Alon
Fina, Caseys and Pilot Oil in the United States and Husky Oil in Canada. Our
annual worldwide sales have grown from $36.1 million in 2000 to $191.3 million
in 2005.

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

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

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

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

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

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Our Market
Opportunity

The customer
retention battle

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

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

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

The information
system needs of food and fuel retailers and distributors

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

|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | increase operating efficiencies through tighter integration of
  in-store, enterprise level and warehouse management systems, enabling
  visibility across the entire scope of their retail and distribution
  operations;         
|  |                                                                                                                                                                                                                                    
| | capture and analyze data and leverage customers demand information
  to enable advanced forecasting capability and thereby to optimize the ordering
  and inventory stocking process in the store and in distribution centers; and
|  |                                                                                                                                                                                                                                    
| | extend supply chain visibility to include suppliers and customers,
  enabling retailers and distributors to share data and collaborate between
  themselves and with suppliers in supply chain decisions.                          

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

19

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

The food and fuel
software opportunity

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

In order to
remain competitive and avoid the ongoing costs associated with maintaining
their legacy systems, many retailers and distributors are seeking to replace
their legacy systems with modern, integrated food and fuel-specific retail
information systems that can provide them with visibility across the entire
scope of their operations, support collaboration among retailers, distributors
and their suppliers, allow enterprise-wide information flow and enable
implementation of sophisticated customer loyalty and promotion strategies. We
believe that these replacement systems typically will be based upon a modular,
open-systems architecture, or non-proprietary software that can be easily integrated
into a retailers existing IT infrastructure. Systems meeting such criteria
provide retailers and distributors with the flexibility to modify their
information systems to respond to and manage their changing business
environment. Data compiled by a large industry provider indicates that North
American retailers across all industries continue to rely upon legacy POS
systems that have an average age of eight years, with some retailers using
systems that are as much as 10 to 20 years old. Consequently, many retailers
and distributors are considering replacing their outdated legacy systems in the
near to medium term. Several industry surveys indicate that a significant
percentage of food retailers plan to make decisions regarding the deployment of
new POS software systems during 2006 and that 2006 is expected to be
characterized by a significant increase in POS projects resulting in large
volumes of rollouts throughout 2007 and beyond. These surveys also predict a
relatively high average annual growth rate of software spending within the
global retail and wholesale industries during 2006 to 2009.

Our Solutions

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

Our integrated solutions
span the retailers and distributors entire organization

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

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Our solutions
provide for both retail operations management and customer management

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

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

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

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

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

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

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

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

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

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

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

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Our robust solutions
provide system resiliency and data redundancy

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

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

In response
to retailers increasing demand for software solutions that are easier to use
and cheaper to maintain, we have developed our Retalix InSync Solution
Portfolio based on a thin client architecture, using state of the art service
architecture and software technologies (J2EE and Microsoft .Net). Our thin
client solutions allow our applications to run on remote servers with the
users accessing the applications through a standard browser. These solutions
reduce the need for expensive, bulky hardware and software installations at
each store location, lower an enterprises IT maintenance costs and facilitate
enterprise-wide integration. In addition, thin client architecture makes it easier
and more cost-effective to upgrade software as and when required. In addition,
we are developing a next-generation version of our existing StoreLine in-store
solution, called StoreLine.net, which is based on a thin client architecture
using the Microsoft .Net platform. This capability to provide for a thin POS
and a thin back office solution allows a choice of additional flexibility and
cost savings, as part of our product suite.

Our enterprise
solutions can be easily integrated with existing IT infrastructures

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

Our enterprise
solutions can be easily customized, localized and personalized

Large and
mid-size retailers and distributors require that software products be tailored
to fit their operational needs. In many cases, such a requirement demands huge
implementation efforts. Our products, especially our new Retalix InSync
Solution Portfolio, were designed and built to facilitate customer
customization with reduced efforts. In addition, multinational retailers and
distributors may operate in several locales or countries, and require specific
customization per locale, and in some cases personalization capabilities. We
offer to meet these needs as part of our customization capabilities. The ability
to customize a complex system with significantly reduced effort and cost
provides us with a significant advantage over our competitors.

Our Growth Strategy

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

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

We offer
our customers enterprise-wide software solutions that allow them to collect,
manage and analyze information across their entire retail enterprise, from the
warehouse to the checkout counter. We extended our product offering from
in-store solutions to include integrated enterprise level and head office
applications. With the acquisition of TCI Solutions in 2005, we solidified our
leadership in the in-store and headquarters software segments and added
powerful pricing, inventory and DSD capabilities to our offering. With our
acquisitions of OMI International and IDS, we have further expanded our product
offering to include ERP, distribution, supply chain execution and warehouse
management systems. In September 2005, we announced the introduction of Retalix
InSync, our new platform and solution portfolio. We are progressing as planned
in migrating our acquired ERP, retail, supply chain execution and warehouse
management systems onto the new Retalix InSync platform. We believe that with
our integrated solutions, we will be well positioned to leverage our large
customer base to become the leading provider of retail solutions to the retail
and distribution food and fuel industries.

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

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

|  |                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | based on open standards software architecture, database independent
  and are hardware neutral;                                                                                
|  |                                                                                                                                                                                
| | scalable, meaning they can easily support a large number of users
  before a system upgrade or replacement is needed;                                                          
|  |                                                                                                                                                                                
| | able to support multiple retail and distribution formats such as grocery,
  fuel and QSRs with a single solution;                                                              
|  |                                                                                                                                                                                
| | able to support multi-national retailers and distributors that
  require a standardized solution that can be easily deployed across their
  multiple regions and countries; and
|  |                                                                                                                                                                                
| | able to customize and localize our systems to fit the specific
  requirements of our customers with reduced effort and cost.                                                   

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

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

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

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

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

In the
past, our sales to smaller chains and independent grocers were primarily
limited to POS applications. Leveraging our new thin client solutions and our
ability to support multiple enterprises from a single data center, we are now
able to offer our enterprise level applications, such as product and price
management, sales analysis, promotions, loyalty and information services, to
Tier 3 and Tier 4 retailers on an ASP basis. We provide these Connected
Services through StoreNext in return for a monthly subscription fee. These
Connected Services enable Tier 3 and Tier 4 retailers to enjoy many of the
benefits of enterprise and back-office applications that were originally
designed for Tier 1 and Tier 2 retailers, without the need to make a
significant upfront investment in the systems and personnel required to run
these applications in-house. To date, StoreNext USA had signed up about 1,000
stores and StoreNext Israel has signed up over 750 stores. We intend to
continue to market Connected Services to this retail sector in an effort to
increase the revenues we generate from our Tier 3 and Tier 4 customer base.

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

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

Continue broadening
market penetration through strategic acquisitions

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

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

In the past
our primary geographic markets were North America, Israel and Europe,
particularly the United Kingdom and Scandinavia. In 2004, we announced
significant new sales that were viewed as market entries in new markets, such
as France and Italy in Europe, and China, Japan and India in Asia. We aim to
continue to establish our presence in these new markets, as well as to expand
into additional countries in Europe, Asia and Latin America. In addition, we
are beginning to expand into other types of retail sectors, such as health and
beauty and pharmacy, which have retail characteristics that are similar to the
food and fuel retail and distribution market sectors, in an effort to broaden
our addressable market.

Our Products

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

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

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

Supply
Chain and Warehouse Management Solutions: Suite of
supply chain execution and warehouse management software solutions that
provides retailers and distributors with a range of applications designed to
help them manage complex, multi-facility warehouses and distribution centers.
These applications include warehouse management and optimization, automated
procurement, merchandising, order management, invoice reconciliation and yard
and dock management. Our supply chain execution and warehouse management
systems consist of TRICEPS (Transportation, Receiving, Inventory Control and Productivity
Systems) Warehouse Management, BICEPS (Buyers Inventory Control Effecting
Profits and Services), Purchasing Management, PROMPT Invoice Matching, MDS Yard
and Dock Management, ABS (Advanced Billing System) Advanced Billing and Order
Management, and DemandAnalytX for optimized demand forecasting and order
optimization. We added these solutions to our product suite in
January 2004 through our acquisition of OMI International. Our new Retalix
InSync Solution Portfolio will consolidate these offerings into a single
product portfolio.

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

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

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

|                   |  |                                                                                                                                                                                                                                                  |  |                                             |  |                                       
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------- |  | --------------------------------------
|Product            |  | Description / Features                                                                                                                                                                                                                           |  | Technology Platform                         |  | Target Markets                        
|                   |  |                                                                                                                                                                                                                                                  |  |                                             |  |                                       
|                   |  |                                                                                                                                                                                                                                                  |  |                                             |  |                                       
|In-Store Solutions |  |                                                                                                                                                                                                                                                  |  |                                             |  |                                       
|Retalix StoreLine  |  |  POS and front office solution 
   Keyboard or touch
   Highly configurable
   Multi-language, currency and tax
   High availability and resilience
   Hardware neutral
   Supports multiple types of POS
  formats  grocery, fuel, QSRs |  |  Client server, Windows
  operating system |  |  Supermarkets and grocers  All Tiers

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|                                                |  |                                                                                                                                                                                                                                                                       |  |                                                                                                                      |  |                                                              
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------
|Retalix StoreLine.net(in
  development)[still?] |  |  POS solution 
   Allows retailers to run POS
  applications remotely
   Reduces total cost of ownership of
  in-store IT infrastructure
   Highly scalable                                                                                                       |  |  Web-based, open
  architecture
  Based on thin client architecture
   Developed on the Microsoft .Net platform |  |  Supermarkets and grocers  All Tiers                       
|Retalix StorePoint                              |  |  POS, front-office and back-office solution 
   Touch based, highly configurable
   Multi-language, currency and tax
   High availability and resilience
   Hardware neutral
   Supports multiple types of POS
  formats  convenience store, fuel, QSRs, kiosk |  |  Client server, Windows
  operating system                                                                          |  |  Convenience store, QSRs, and fuel retailers                
|RPO (Retalix
  Pocket Office)                   |  |  Mobile, hand-held suite of front-office and back-office
  applications 
   Allows employees to perform
  front-office and back-office functions from their in-store location                                                                                       |  |  Microsoft Windows CE
  platform                                                                                    |  |  Supermarkets and grocers  All Tiers
   Convenience stores
|RBO (Retalix Back
  Office)                     |  |  Functionally rich 
  back-office applications
   Interfaces to several types of POS formats
   Integrated with StoreLine                                                                                                                                          |  |  Client server, Windows operating system                                                                            |  |  Supermarkets and grocers  Tier 2  Tier 4                 
|Retalix Store                                   |  |  Functionally rich store based
  back-office applications
   Powerful price generation and
  competitive pricing capabilities
   DSD, Inventory
   Interfaces to many types of POS formats
  and vendors
   Acquired from TCI                                    |  |  Client server, Windows operating system, database independent
   Developed on Delphi                              |  |  Supermarkets and grocers  Tier 1  Tier 3                 
|Retalix ScanMaster                              |  |  POS solution 
   Highly configurable
   Multi-language and tax
   Broad set of customer loyalty
  functionality support
   Integrated with self-checkout systems                                                                                                |  |  Client server, Windows
  operating system                                                                          |  |  Supermarkets and grocers  Tier 3 & Tier 4                 
|Enterprise Solutions                            |  |                                                                                                                                                                                                                                                                       |  |                                                                                                                      |  |                                                              
|Retalix HQ                                      |  |  Functionally rich HQ based
  back-office applications
   Powerful price generation and
  competitive pricing capabilities
   DSD, Inventory
   Interfaces to many types of POS formats
  and vendors
   Acquired from TCI                                       |  |  Client server, Windows operating system, Database independent 
   Developed on Delphi                             |  |  Tier 1  Tier 3 supermarkets                               
|Retalix ThinStore                               |  |  DSD, Receiving
   Acquired from TCI                                                                                                                                                                                                                                |  |  J2EE, Websphere, operating system and database independent                                                         |  |  Tier 1  Tier 3 supermarkets                               

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|                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                          |  |                                                                                       
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------
|Retalix HQC    Retalix HQ
  for
  C-Stores and Fuel  |  |  Enterprise system for central management of head-office and
  back-office applications 
   Broad functionality  product and
  pricing, promotions, loyalty, ordering, receiving, analysis and reporting
   Provides for central location of the
  server hosting the software, with users throughout the enterprise accessing
  applications through browsers
   Single data repository
   Integrated with Retalix StorePoint
   Reduces the technology footprint and
  maintenance in the retail store |  |  Web-based, open
  architecture
   Based on web services and thin client
  architecture
   Developed on the Microsoft .Net platform |  |  Large chain convenience stores and fuel retailers                                   
|Retalix Loyalty                                       |  |  Enterprise system for central management of consumer loyalty
  programs 
   Based on POS loyalty and
  promotion T-Log
   Powerful customizable promotion engine
  
  Supports a wide variety of loyalty programs, from simple loyalty cards
  to long term programs                                                                                                                                                                                                                                       |  |  Web-based, open
  architecture
   Based on web services and thin client
  architecture
   Developed on the Microsoft .Net platform |  |  Tier 1 & Tier 2 supermarkets
   Large chain convenience stores
  and fuel retailers
|                                                     
|Supply Chain and Warehouse Management Solutions
(WMS) |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                          |  |                                                                                       
|TRICEPS Warehouse
  Management                        |  |  Automated warehouse location and task management system 
   Optimizes distribution of
  warehouse resources
   Provides real time warehouse data to
  warehouse managers                                                                                                                                                                                                                                                                                                                                    |  |  Advanced Radio Frequency
  (RF) and Voice technology                                                                                   |  |  Tier 1 & Tier 2 supermarkets                                                        
|BICEPS Purchasing
  Management                        |  |  Automated procurement system 
   Just in time and forward buying
  procurement
   Invoice and purchase order
  reconciliation
   Vendor profiling
   Item inventory management                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                          |  |  Tier 1 & Tier 2 supermarkets                                                        
|PROMPT Invoice
  Matching                             |  |  Automated invoice reconciliation system 
   Tracks invoices and interfaces
  with general ledger systems
   Provides real time inventory levels
   Reduces time necessary to resolve cost
  discrepancies                                                                                                                                                                                                                                                                                                  |  |  EDI and EFT technology                                                                                                                 |  |  Tier 1 & Tier 2 supermarkets                                                        
|MDS Yard and Dock
  Management                        |  |  Automated yard and dock resource management system 
   Real time management of yard /
  dock arrivals and departures                                                                                                                                                                                                                                                                                                                                                                                         |  |  Advanced RF, EDI and
  Advanced Ship Notice (ASN) technology                                                                           |  |  Tier 1 & Tier 2 supermarkets and distributors                                       

27

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

28

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|                           |  |                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                   |  |                                                                                                               
|-------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|                           |  |  Ordering, receiving 
   Load balancing                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                   |  |                                                                                                               
|Retalix Power NET          |  |  Web order management system
   View and act on store orders on
  the web                                                                                                                                                                                                                                                                                     |  |  Java based                                                                                                                      |  |  Tier 1 & Tier 3 distributors
   Tier 2 & Tier 3 supermarkets                                               
|Retalix Power CRM          |  |  Handheld applications for delivery
   Notebook applications for  sales and delivery agents                                                                                                                                                                                                                                                                   |  |  Java and Client Server set of applications                                                                                      |  |  Tier 1  Tier 3 distributors
   Tier 2 & Tier 3 supermarkets                                               
|Retalix InSync Solutions   |  |                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                   |  |                                                                                                               
|Retalix InSync Platform    |  |  New portfolio of enterprise and supply chain applications based on
  the Retalix InSync platform
   Purchasing
   Ordering 
   Management & billing
   Invoice reconciliation
   Analyzer
   WMS
   Replenishment optimization 
   Yard management 
   Thin store 
   Price management & optimization
   Merchandising 
   Master data management |  |  J2EE based
   Database independent
   Unix, Windows, Linux. iSeries, Mainframe
   IBM WebSphere, Jboss
   SOA, Web Services |  |  Tier 1  Tier 3 supermarkets
   Large and small chain convenience
  stores
   Tier 1  Tier 3 distributors
|ASP and Supplier Solutions |  |                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                   |  |                                                                                                               
|Connected Services         |  |  Provides retailers access to ASP applications in return for a
  monthly subscription fee
   Allows these retailers access to
  applications that would otherwise be too expensive or difficult to manage
  in-house                                                                                                                                          |  |  ASP.Net technology for enterprise and back-office applications                                                                  |  |  Tier 3 & Tier 4 independent grocers                                                                         
|Supplier Solutions         |  |  Aggregated retail food industry data
   Collaborative supply chain
  functionality
   E-marketplace for retail food industry 
   Enables supplier to better understand
  market trends and consumer demands
   Enables retailers and suppliers to
  streamline work processes,  exchange
  pricing, inventory and market information                      |  |                                                                                                                                   |  |  Suppliers to all Tiers of supermarkets and grocers                                                          

In-Store Solutions

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

29

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

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

StoreLine

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

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

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

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

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

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StoreLine.net

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

StorePoint

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

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

| |                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retalix POS  touch-screen based POS application for in-store
  coffee shops and restaurants;                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  Fuel  system that
  supports a variety of fuel payment modes including pre-pay, pay-at-pump,
  pay-in-store and payment by audio-video-interleave, or AVI, devices;                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                            
| | RFS  software forecourt controller that can serve as
  a cheaper and a functionally richer option than the traditional
  hardware-based forecourt controllers, enabling control of fuel pumps, fuel
  tanks, price polls and other forecourt devices;                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                            
| | Retalix QSR  touch-screen based, easy-to-use application for
  selling quick-service food service to match any fast food, espresso bar, and
  food service type establishments. Includes the necessary inventory functions
  defining product tree, waste control, etc. as well as order preparation
  instructions and interactive kitchen order screens;
| |                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  Self-Order  food
  service with self-order stations and drive-thru operations support; and                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  Customer Loyalty  flexible
  suite of customer behavioral incentive programs, store value cards and
  automatic reward fulfillment at a variety of customer touch points, including
  at the fuel pump, the POS and on the internet.                                                                                                            

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

Retalix PocketOffice (RPO)

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

Retalix BackOffice (RBO)

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

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Retalix Store

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

Enterprise Solutions

Retalix HQ

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

Retalix ThinStore

Retalix ThinStore, a
web-based centralized store back office application that was acquired as part
of TCI Solutions, is one of the first ThinStore back office system to be
offered  in North America to Tier 1
through Tier 3 retailers. The first release has robust receiving capabilities,
based on the Retalix Store functionality. The next version will be delivered as
part of the Retalix InSync Solution Portfolio.

Retalix HQC    HQ Solutions for Convenience Stores and Fuel Retailers
(HQC)

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

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | HQC is an integrated set of modules
addressing a convenience store retailers supply chain operations, including:                                                                                                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Product and Price Management  allows retailers to centrally manage
  their product pricing according to specific criteria and also enables
  collaboration with suppliers product and pricing data;                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Store Sales Audit and Alerts  allows retailers to mine store sales and
  operation data for exceptions based on business rules and facilitates
  management by analysis of exceptions;                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Document Management  assists with invoices, POS, returns and other
  features;                                                                                                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | POS Hosting  assists retailers with POS parameters, keyboards,
  modifiers, price changes, and other features;                                                                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Sales Analysis  provides retailers with a data warehouse solution that
  facilitates multiple views of sales, product and store data and provides for
  customized views of such data according to different users needs;                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Electronic Journal  acts as a central data repository that tracks and
  records all checkout transactions throughout the enterprise and provides for
  easy retrieval of transactions; and                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Promotions  provides retailers with the ability to deliver a wide
  assortment of promotions that can be configured according to various criteria,
  such as types of purchase thresholds, duration, reward types and type of POS
  system. In addition, the Promotions module provides a synchronized, two-way
  flow of data between the enterprise and the POS that enables promotions to be
  transmitted and implemented at the store level and their results to be
  analyzed at the headquarters level.

Retalix Loyalty

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

32

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|  |                                              
|- | ---------------------------------------------
| | create and sustain customer interest;        
|  |                                              
| | focus on household spending over time;       
|  |                                              
| | optimize value through customer segmentation;
|  |                                              
| | simplify campaign management;                
|  |                                              
| | manage supplier funding;                     
|  |                                              
| | develop built-in cost controls; and          
|  |                                              
| | develop personalized marketing programs.     

Warehouse Management Solutions

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

TRICEPS Warehouse Management

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

BICEPS Purchasing Management

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

PROMPT Invoice Matching

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

MDS Yard and Dock Management

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

ABS Billing and Order Management

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

33

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DemandAnalytX

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

Distribution Solutions

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

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

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

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

Retalix
Power Net a
web-based order management system; Java based;

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

Retalix
Power Net a web
based ordering portal for retailers ordering from a foodservice, convenience
store or grocery distributor;

Retalix
Power PDA a
handheld solution for distributors; and

Power
CRM a set of
customer relationship management, or CRM, applications for delivery and food
service agent applications for handheld and notebook computers; based on Java
and client server Delphi.

Retalix InSync

In
September 2005, we announced our new state-of-the-art, web-based portfolio of
synchronized applications - the only complete suite designed and developed to
meet the most demanding requirements of retailers, distributors and operators
in the grocery and foodservice industries. Retalix InSync brings together more
than 20 years of accumulated industry and software development expertise and
experience from us, OMI International, IDS and TCI Solutions. This is the
platform on which our existing products will be integrated and on which new
products will be developed.  The
benefits of this portfolio include seamless integration between applications,
lower total cost of ownership, or TCO, and customers ability to integrate
third-party applications on top of Retalix InSync. Retalix InSync unifies our
applications onto a single platform, reducing the need for custom integrations.

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

|  |                                                                  
|- | -----------------------------------------------------------------
| | service oriented architecture;                                   
|  |                                                                  
| | web services;                                                    
|  |                                                                  
| | Java/J2EE development standard;                                  
|  |                                                                  
| | database independence (DB2, MS-SQL, Oracle);                     
|  |                                                                  
| | interoperability (Unix, Linux, Windows, iSeries, Mainframes); and
|  |                                                                  
| | application server independence (IBM WebSphere, Jboss).          

34

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The
Retalix InSync Solution Portfolio includes the following:

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

|  |                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|¡ | data
  layer  consists of a dynamic data model, a thick layer of meta data that
  actually defines how the services will be configured and executed, a flexible
  and extendable business entity layer and a robust industry specific
  integrated catalog;
|  |                                                                                                                                                                                                                                                             
|¡ | platform
  services layer  includes a rich set of GUI services, workflow, logs, data
  synchronization, reporting, rule engine and search and selection features;                                                                                          
|  |                                                                                                                                                                                                                                                             
|¡ | application
  services layer  includes perpetual inventory, or PI, rates, costing, retail
  price generation and demand forecasting; and                                                                                                                   
|  |                                                                                                                                                                                                                                                             
|¡ | science
  layer  includes data (cleansing) logic, demand logic, price elasticity logic,
  key performance indicators, or KPI, alert tools, and optimization tools.                                                                                         

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retalix
  InSync MDM (Master Data Management)  a module that facilitates maintenance of
  business entities and catalog data, integration with external data sources,
  data staging and workflow based data integration processes.                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Purchasing  a robust purchasing solution for the retail and
  distribution markets. Includes demand forecasting, purchase order triggering,
  generation and review, load building, price brackets and PI.                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Forecasting    an advance demand and supply based DC forecasting and
  forecast modeling tool. Supports turn and promotion forecasting.                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync WMS  a full-featured warehouse management package that supports the
  needs of small and large scale food and non-food retail and distribution
  warehouses. Main modules include receiving, voice and RF, directed put-away,
  replenishment and picking movements, selection and shipping, X-Docking, radio
  frequency identification tags, or RFID, labor standards and optimization
  tools.                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Order Management & Billing  a sophisticated product that allows
  retail and distribution organization to improve the operations of
  distribution centers by attempting to optimize the handling process of store
  and customer orders. The product supports product substitutions, short
  product allocation, and short date product forced distribution, while
  integrating demand signals and inventory positions.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Invoice Reconciliation  sophisticated 3-way and 2-way (DSD) matching
  process (matching invoice, order, and receiving documents) that facilitates
  automation and maximization of fee and revenue collection and minimizes loss
  of revenue and labor.                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync ThinStore  a web-based centralized store back-office application that
  runs at the headquarters as if it were installed at each store, reduces the
  amount of hardware and software in the store and requires less maintenance.
  Includes ordering and receiving, inventory management, download and upload
  functions between the headquarters and store equipment, such as POS and
  scales.                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Pricing  a robust rule based retail pricing application, based mainly
  on the acquired TCI Solutions applications. Supports price generation,
  competitive pricing and links between different prices.                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Price Optimization  a new product to complement Retalix InSync Pricing
  that uses the Demand Logic (developed in the Retalix DemandAnalytX
  application) as a base for an advanced price elasticity based optimization.
  Designed to assist in retail price setting, achieving maximal profit using
  price strategies, and optimizing deals and promotions.                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Analyzer BI  a set of analytic applications that use the advanced
  Qlik-View business intelligence tool. Each Retalix InSync Analyzer
  application provides a sophisticated set of integrated online and graphical reports.                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Customer Portal    a robust J2EE based customer portal, based on the
  acquired Power Net (IDS) customer portal. Supports customer order entry and
  presentation.                                                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retalix
  InSync Supplier Portal    a robust J2EE based supplier portal, based on the
  acquired Power Net (IDS) customer portal. Supports vendor processes such as
  new items and deals.                                                                                                                                                                                                                                                

ASP and Supplier Solutions

We
provide ASP and supplier solutions through StoreNext USA and StoreNext Israel.

35

---

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ASP Solutions

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

Supplier Solutions

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

Services and Projects

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

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

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

36

---

---



Customers

Our
software has been deployed worldwide in supermarket and grocery stores,
convenience stores, fuel retailers and quick service restaurants. The following
list is a representative sample of companies that purchased an aggregate of at
least $200,000 of our products and services in 2004 and 2005 combined.

|                                                |  |                                         |  |                                
|----------------------------------------------- |  | --------------------------------------- |  | -------------------------------
|Grocery                                         |  | Convenience Stores
  and Fuel Retailers |  | Distributors                   
|                                                |  |                                         |  |                                
|Albertsons (US)                                 |  | Alon Oil
  (US)                         |  | Farner-Bocken
  Company (US)   
|Big Y (US)                                      |  | Caseys (US)                            |  | Food
  Services of America (US)
|Costco (US)                                     |  | Irving Oil
  (US)                       |  | Sysco (US)                     
|Dierbergs (US)                                  |  | Pilot Corporation
  (US)                |  | Met Cash
  (Australia)         
|Hannaford Bros. (US)                            |  | Tesoro (US)                             |  |                                
|K-VA-T (US)                                     |  | Husky Oil
  (Canada)                    |  |                                
|Publix (US)                                     |  | Welcome
  Break (UK)                    |  |                                
|Schnucks (US)                                   |  | Pressbyran
  (Sweden)                   |  |                                
|Delhaize Group (Europe)                         |  |                                         |  |                                
|Sainsburys (UK)                                |  |                                         |  |                                
|Tesco Stores (UK)                               |  |                                         |  |                                
|A.S. Watson (Europe)                            |  |                                         |  |                                
|Intermarche (Europe)                            |  |                                         |  |                                
|Metro Cash & Carry (South Africa &
  Australia) |  |                                         |  |                                
|Shoprite Checkers (South Africa)                |  |                                         |  |                                

Recent Significant Acquisitions

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

On
April 1, 2005, we acquired approximately 73.4% of the issued and outstanding
shares (on an as-converted-to-common-stock basis) of TCI Solutions, a provider
of retail store and headquarters solutions, including pricing, promotions,
inventory, management and DSD solutions for the grocery industry, for approximately
$14.5 million in cash and 715,730 of our ordinary shares. The solutions of TCI
Solutions enable grocers to automate complex pricing strategies, streamline
inventory management processes, and execute consistently across the retail
enterprise, from headquarters to the store. TCI Solutions flagship offering,
TCI Retail, consists of headquarters and in-store applications that provide
supermarket operators with the control, automation and execution capabilities
necessary to increase revenue, lower costs and improve margins in todays
complex retail environment. The solutions of TCI Solutions enable grocers to
accelerate and improve decision-making through enterprise-wide merchandising
and store operations solutions. As part of the acquisition, we retained 111 of
TCI Solutions employees. We believe that the acquisition of TCI Solutions will
enable us to strengthen our position as a provider of headquarters and in-store
systems for retailers, improve the quality of our offerings, broaden our
customer base and expand our suite of products.

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

On
April 1, 2005, we also acquired substantially all of the assets of IDS, a
provider of ERP and distribution solutions for the food service, convenience
store and grocery industries, for approximately $37.4 million in cash and
290,128 of our ordinary shares. In addition, 207,236 of our ordinary shares
will be eligible for release from escrow only if certain future customer
retention milestones are met as of April 1, 2007. IDSs solutions enable
distributors in the grocery, convenience store and food service markets to
achieve increased productivity, improved customer service and operational cost
savings. As part of the acquisition, we retained 133 of IDSs employees. We
believe the acquisition of IDS will enable us to strengthen our position as a
provider of supply chain execution and warehouse management systems, improve
the quality of our offerings and in particular those which collaborate between
retail and supply organizations, broaden our customer base and expand our suite
of products.

37

---

---



In
August 2004, we acquired 51% of Retalix Italia (then Unit), a supplier
of specialized software and hardware solutions for the food and fuel retail
industries in Italy. As part of the acquisition we retained 59 employees of
Retalix Italia headquartered near Milan. In December 2004, we acquired the
remaining 49% of Retalix Italia. Retalix Italia focuses on the delivery,
deployment and support of the Retalix advanced enterprise-wide retail solutions
to the Italian, as well as other European, food and fuel retail markets.

In
January 2004, we acquired OMI International, a provider of supply chain
execution and warehouse management systems for the retail food industry, for
aggregate consideration of approximately $19.5 million in cash and ordinary
shares, including related transaction expenses. As part of the acquisition, we
retained 67 of OMIs employees. OMI integrated applications provide end-to-end
supply chain management enabling enterprise-wide procurement, merchandising,
warehouse management and order management for multi-warehouse, multi-facility
food retailers and wholesalers. The acquisition of OMI enabled us to enter into
the supply chain execution and warehouse management systems markets for
retailers, broaden our customer base and expand our suite of products. In early
2004, we also acquired the independent operations of the distributors of OMIs
products in Israel and Europe.

The StoreNext Initiatives

StoreNext USA

Established
in 2002 with Fujitsu Transaction Solutions, StoreNext Retail Technology LLC,
which we refer to as StoreNext USA, provides POS hardware and software and
Connected Services to the independent and small chain grocery market sectors
(Tier 3 and Tier 4 retailers). This initiative manages the regional dealer
channels for the Tier 3 and Tier 4 grocery market sectors. Retalix supplies
StoreNext USA with POS, back office and mobile solutions software and Fujitsu
supplies StoreNext USA with POS hardware. Retalix receives revenues from the
sale of its software solutions to StoreNext USA. StoreNext USA has recently
begun to offer Connected Services to these Tier 3 and Tier 4 food retailers. As
of December 31, 2005, we estimate that StoreNext USA had more then 1,000
stores that have signed up to Connected Services. On March 31, 2006, Retalix
increased its ownership of StoreNext USA from 50.01% to 95% for consideration
of approximately $4.9 million.

StoreNext Israel

Established
in 1999, StoreAlliance.com Ltd., which we refer to as StoreNext Israel,
provides Connected Services to food retailers and suppliers in Israel. In
addition, StoreNext Israel has established an e-marketplace across the Israeli
retail supply chain by building a subscriber base comprised of both retailers
and suppliers. The aim of this initiative is to provide its members supply
chain efficiencies by providing up-to-date aggregated data. To date, StoreNext
Israel subscribers include over 750 stores and 900 suppliers. StoreNext Israel
is currently running an online collaboration project with Supersol, the largest
supermarket chain in Israel, and several of its key suppliers, including
Osem-Nestle, Strauss-Elite, Unilever Israel, Central Bottling Company Ltd.
(Coca Cola Israel) and Hogla-Kimberley.

StoreNext
Israel is a business initiative controlled by us. In addition there are three
other Israeli shareholders in this initiative: Discount Investment Corporation
Ltd.; Isracard, a subsidiary of Bank Hapoalim, Israels largest bank; and Coca
Cola Israel. As of December 31, 2005, we owned directly and through one of our
wholly owned subsidiaries, approximately 51.5% of the issued share capital of
StoreNext Israel. In addition, approximately 270,000 ordinary shares of
StoreNext Israel, or approximately 7.7% of StoreNext Israels issued and
outstanding share capital, are reserved for issuance upon the exercise of
options granted to our and StoreNext Israels employees. An additional 90,000
ordinary shares of StoreNext Israel, or approximately 2.6% of StoreNext
Israels issued and outstanding share capital, are reserved for issuance upon
the exercise of options granted to employees of Coca Cola. An additional
305,973 ordinary shares of StoreNext Israel, or approximately 8.75% of
StoreNext Israels issued and outstanding share capital, are reserved for
issuance upon the exercise of an option granted to Isracard.

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

Sales and Marketing

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

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

38

---

---



Direct Sales

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

Marketing Alliances

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

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

Dealer Sales

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

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

Competition

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

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

|  |                                                                                  
|- | ---------------------------------------------------------------------------------
| | breadth of
  product offerings;                                                  
|  |                                                                                  
| | integrativity
  of solutions and solution components;                            
|  |                                                                                  
| | suitability
  for multi-national, multi-concept retailers;                       
|  |                                                                                  
| | quality
  track record;                                                          
|  |                                                                                  
| | established
  reputation with key customers;                                     
|  |                                                                                  
| | products
  that balance feature/performance requirements with cost effectiveness;
|  |                                                                                  
| | scope and
  responsiveness of professional services and technical support;       
|  |                                                                                  
| | retail and
  business know-how and expertise;                                    
|  |                                                                                  
| | compatibility
  with emerging industry standards;                                
|  |                                                                                  
| | ease of
  upgrading and ease of use; and                                         
|  |                                                                                  
| | timeliness
  of new product introductions.                                       

39

---

---



C. Organizational Structure

We have the following subsidiaries and related companies:

|                                                    |  |                         |  |                                             |  |                                       |      |  | 
|--------------------------------------------------- |  | ----------------------- |  | ------------------------------------------- |  | ------------------------------------- | ---- |  | 
|Subsidiary                                          |  | Country of 
  Residence |  | Portion of
  ownership 
  interest held (%) |  | Portion of
  voting 
  power held (%) |     
|                                                    |  |                         |  |                                             |  |                                       |     
|Retalix
  Holdings Inc.                             |  | United States           |  | 100                                         |  |                                       | 100  |  | 
|Retalix USA
  Inc.(1)                               |  | United States           |  | 100                                         |  |                                       | 100  |  | 
|Retail Control Systems Inc. (1)                     |  | United States           |  | 100                                         |  |                                       | 100  |  | 
|BASS Inc. (2)                                       |  | United States           |  | 100                                         |  |                                       | 100  |  | 
|StoreNext Retail Technology LLC (1)                 |  | United States           |  | 95                                          |  |                                       | 95   |  | 
|OMI International, Inc. (1)                         |  | United States           |  | 100                                         |  |                                       | 100  |  | 
|C-StoreMatrix.com Inc. (3)                          |  | United States           |  | 25                                          |  |                                       | 25   |  | 
|Retalix SCM Inc. (1)                                |  | United States           |  | 100                                         |  |                                       | 100  |  | 
|Retalix TCI, LLC (1)                                |  | United States           |  | 100                                         |  |                                       | 100  |  | 
|PalmPoint Ltd.                                      |  | Israel                  |  | 100                                         |  |                                       | 100  |  | 
|Tamar Industries M. R. Electronic (1985)
  Ltd. (4) |  | Israel                  |  | 100                                         |  |                                       | 100  |  | 
|StoreAlliance.com Ltd. (5)                          |  | Israel                  |  | 51.5                                        |  |                                       | 51.5 |  | 
|StoreNext Ltd. (6)                                  |  | Israel                  |  | 51.5                                        |  |                                       | 51.5 |  | 
|TradaNet Electronic Commerce Services Ltd.
  (6)    |  | Israel                  |  | 51.5                                        |  |                                       | 51.5 |  | 
|IREX    Israel Retail Exchange Ltd. (6)            |  | Israel                  |  | 51.5                                        |  |                                       | 51.5 |  | 
|Cell-Time Ltd. (7)                                  |  | Israel                  |  | 17.1                                        |  |                                       | 33   |  | 
|DemandX Ltd. (6)                                    |  | Israel                  |  | 51.5                                        |  |                                       | 51.5 |  | 
|Retail College StoreNext Ltd. (8)                   |  | Israel                  |  | 38.6                                        |  |                                       | 75   |  | 
|P.O.S.
  (Restaurant Solutions) Ltd.                |  | Israel                  |  | 69                                          |  |                                       | 69   |  | 
|Net Point
  Ltd.                                    |  | Israel                  |  | 95                                          |  |                                       | 95   |  | 
|Kohav Orion Advertising and Information
  Ltd.      |  | Israel                  |  | 100                                         |  |                                       | 100  |  | 
|Orlan Orion Systems Ltd.                            |  | Israel                  |  | 100                                         |  |                                       | 100  |  | 
|Retalix (UK) Limited                                |  | United Kingdom          |  | 100                                         |  |                                       | 100  |  | 
|Retalix Italia
  S.p.A.                             |  | Italy                   |  | 100                                         |  |                                       | 100  |  | 
|M.P.S.
  Millennium Pos Solutions S.r.l.            |  | Italy                   |  | 100                                         |  |                                       | 100  |  | 
|Retalix France SARL                                 |  | France                  |  | 100                                         |  |                                       | 100  |  | 
|Retalix SA
  PTY Ltd.                               |  | South Africa            |  | 100                                         |  |                                       | 100  |  | 
|Retalix
  Australia PTY Ltd.                        |  | Australia               |  | 100                                         |  |                                       | 100  |  | 
|Retalix
  Japan                                     |  | Japan                   |  | 100                                         |  |                                       | 100  |  | 

|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | Held through
  our wholly-owned subsidiary, Retalix Holdings Inc.                                        
|    |                                                                                                          
|(2) | Held through
  our wholly-owned subsidiary, Retalix USA Inc.                                             
|    |                                                                                                          
|(3) | Ceased
  operations.                                                                                     
|    |                                                                                                          
|(4) | Holds 26.8%
  of the issued share capital of StoreAlliance.Com, Ltd.                                     
|    |                                                                                                          
|(5) | Including
  holdings through our wholly-owned subsidiary, Tamar Industries M. R.
  Electronic (1985) Ltd.
|    |                                                                                                          
|(6) | Wholly owned
  by our subsidiary, StoreAlliance.com Ltd.                                                 
|    |                                                                                                          
|(7) | 33% owned by
  our subsidiary, StoreAlliance.com Ltd.                                                    
|    |                                                                                                          
|(8) | 75% owned by
  our subsidiary, StoreAlliance.com Ltd.                                                    

D. Property, Plants and Equipment

Our
Israeli corporate headquarters are located in Raanana, Israel, where we occupy
approximately 6,500 square meters of office space, of which approximately 3,500
square meters represent ownership rights under a long-term lease from the
Israel Lands Administration and approximately 3,000 square meters are leased
from other third parties for shorter terms.

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

ITEM 4A    UNRESOLVED STAFF COMMENTS

None.

40

---

---



ITEM 5    OPERATING AND FINANCIAL REVIEW AND
PROSPECTS

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

A. Operating Results

Overview

General

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

Since
inception, we have significantly increased our revenues through a combination
of factors, including obtaining new customers, expanding existing customer
relationships, introducing new products, expanding the features and
functionality of our existing products and acquiring complementary businesses,
including most recently Base Products in February 2006, TCI Solutions and IDS
in April 2005, Unit S.p.A. (Retalix Italia) in August 2004, and OMI
International in January 2004.

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

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

During
2005, we continued our strategy of focusing on Tier 1 and Tier 2 supermarkets,
large convenience store chains and major fuel retailers. In addition, we
strengthened and widened our offering in the supply chain and warehouse
management areas with the acquisitions of IDS and TCI Solutions.

Highlights
since the beginning of 2004 include:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March
  2006, we increased our holdings in StoreNext USA to 95%, with the acquisition
  of additional 45% in StoreNext USA from Fujitsu Transaction Solutions. The
  consideration we paid for this acquisition was approximately $4.9 million.  The purpose of this acquisition was to
  decrease the StoreNext USA dependency on a single hardware vendor and thus
  improve its acceptance in the relevant markets.                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | In February
  2006, we acquired substantially all of the assets of Base Products, Inc.
  d/b/a/ C&L Retail Solutions, a provider of a suite of hardware and
  software products and services for food and consumer goods retailer, for $2.6
  million in cash, and assumption of certain liabilities. As part of the
  acquisition we retained 31of Base Products employees. The purpose of this
  acquisition was to strengthen our customer base and position in the small and
  independent retail sector in the United States.

41

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April
  2005, we acquired approximately 73.4% of the issued and outstanding shares
  (on an as-converted-to-common-stock basis) of TCI Solutions, now called
  Retalix TCI, LLC, a provider of retail store and headquarters solutions,
  including pricing, promotions, inventory management and DSD solutions for the
  grocery industry, for approximately $14.5 million in cash and 715,730 of our
  ordinary shares. As part of the acquisition, we retained 111 of TCI
  Solutions employees.  The purpose of
  the acquisition of TCI Solutions was to strengthen our position as a provider
  of headquarters and in-store systems for retailers, improve the quality of
  our offerings, broaden our customer base and expand our suite of products. In
  November 2005, we completed the acquisition of TCI Solutions as we acquired
  the remaining outstanding common stock and preferred stock of TCI Solutions
  in a merger, for an aggregate of approximately $2.6 million in cash.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In April
  2005, we also acquired through our wholly owned subsidiary Retalix SCM, Inc.,
  substantially all of the assets of IDS, a provider of ERP and distribution
  solutions for the foodservice, convenience store and grocery industries, for
  approximately $37.4 million in cash, and 290,128 of our ordinary shares. In
  addition, 207,236 of our ordinary shares will be eligible for release to the
  sellers from escrow only if certain future customer retention milestones are
  met as of April 1, 2007.  As part of
  the acquisition, we retained 133 of IDSs employees.  The purpose of the acquisition of IDS was
  to enable us to strengthen our position as a provider of supply chain
  execution and warehouse management systems, improve the quality of our
  offerings, and in particular, those which facilitate coordination between
  retail and supply organizations, broaden our customer base and expand our
  suite of products.                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In August
  2004, we acquired UNIT, now called Retalix Italia, a supplier of specialized
  software and hardware solutions for the food and fuel retail industries in
  Italy and Europe. As part of the acquisition, we retained 59 of UNITs
  employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In January 2004,
  we acquired OMI International, a provider of supply chain execution and
  warehouse management systems for the retail food industry, for aggregate
  consideration of approximately $19.5 million in cash and ordinary
  shares, including related transaction expenses. This acquisition was
  concluded on January 2, 2004. As part of the acquisition, we retained 67
  of OMI Internationals employees. The purpose of the acquisition of OMI
  International was to enable us to enter the supply chain execution and warehouse
  management systems market for retailers, broaden our customer base and expand
  our suite of products. As expected, we invested significant resources in
  developing a next-generation, web-based version of OMI Internationals
  applications and in integrating these applications with ReMA, our web-based
  enterprise application suite.                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | We announced
  numerous new customer agreements, including French-based
  Mousquetaires-Intermarche, Tesco (Retalix Back Office systems for sites
  across the United Kingdom, Europe and Asia), Alon USA, Zen and Drug-Eleven in
  Japan, Lotus Supermarkets in China, Rautakirja in Finland and Woolworths in
  Australia. These new customers in Europe, Asia and the Pacific-Rim represent
  the advancement of our strategy to expand our business to new retail markets
  around the globe.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | We completed
  a public offering of 3,450,000 of our ordinary shares at a price to the
  public of $18.00 per share in May 2004. The proceeds of the offering, net of
  underwriting discount and other related expenses, amounted to approximately
  $59 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Revision
of periodic and annual results previously published in regard to 2005

During
July 2006, we came to the conclusion that the accounting treatment previously
implemented in connection with certain transactions was incorrect, and not in
accordance with the applicable accounting rules. Accordingly, the correction of
the accounting treatment which affected previously published financial
statements for each quarter during 2005, as well as the year ended December 31,
2005, was included herein in this annual report. The issues revised herein
included:

|  |                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the
  accounting treatment of the impact of open contracts in connection with
  recent acquisitions                                                                                                                                  
|  |                                                                                                                                                                                                                                      
| | the
  accounting treatment of revenue recognition applied to a certain
  multi-element transaction executed in 2005 involving a software license and a
  maintenance arrangement based deployment progression or delayed commencement
|  |                                                                                                                                                                                                                                      
| | the
  accounting treatment in accordance with FAS 123 in connection with certain
  options                                                                                                                                           
|  |                                                                                                                                                                                                                                      
| | insufficient
  provisions to cover unforeseen accounting fees in connection with the lengthy
  audit of our December 31, 2005 financial reports                                                                                      
|  |                                                                                                                                                                                                                                      
| | a certain
  correction of effective tax rate applied to deferred tax expense                                                                                                                                                         
|  |                                                                                                                                                                                                                                      
| | incorrect
  classification of certain revenues as product sales instead of revenues from
  services and projects                                                                                                                     

In
addition, the restatement of our financial statements for the year ended
December 31, 2004 and in this context, the correction of the accounting
treatment of revenue recognition applied to a certain multi-element transaction
executed in 2004 involving a software license and a maintenance arrangement
based on deployment progression, also impacted our December 31, 2005 financial
reports.

42

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The
following table shows the impact of the corrections made and included in the
financial statements attached herein on our previously published quarterly
results of operations for the year ended December 31, 2005:

|                           | The three months period ended | The yearended | The three months period ended | The yearended
|-------------------------- | ----------------------------- | ------------- | ----------------------------- | -------------
|
|
|
|
|Revenues:                  |                               |               |                               |              
|Product sales              |                               |               | $                             | (3,824       
|Services and projects      |                               |               |                               | 3,813        
|                           |                               |               |                               |              
|Total revenues             |                               |               |                               | (11          
|                           |                               |               |                               |              
|Cost of revenues:          |                               |              
|Cost of product sales      |                               |               |                               | -            
|Cost of services and       |                               |              
|projects                   |                               |               |                               | -            
|                           |                               |               |                               |              
|Total cost of revenues     |                               |               |                               | -            
|                           |                               |               |                               |              
|Gross profit               |                               |               |                               | (11          
|                           |                               |               |                               |              
|                           |                               |              
|Operating expenses:        |                               |              
|Research and development   |                               |              
|expenses-net               |                               |               |                               | -            
|Selling and marketing      |                               |              
|expenses                   |                               |               |                               | -            
|General and                |                               |              
|administrative expenses .  |                               |               |                               | -            
|Other general income       |                               |              
|(expenses) - net           |                               |               |                               | -            
|                           |                               |               |                               |              
|Total operating expenses   |                               |               |                               | -            
|                           |                               |               |                               |              
|Income from operations     |                               |               |                               | (11          
|Financial income           |                               |              
|(expenses) - net           |                               |               |                               | -            
|Gain arising from issuance |                               |              
|of shares by a             |                               |              
|subsidiary and an          |                               |              
|associated company         |                               |               |                               | -            
|                           |                               |               |                               |              
|Income before taxes on     |                               |              
|income                     |                               |               |                               | (11          
|Taxes on income            |                               |               |                               | (2           
|                           |                               |               |                               |              
|Income after taxes on      |                               |              
|income                     |                               |               |                               | (9           
|Share in losses of an      |                               |              
|associated company         |                               |               |                               | -            
|Minority interests in      |                               |              
|losses of subsidiaries     |                               |               |                               | -            
|                           |                               |               |                               |              
|                           |                               |              
|Net income                 |                               |               | $                             | (9           
|                           |                               |               |                               |              
|                           |                               |              
|Earnings per share:        |                               |              
|Basic                      |                               |               |                               | -            
|                           |                               |               |                               |              
|                           |                               |              
|Diluted                    |                               |               |                               | -            
|                           |                               |               |                               |              

43

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Application
of Critical Accounting Policies and Use of Estimates

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

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

Revenue
recognition

Our
revenue recognition policy is critical because our revenue is a key component
of our results of operations. we derive our revenues primarily from the
licensing of integrated software products, and to some extent from the sale of
complementary computer and other hardware equipment, all of which we classify
as revenues from product sales. We also derives revenues from maintenance and
other professional services which are principally software changes and enhancements
requested by customers, all associated with products sold by us and which we
classify as revenues from services and projects.  See further discussion of sources of revenues below.

We
derive our revenues primarily from the licensing of integrated software
products, and to some extent from the sale of complementary computer and other
hardware equipment, all of which we classify as revenues from product sales. We
also derive revenues from maintenance and other professional services which are
principally software changes and enhancements requested by customers as well as
on-line application, information and messaging services, mostly associated with
products we sell and which we classify as revenues from services and projects.

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

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

Revenues
from professional services that are not bundled or linked to a software sale
accounted for under SOP 97-2 are recognized as services are performed in
accordance with the provisions of Staff Accounting Bulletin No. 104 of the
Securities and Exchange Commission.

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

In
cases where the products are sold to smaller retailers, through resellers,
revenues are recognized as the products are supplied to the resellers as per
the method sometimes referred to as the sell-in method.

In
specific cases where resellers have right of return or we are required to
repurchase the products or in case we
guarantee the resale value of the products, revenues are recognized as
the products are delivered by the resellers as per the method sometimes
referred as the sale through method.

44

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

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

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

Goodwill
and Intangible Assets

On
January 1, 2002, we adopted SFAS, No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and intangible assets with an
indefinite life be tested for impairment on adoption and at least annually
thereafter. Goodwill and intangible assets with an indefinite life are required
to be written down when impaired, rather than amortized as previous accounting
standards required. Goodwill and intangible assets with an indefinite life are
tested for impairment by comparing the fair value of the reporting unit with
its carrying value. Fair value is generally determined using discounted cash
flows, market multiples and market capitalization. Significant estimates used
in the fair value methodologies include estimates of future cash flows, future
short-term and long-term growth rates, weighted average cost of capital and
estimates of market multiples of the reportable unit. If these estimates or
their related assumptions change in the future, we may be required to record
impairment charges for our goodwill and intangible assets with an indefinite
life.

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

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

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

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

During
2005, as a result of our annual impairment analysis, we determined that no
goodwill of any of our past acquisitions was impaired.

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

45

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Tax
provision

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

Other
non critical  accounting policies and
additional discussion of accounting characteristics

Our
Functional Currency

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

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

Bad
debt and allowance for doubtful accounts

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

Variable Interest Entities

We evaluate whether entities in which we have invested are variable interest entities within the meaning
of FIN 46R. If an entity is a variable interest entity, then we determine whether we are the primary
beneficiary of that entity by reference to our contractual and business arrangements. Assessment of
whether an entity is a variable interest entity for purposes of FIN 46R and the determination of the
primary beneficiary of such entity requires judgment and careful analysis of all relevant facts and
circumstances, including determining whether other parties are related parties solely for the purposes
of FIN 46R.

StoreNext USA  is a variable interest entity, which the Company holds majority of voting interest and,
under the relevant guidelines of Financial Accounting Standards Board Interpretation No. 46R,
"Accounting for Variable Interest Entities" ("FIN 46R"), we are considered the primary beneficiary, and
therefore we consolidate the results of StoreNext into our financial statements.

Sources
of Revenue

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

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

During
2005, one single customer accounted for 5% or more of our revenues and during
2004, none of our customers accounted for 5% or more of our revenues.

46

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Product
Sales

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

Services
and Projects

Revenues
from services consist of:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Maintenance  
consists primarily of technical support and use of help-desk services,
dealing primarily with difficulties or failures occurring from erroneous use
of software products bugs, etc. In some cases the maintenance includes
unspecified upgrades, which are mainly bug fixes. We provide maintenance
services primarily based on annual arrangements or, alternatively, through
dedicated-team arrangements based on professional personnel fully dedicated
to the customer and directed by him primarily in the context of performance
of change requests and for relatively long periods of time. In some cases, we
provide maintenance services on a per-call basis.                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Development/Enhancement services in the
form of short-term projects - primarily fixed price
or hourly/daily fee arrangements for the enhancement of our products to
accommodate the request of a specific customer. Such short-term tasks take up
to twelve weeks to complete. Examples to this type of revenue could be the
development of a new report, a simple type of a promotion or a simple
interface to an external system based on the needs specified by the customer.
These projects are small in volume and in most cases take only days to
complete. Such services can also be provided in the context of
dedicated-team arrangements, where specified amounts of personnel are
dedicated to customers, charged to the customer and paid for, on the basis of
daily rates.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Development/Enhancement services in the
form of long-term projects - consists of relatively
significant customizations which are of a longer-term in nature. Such tasks
are most commonly performed for existing customers who request relatively
complicated enhancements such as complicated promotion programs or
complicated customizations required due to new fiscal regulations. Such
services can also be provided in the context of dedicated-team arrangements.                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On-line information services, messaging and
application services - including communication and
business messaging services between retailers and suppliers, provision of
market data analysis and operational supply chain information services to
suppliers and manufacturers and a variety of remote on-line retail and
operational applications sold to retailers through monthly subscription fee
arrangements, also referred to as Connected Services. These revenues have not
been significant during 2005 and prior years. Most of these services are based on periodic subscription fees
and thus are recognized over the service period. Some of these services such
as EDI messaging services are charged to customers on the basis of volumes of
usage.                     

Multiple
element agreements

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

Sales
to integrators

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

Sales
through resellers

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

47

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Cost
of Revenues

Cost
of revenues is comprised of the cost of product sales and the cost of services
and projects. Furthermore, since our adoption of  SFAS, No. 142, Goodwill and other Intangible Assets and
SFAS No. 141 Business Combinations, in their entirety, as of
January 1, 2002, intangible assets created through purchase price
allocations such as customer base and technology are amortized to cost of
revenues over their expected periods of life. In addition, generally we are
obligated to pay the Israeli government royalties at a rate of 3% to 5% on
revenues from specific products resulting from grants, up to a total of 100% of
the grants received. These royalties are presented as part of our cost of
revenues.

Cost
of Product Sales   Cost of product sales consists
of costs mostly related to cost of hardware and amortization of intangible
assets. Historically, our revenues from hardware sales represented a relatively
small portion of our overall revenues. Beginning in July 2002, we began
consolidating the results of StoreNext USA into our financial statements. As
hardware sales constitute a significant portion of StoreNext USA revenues, our
cost of product sales has increased, reflecting the higher costs of hardware. The amortization of intangible assets
acquired from OMI International, IDS and TCI Solutions was another factor that
contributed to the increase in cost of product sales during recent years.

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

Operating
Expenses

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

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

Selling
and Marketing Expenses consist primarily of salaries,
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 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 SFAS, No. 142, Goodwill and other Intangible Assets
and SFAS 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 SFAS 141
and SFAS 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.

Other
General Income (Expenses), Net consists
primarily of  gains or losses with
respect to ordinary course dispositions of fixed assets. In addition, 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 initiative and
the gain we realized upon this sale in 2002 is included in this line item for
that year.

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.

48

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

In
March 2003 we established Cell-Time, through our subsidiary StoreNext Israel,
together with Lipman Electronic Engineering Ltd. and Dai Telecom Ltd. Cell-Time
is a provider of on-line services that enables retailers and cellular
communication providers in Israel to sell on-line pre-paid cellular air-time at
retail points of sale. Each of the three parties holds an equal share in
Cell-Time. According to the agreement between the parties, Dai has committed to
invest $1.25 million in consideration for its share in Cell-Time and the other
parties have committed to grant Cell-Time rights to use certain of their
technologies. As of December 31, 2005, Dai has fulfilled its above commitment.
As a result of Dais investments, we recorded in 2005 and 2004,  gains of $83,000 and $200,000,
respectively,  representing StoreNext
Israels portion in Cell-Time, which is shown as a gain arising from issuance
of shares by a subsidiary and an associated company.

In
the fourth quarter of 2003, Isracard, a subsidiary of Bank Hapoalim, invested
approximately $2.5 million in StoreNext Israel. Gain arising from issuance
of shares by a subsidiary and an associated company 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.

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, |      
|                                                                                 |  |                         |      
|                                                                                 |  | 2003                    |       | 2004 |  | 2005  |  
|                                                                                 |  |                         |       |      |  |       |  
|Revenues:                                                                        |  |                         |       |      |  |       |   |  |       |  
|Product sales                                                                    |  |                         | 63.5  | %    |  | 63.0  | % |  | 48.9  | %
|Services and projects                                                            |  |                         | 36.5  |      |  | 37.0  |   |  | 51.1  |  
|                                                                                 |  |                         |       |      |  |       |   |  |       |  
|Total revenues                                                                   |  |                         | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|Cost of revenues:                                                                |  |                         |       |      |  |       |   |  |       |  
|Cost of product sales                                                            |  |                         | 18.0  | %    |  | 18.9  | % |  | 16.8  | %
|Cost of services and projects                                                    |  |                         | 13.5  |      |  | 15.4  |   |  | 18.4  |  
|                                                                                 |  |                         |       |      |  |       |   |  |       |  
|Total cost of revenues                                                           |  |                         | 31.5  | %    |  | 34.3  | % |  | 35.2  | %
|                                                                                 |  |                         |       |      |  |       |   |  |       |  
|Gross profit                                                                     |  |                         | 68.5  | %    |  | 65.7  | % |  | 64.8  | %
|Operating expenses:                                                              |  |                         |       |      |  |       |   |  |       |  
|Research and development expenses, net                                           |  |                         | 19.9  | %    |  | 27.7  | % |  | 23.1  | %
|Selling and marketing expenses                                                   |  |                         | 23.4  |      |  | 20.1  |   |  | 17.8  |  
|General and administrative expenses                                              |  |                         | 14.5  |      |  | 13.0  |   |  | 12.3  |  
|Other general expenses, net                                                      |  |                         | (0.1  | )    |  |       |   |  |       |  
|                                                                                 |  |                         |       |      |  |       |   |  |       |  
|Total operating expenses                                                         |  |                         | 57.9  | %    |  | 60.8  | % |  | 54.0  | %
|                                                                                 |  |                         |       |      |  |       |   |  |       |  
|Income from operations                                                           |  |                         | 10.6  |      |  | 4.9   |   |  | 10.8  |  
|Financial income (expenses), net                                                 |  |                         | (0.1  | )    |  |       |   |  | 0.1   |  
|Gain arising from issuance of shares by a subsidiary and an
associated
  company |  |                         | 1.1   |      |  | 0.2   |   |  |       |  
|                                                                                 |  |                         |       |      |  |       |   |  |       |  
|Income before taxes on income                                                    |  |                         | 11.6  | %    |  | 5.1   | % |  | 10.9  | %
|Taxes on income                                                                  |  |                         | (2.9  | )    |  | (1.3  | ) |  | (3.2  | )
|Share in losses of an associated company                                         |  |                         | (0.1  | )    |  | (0.1  | ) |  |       |  
|Minority interests in losses of subsidiaries                                     |  |                         | 0.3   |      |  | 0.2   |   |  | 0.1   |  
|                                                                                 |  |                         |       |      |  |       |   |  |       |  
|Net income                                                                       |  |                         | 8.9   | %    |  | 3.9   | % |  | 7.8   | %
|                                                                                 |  |                         |       |      |  |       |   |  |       |  

49

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Comparison
of 2003, 2004 and 2005

Revenues

|                      |  |                           |      |                       |   |          |  |      |       |      |     |      |     |                 |     |                 |     |  |     |   | 
|--------------------- |  | ------------------------- | ---- | --------------------- | - | -------- |  | ---- | ----- | ---- | --- | ---- | --- | --------------- | --- | --------------- | --- |  | --- | - | 
|                      |  | Year ended
  December 31, |      | % Change              |   | % Change | 
|                      |  |                           |      |                       |   |          | 
|                      |  | 2003                      |      | 2004                  |   | 2005     |  | 2003 |       | 2004 |     | 2005 |     | 2004 vs.
  2003 |     | 2005 vs.
  2004 |    
|                      |  |                           |      |                       |   |          |  |      |       |      |     |      |     |                 |     |                 |    
|                      |  | (U.S. $ in
  millions)    |      | % of total
  revenues |   |          |  |      |      
|                      |  |                           |      |                       |   |          |  |      |      
|Product sales         |  | $                         | 58.5 |                       | $ | 77.5     |  | $    | 91.7  |      | 64% |      | 63% |                 | 49% |                 | 33% |  | 19  | % | 
|Services and projects |  |                           | 33.6 |                       |   | 45.4     |  |      | 95.7  |      | 36% |      | 37% |                 | 51% |                 | 35% |  | 110 | % | 
|                      |  |                           |      |                       |   |          |  |      |       |      |     |      |     |                 |     |                 |     |  |     |   | 
|Total revenues        |  | $                         | 92.1 |                       | $ | 122.9    |  | $    | 187.4 |      |     |      |     |                 |     |                 | 34% |  | 52  | % | 
|                      |  |                           |      |                       |   |          |  |      |       |      |     |      |     |                 |     |                 |     |  |     |   | 

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

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. The increase in
revenue from sales to international customers constituted 45% of the total increase in sales during
2004. 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.

Cost
of Revenues

|                                |  |                         |      |                             |   |          |  |      |      |      |     |      |     |               |     |               |     |  |    |   | 
|------------------------------- |  | ----------------------- | ---- | --------------------------- | - | -------- |  | ---- | ---- | ---- | --- | ---- | --- | ------------- | --- | ------------- | --- |  | -- | - | 
|                                |  | Year ended December 31, |      | % Change                    |   | % Change | 
|                                |  |                         |      |                             |   |          | 
|                                |  | 2003                    |      | 2004                        |   | 2005     |  | 2003 |      | 2004 |     | 2005 |     | 2004 vs. 2003 |     | 2005 vs. 2004 |    
|                                |  |                         |      |                             |   |          |  |      |      |      |     |      |     |               |     |               |    
|                                |  | (U.S. $ in millions)    |      | % of corresponding revenues |   |          |  |      |     
|                                |  |                         |      |                             |   |          |  |      |     
|Cost of
  product sales         |  | $                       | 16.6 |                             | $ | 23.2     |  | $    | 31.5 |      | 28% |      | 30% |               | 34% |               | 40% |  | 36 | % | 
|Cost of
  services and projects |  |                         | 12.4 |                             |   | 18.9     |  |      | 34.5 |      | 37% |      | 42% |               | 36% |               | 52% |  | 82 | % | 
|                                |  |                         |      |                             |   |          |  |      |      |      |     |      |     |               |     |               |     |  |    |   | 
|Total cost
  of  revenues       |  | $                       | 29.0 |                             | $ | 42.1     |  | $    | 66.0 |      |     |      |     |               |     |               | 45% |  | 57 | % | 
|                                |  |                         |      |                             |   |          |  |      |      |      |     |      |     |               |     |               |     |  |    |   | 

50

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The
increase in cost of product sales as a percentage of product sales in 2005 was
primarily attributable to the amortization of intangibles associated with
acquisitions. In 2004 and 2003, this increase 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 point-of-sale hardware, which
generally has a higher associated cost of revenues and lower gross margins. We
expect our gross margins for future periods to be lower than our historical
gross margins as a result of both the consolidation of the StoreNext USA
results and our acquisition of IDS and OMI International, which generate a
larger portion of revenues from services, with a lower associated gross margin.

Operating
Expenses

|                                |  |                         |      |               |   |          |  |      |       |      |  |       |   |               |       |               |  |       |   |     |  |     | 
|------------------------------- |  | ----------------------- | ---- | ------------- | - | -------- |  | ---- | ----- | ---- |  | ----- | - | ------------- | ----- | ------------- |  | ----- | - | --- |  | --- | 
|                                |  | Year ended December 31, |      | % Change      |   | % Change | 
|                                |  |                         |      |               |   |          | 
|                                |  | 2003                    |      | 2004          |   | 2005     |  | 2003 |       | 2004 |  | 2005  |   | 2004 vs. 2003 |       | 2005 vs. 2004 | 
|                                |  |                         |      |               |   |          |  |      |       |      |  |       |   |               |       |               | 
|                                |  | (U.S. $ in millions)    |      | % of revenues |   |          |  |      |      
|                                |  |                         |      |               |   |          |  |      |      
|Research and development, net   |  | $                       | 18.3 |               | $ | 34.1     |  | $    | 44.7  |      |  | 20    | % |               | 28    | %             |  | 24    | % | 86% |  | 31% | 
|Selling and marketing           |  |                         | 21.5 |               |   | 24.8     |  |      | 33.4  |      |  | 23    | % |               | 20    | %             |  | 18    | % | 15% |  | 35% | 
|General and administrative      |  |                         | 13.4 |               |   | 15.9     |  |      | 23.1  |      |  | 15    | % |               | 13    | %             |  | 12    | % | 19% |  | 45% | 
|Other general income (expenses) |  |                         | 0.1  |               |   | -----    |  |      | ----- |      |  | ----- |   |               | ----- |               |  | ----- |   |     |  |     | 
|                                |  |                         |      |               |   |          |  |      |       |      |  |       |   |               |       |               |  |       |   |     |  |     | 
|Total operating expenses        |  | $                       | 53.3 |               | $ | 74.8     |  | $    | 101.2 |      |  | 58    | % |               | 61    | %             |  | 54    | % | 40% |  | 35% | 

Research and
Development Expenses, Net. These expenses are
presented net of grants under programs of the Office of the Chief Scientist of
the Ministry of Industry, Trade and Labor of the Government of Israel. For more information, please see the
discussion in Item 5.C below under Grants from the Office of the Chief Scientist. The significant growth in research and
development expenses reflects our considerable investments in integrating our
recently acquired supply chain and warehouse management systems into our
synchronized suite of products as well as the efforts invested in developing
our next-generation applications and our recently introduced products. Although
we believe that in 2004 and in 2005 our research and development expenses were
relatively high in comparison to what we expect in the long run as a percentage
of revenues, we intend to continue to invest considerable resources in research
and development as we believe that this is essential to enable us to establish
ourselves as a market leader in our fields of operation. We view our research
and development efforts as essential to our ability to successfully develop
innovative products that address the needs of our customers as the market for
enterprise-wide retail software solutions evolves.

Selling
and Marketing Expenses. During 2004 and 2005, we invested
significant marketing efforts in increasing awareness of our new offerings in
the supply chain management area and in establishing a presence in new markets
in Europe and Asia. During 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 2005,
our general and administrative expenses continued to decrease as a percentage
of sales, continuing the trend from 2003 and 2004, largely because we were able
to rely on our existing infrastructure to support our growth in revenues.

Financial
Income (Expenses), Net

Financial
income (expenses), net, totaled income of $202,000 in 2005 compared to income
of $85,000 in 2004, and expenses of $95,000 in 2003. The net income in 2004 and
2005 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 resulted primarily
from financial expenses incurred on bank loans used to finance acquisitions.

51

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Corporate
Tax Rate

The
general corporate tax rate in Israel is 34% for the 2005 tax year, and is
scheduled to be reduced to 31% for the 2006 tax year, 29% for the 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010
tax year and thereafter. Our effective consolidated tax rate, however, was
28.9% in 2005, 24.7% in 2004, and 24.6% in 2003. We enjoy these lower effective
tax rates primarily because of tax reductions to which we are entitled under
Israels Law for Encouragement of Capital Investments, 1959, or the Investments
Law, with respect to our investment programs that were granted the status of
approved enterprise under this law. Under our Approved Enterprise investment
programs, we are entitled to certain tax exemptions and reductions in the tax
rate normally applicable to Israeli companies with respect to income generated
from our approved enterprise investment programs. We expect to continue to
derive a portion of our income from our approved enterprise investment
programs. The tax benefits for our existing Approved Enterprise programs are
scheduled to gradually expire by 2009. The period of tax benefits for each
capital investment plan expires upon the earlier of: (1) twelve years from
completion of the investment under the approved plan, or (2) fourteen years
from receipt of approval. We cannot assure you that such tax benefits will be
available to us in the future at their current levels or at all.

Part
of the income of the Companys and a certain Israeli subsidiarys income is tax
exempt due to the approved enterprise status granted to most of their
production facilities. The Company has decided to permanently reinvest the
amount of such tax exempt income and not to distribute it as dividends.
Accordingly, no deferred taxes have been provided in respect of such income in
the financial statements attached herein to this annual report..

The
amount of income taxes that would have been payable had such tax exempt income,
earned through December 31, 2005, been distributed as dividends is
approximately $3,700,000.

Out
of our retained earnings as of December 31, 2005, approximately $14,846,000 are
tax-exempt. If we were to distribute this tax-exempt income before our complete
liquidation, it would be taxed at the reduced corporate tax rate applicable to
these profits (25%), and an income tax liability of up to approximately
$3,712,000 would be incurred. Our board of directors has determined that we
will not distribute any amounts of our undistributed tax exempt income as a
dividend. We intend to reinvest our tax-exempt income and not to distribute
such income as a dividend. Accordingly, no deferred income taxes have been
provided on income attributable to our Approved Enterprise program as the
undistributed tax exempt income is essentially permanent in duration.

On
April 1, 2005, an amendment to the Investments Law came into effect, which
revised the criteria for investments qualified to receive tax benefits. An
eligible investment program under the amendment will qualify for benefits as a
Privileged Enterprise (rather than the previous terminology of Approved
Enterprise) if it is an industrial facility (as defined in the Investments Law)
that will contribute to the economic independence of the Israeli economy and is
a competitive facility that contributes to the Israeli gross domestic product.
Among other things, the amendment provides tax benefits to both local and
foreign investors and simplifies the approval process - the Privileged
Enterprise routes do not require pre-approval by the Investment Center of the
Israeli Ministry of Industry, Trade and Labor, the Investment Center. The
amendment does not apply to investment programs Approved prior to December 31,
2004.

As
a result of the amendment, tax-exempt income generated under the provisions of
the new law will subject us to taxes upon distribution or liquidation and we
may be required to record deferred tax liability with respect to such
tax-exempt income. We are currently evaluating the impact the amendment will
have on us. This may materially increase our provision for income taxes in 2006
and subsequent years.

Recent Accounting Pronouncements

SFAS
No. 123R. In December 2004, the FASB issued Statement No. 123 (revised 2004),
Share-Based Payment (FAS 123(R)). FAS 123(R) will provide investors and other
users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
FAS 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share appreciation rights and employee share purchase plans. FAS 123(R)
replaces SFAS No. 123, Accounting for Stock-Based Compensation (FAS 123), and
supersedes APB No. 25, Accounting for Stock Issued to Employees (APB 25). FAS
123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that Statement permitted entities the option of continuing to apply
the guidance in APB 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used.

We
will be required to apply FAS 123(R) as of the first annual reporting period
that begins after June 15, 2005. As permitted by FAS 123, we currently account
for share-based payments to employees using APB 25s intrinsic value method.
Accordingly, the adoption of FAS 123(R)s fair value method will have a
significant impact on our result of operations, although it will have no impact
on its overall financial position. We plan to adopt FAS 123(R) using the
modified prospective method. The modified prospective method requires
compensation cost to be recognized beginning with the effective date (a) based
on the requirements of FAS 123(R) for all share-based payments granted after
the effective date and (b) based on the requirements of FAS 123 for all awards
granted to employees prior to the effective date of FAS 123(R) that remain
unvested on the effective date. The impact of adoption of FAS 123(R) on future
periods cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, have we adopted FAS 123(R)
in prior periods, the impact of that standard would have approximated the
impact of FAS 123 as described in the disclosure of pro forma net income and
earnings per share in Note 1(q) to the financial statements

52

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SFAS
No. 154. In May 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections, a replacement of APB No. 20, Accounting Changes and SFAS
No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No.
154 provides guidance on the accounting for and reporting of accounting changes
and error corrections. APB No. 20 previously required that most voluntary
changes in accounting principles be recognized by including in net income for
the period of the change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 requires retroactive application to prior
periods financial statements of a voluntary change in accounting principles
unless it is impracticable. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. As of December 31, 2005 adoption of SFAS No. 154 will not have a material
impact on our financial position or results of operation.

In
November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment
of ARB No. 43, Chapter 4. (SFAS 151). SFAS 151 amends Accounting Research
Bulletin (ARB) No. 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight handling costs and wasted materials (spoilage) should
be recognized as current-period charges. In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. SAFS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not expect that the adoption of SFAS No. 151 will have a material
effect on its financial position or results of operations.

In
November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The FSP addresses the determination as to when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. The FSP also includes accounting
considerations subsequent to the recognition of other than-temporary impairment
and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The guidance in this FSP amends
SFAS No. 115, Accounting for Certain Investments in Debt and Equity. The FSP
replaces the impairment evaluation guidance of EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, with references to the existing other-than-temporary impairment
guidance. The FSP clarifies that an investor should recognize an impairment
loss no later than when the impairment is deemed other-than-temporary, even if
a decision to sell an impaired security has not been made. The guidance in this
FSP is to be applied to

B.
Liquidity and Capital Resources

We
had cash and cash equivalents of approximately $55.7 million, $91.4 million,
and $46.1 million, as of December 31, 2005, 2004 and 2003,
respectively. Our total cash and cash equivalents, short-term bank deposits and
short- and long-term marketable securities, net of short-term bank credit
amounted to approximately $64.7 million as of December 31, 2005, compared to
$104.3 million as of December 31, 2004, and $49.0 million as of
December 31, 2003. The increase of financial resources during 2004 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. During 2005, our financial resources decreased primarily due to
approximately $54.0 million of cash used to finance the acquisition of new
subsidiaries and activities as well as additional investments in subsidiaries
and in spite of a positive cash flow of $12.5 million provided by operating
activities.

Net cash provided by operating activities was $12.5
million in 2005 and $6.2 million in 2004,
primarily the result of net income of $14.6 million and $4.8 million, respectively. Net cash provided by
operating activities in 2003 was approximately $11.7 million,  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 used in investing activities in 2005 and 2004 of approximately $47.7
million and $28.5 million, respectively, was primarily attributable to
cash spent on acquisitions of subsidiaries which amounted to approximately
$54.1 million in 2005 and $16.3 million in 2004, in addition to the net
investment in debt securities of $10.0 million in 2004. Net cash used in
investing activities in 2003 was approximately $3.2 million, primarily
attributable to net investments in marketable debt securities and acquisitions
of fixed assets.

Our
capital expenditures (consisting of the purchase of fixed assets) were $3.1
million, $1.8 million and $1.0 million in 2005, 2004 and 2003, respectively,
mostly attributable to purchasing of computer equipment and software systems
and licenses.

Net
cash used in financing activities in 2005 amounted to $0.3 million, primarily
from repayment of bank loans and decrease in short term bank credit offset by
cash provided by issuance of share capital to employees resulting from exercise
of options. Net cash provided by financing activities in 2004 amounted to
approximately $67.4 million, primarily attributable to our public equity
offering completed in May 2004, which yielded approximately $58.9 million in
proceeds. An additional factor was the issuance of ordinary shares upon the
exercise of options by employees, the proceeds from which amounted to $10.1
million. 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.

53

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Public Offering in
May 2004

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

Bank Debt

As
of December 31, 2005, we had an outstanding bank loan in the principal amount
of $1.1 million. This loan is in EURO and accrues interest at the rate of 2.0%
per year and matures through July 2011.

Subsidiaries Short-Term Bank Credit

As
of December 31, 2005, 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 $2.7 million. The funds borrowed under this line of
credit bear interest at the rate of 7.25% per year as of December 31, 2005.

Credit Risk

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

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

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

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

For
information relating to our market risks, please see Item 11 Quantitative and
Qualitative Disclosures About Market Risk below.

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

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

Most
of our sales are denominated in U.S. dollars or are dollar linked.
However, some portions of our expenses, primarily expenses associated with
employee compensation, 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.

54

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

|                          |  |                              |  |                                                      |  |                                                                                             
|------------------------- |  | ---------------------------- |  | ---------------------------------------------------- |  | --------------------------------------------------------------------------------------------
|Year Ended
  December 31, |  | Israeli Inflation
  Rate
  % |  | NIS Devaluation
  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                                                                                         
|2005                      |  | 2.4                          |  | 6.8                                                  |  | 4.4                                                                                         

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

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

Research and Development

We
believe that our research and development efforts are essential to our ability
to successfully develop innovative products that address the needs of our
customers as the market for enterprise-wide software solutions evolves. In
particular, we intend to continue to invest significant resources in developing
new next-generation products for use in our enterprise solution As of December
31, 2005, our research and development staff consisted of 598 employees, of
whom 344 were located in Israel and the remaining 254 were located primarily in
the United States.

Proprietary Rights

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

Grants from the Office of the Chief Scientist

From
time to time we receive grants under programs of the Office of the Chief
Scientist, or the OCS, of the Ministry of Industry, Trade and Labor of the
Government of Israel. The amount of grants of the OCS recognized in our
statement of operations for the year ended December 31, 2005 was
approximately $539,000. This governmental support is conditioned upon our
ability to comply with certain applicable requirements and conditions specified
in the OCS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. In June 2005, an
amendment to the Research and Development Law came into effect, which intends
to make the Research and Development Law 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
government-funded know-how outside of Israel, as described below.

55

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

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

The
Israeli government is currently in the process of formulating a proposed
amendment to the royalty regulations promulgated under the Research and
Development Law. The amendment is expected to include changes to the royalty
rates, which would vary from company to company based on the amount of its
revenues and approval date of its program, up to a rate of 6%, and, as of 2006,
to increase the rate of interest accruing on grants by 1% per year. The
amendment is expected to have retroactive effect from January 1, 2006, although
there is no assurance as to whether and when it will be adopted.

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

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

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

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

56

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D.
Trend Information

Trends
we identify within the retail industry that could influence demand are
increasing focus on areas such as customer loyalty, purchasing and inventory
optimization, synchronization of data and use of shared databases, operation of
multi-format retail operations and the increasing tendency of large retailers
to grow and operate internationally.

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

E.
Off Balance Sheet Arrangements

None.

F.
Tabular Disclosure of Contractual Obligations

The following
table presents further information relating to our liquidity as of
December 31, 2005:

|                                                                                   |  |       |      |                      |   |             |  |           |     |                       |  |   |     |  |  |  |   |    
|---------------------------------------------------------------------------------- |  | ----- | ---- | -------------------- | - | ----------- |  | --------- | --- | --------------------- |  | - | --- |  |  |  | - | ---
|Contractual Obligations (U.S. $ in millions)*                                      |  | Total |      | Less
  than 1
  year |   | 2-3
  years |  | 3-5 years |     | More than
  5
  years | 
|                                                                                   |  |       |      |                      |   |             |  |           |     |                       | 
|Long-Term Debt Obligations (including
  current maturities)                        |  | $     | 1.3  |                      | $ | 0.2         |  | $         | 0.4 |                       |  | $ | 0.5 |  |  |  | $ | 0.2
|Operating Lease Obligations (with regard to
  offices and facilities and vehicles) |  |       | 15.0 |                      |   | 5.8         |  |           | 7.2 |                       |  |   | 1.4 |  |  |  |   | 0.6
|Severance
  pay                                                                    |  |       | 3.9  |                      |   | 0.1         |  |           | 0.1 |                       |  |   | 0.3 |  |  |  |   | 3.4
|                                                                                   |  |       |      |                      |   |             |  |           |     |                       |  |   |     |  |  |  |   |    
|Total                                                                              |  |       | 20.2 |                      |   | 6.1         |  |           | 7.7 |                       |  |   | 2.2 |  |  |  |   | 4.2
|                                                                                   |  |       |      |                      |   |             |  |           |     |                       |  |   |     |  |  |  |   |    

|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | See also the
  notes to our audited consolidated financial statements for the year ended
  December 31, 2005 included elsewhere in this annual report, and in
  particular, Note 8 thereto.

57

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ITEM
6    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.
Directors and Senior Management

Set forth below is
information concerning our executive officers and directors as of July 10,
2006.

|                    |  |     |  |                                                                                        
|------------------- |  | --- |  | ---------------------------------------------------------------------------------------
|Name                |  | Age |  | Position                                                                               
|                    |  |     |  |                                                                                        
|                    |  |     |  |                                                                                        
|Barry Shaked        |  | 49  |  | President, Chief Executive
  Officer and Chairman of the Board                         
|                    |  |     |  |                                                                                        
|Danny Moshaioff     |  | 60  |  | Executive Vice President,
  Chief Financial Officer                                    
|                    |  |     |  |                                                                                        
|Victor Hamilton     |  | 52  |  | President, Chief Executive
  Officer and Chairman, Retalix USA                         
|                    |  |     |  |                                                                                        
|Avinoam Bloch       |  | 49  |  | Executive Vice President,
  Chief Operations Officer-International and Israeli Business
|                    |  |     |  |                                                                                        
|Yoni Stutzen        |  | 54  |  | Executive Vice President,
  International Sales                                        
|                    |  |     |  |                                                                                        
|Reuben Halevi       |  | 48  |  | Executive Vice President,
  Product Development                                        
|                    |  |     |  |                                                                                        
|Saul Simon          |  | 52  |  | Executive Vice President,
  Business Development and CRM Products                      
|                    |  |     |  |                                                                                        
|David Bresler       |  | 50  |  | External Director                                                                      
|                    |  |     |  |                                                                                        
|Louis Berman        |  | 49  |  | External Director                                                                      
|                    |  |     |  |                                                                                        
|Sigal Hoffman       |  | 49  |  | Director                                                                               
|                    |  |     |  |                                                                                        
|Brian Cooper        |  | 50  |  | Director                                                                               
|                    |  |     |  |                                                                                        
|Ian OReilly        |  | 57  |  | Director                                                                               
|                    |  |     |  |                                                                                        
|Amnon Lipkin-Shahak |  | 62  |  | Director                                                                               

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

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

Victor Hamilton has served as
President and Chief Executive Officer of Retalix USA since June 2005, and
served as one of our directors from May 2005 until November 2005. Prior thereto,
Mr. Hamilton served as President of Retalix SCM, Inc. from April 2005. In 1981
he founded H&S Computer Systems, a provider of customized computer software
for the food distribution industry, specializing in ERP warehousing, and sales
force automation applications. In January 2000, Mr. Hamilton assumed the role
of Chairman and Chief Executive Officer of IDS, and served in such capacities
until the acquisition of IDS by us in April 2005.

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

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

Reuben
Halevihas served as our Executive Vice President, Product
Development since June 2005 and as a Vice President for Development since
January 2005. From January to December 2004, Mr. Halevi served as a senior
manager in our development group. During 2000 to 2003, Mr. Halevi served as a
senior IT consultant for Supersol, the largest grocery chain in Israel. Mr.
Halevi received a B.Sc. in Industrial and Management Engineering from the
Technion, Israel Institute of Technology in 1983.

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

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

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

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

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

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

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

B.
Compensation

The
aggregate accrued compensation of all the persons as a group who served in the
capacity of a director or an executive officer during the year ended
December 31, 2005, was approximately $2.0 million. This amount includes
pension, retirement and similar benefits in the aggregate amount of $125,000.
This does not include amounts expended by us for business travel, professional
and business associated dues and business expense reimbursements.

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

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Our
external directors receive annual compensation of approximately $8,400 each and
in addition $310 per board meeting or per board committee meeting in which they
participate, and $190 per such meeting by telephone in which they participate.

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

As
compensation for his services to us, Mr. Shaked is entitled to receive, at
the beginning of each calendar year, options to purchase a number of our
ordinary shares equal to 1.0% of our then outstanding ordinary shares. This
options are vested at the grant date, but are blocked, in thirds for one year,
two years and three years. According to this arrangement, in January of 2004,
January 2005 and January 2006, Mr. Shaked was granted options to
purchase a total of up to 129,767 and 176,556 and 194,090 of our ordinary
shares, respectively, at exercise prices of $23.19, $21.86 and $24.46 per
share, respectively. The options have a term of four years from the date of grant.

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

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

Our
employment agreements with most of our employees located in Israel, including
executive officers and those that are also members of our board of directors,
provide for standard Israeli benefits, such as managers insurance and an
educational fund. We make payments under these programs as follows:
pension5.0% of gross salary; severance pay8.33% of gross salary; disability
insuranceup to 2.5% of gross salary (all of which are considered part of
managers insurance); and educational fund7.5% of gross salary. The total
amount we expensed in 2005 under these arrangements for all executive officers
as a group was approximately $120,000.

During
2005, all our directors and executive officers as a group, were granted options
to purchase an aggregate of 242,556 shares under our stock option plans. The
exercise prices of these options range from $21.86 to $23.02 and their
expiration dates range from December 31, 2008 to June 30, 2009. Of these
options, 80,852 became exercisable on January 1, 2006, 73,519 will become exercisable
on January 1, 2007, 73,519 will become exercisable on January 1, 2008 and
14,666 will become exercisable on January 1, 2009.

C.
Board Practices

Our
articles of association provide for a board of directors of not less than three
and not more than ten directors. Each director is elected at the annual general
meeting of shareholders and holds office until the election of his successor at
the next annual general meeting, except for external directors, who, subject to
the provisions of the Companies Law, hold office for one or two three-year
terms. In addition, any vacancy on the board of directors, however occurring,
including a vacancy resulting from an enlargement of the board, may be filled
by a vote of a simple majority of the directors then in office. A director
elected thereby may serve on the board of directors until the next annual
general meeting. Our officers serve at the discretion of the board of
directors. There are no family relationships among our directors and executive
officers.

According
to the Companies Law, a public companys chairman of the board may not serve as
its chief executive officer, unless otherwise approved by the shareholders for
periods of up to three years. The required shareholder approval is a majority
of the shares voted on the matter, including at least two-thirds of the shares
of non-controlling shareholders voted on the matter, unless the votes of the
opposing non-controlling shareholders constitute less than 1% of the voting
power of the company (in which case a simple majority of shares voted on the
matter will be sufficient). Barry Shaked, one of our founders, has served as
our president, chief executive officer and chairman of the board since our
inception in 1982. His most recently approved three-year period expires in
2007.

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

The
board of directors has determined that all of the members of our board of
directors except Mr. Shaked    the Chairman, and all of the members of our audit
committee are independent directors, as defined under the rules of Nasdaq.

Alternate Directors

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

External Directors

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

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

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

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

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

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The
initial term of an external director is three years and such director may be
reappointed for an additional three-year term. Each committee of a companys
board of directors that is authorized to carry out a power of the board of directors
is required to include at least one external director. Our external directors
are David Bresler and Louis Berman.

Pursuant
to an amendment to the Companies Law, (1) each external director must have
either accounting and financial expertise or professional qualifications
(as such terms are defined in regulations promulgated under the Companies Law)
and (2) at least one of the external directors must have accounting and
financial expertise. Our board of directors has determined that Mr. Bresler
has accounting and financial expertise and Mr. Berman has professional
qualifications.

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

Audit Committee

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

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

Under
Nasdaq rules, our audit committee, operating under a written charter, assists
the board in fulfilling its responsibility for oversight of the quality and
integrity of our accounting, auditing and financial reporting practices and
financial statements and the independence qualifications and performance of our
independent registered public accounting firm (subject to the shareholders
approval under the Companies Law). Our audit committee also has the authority
and responsibility to oversee our independent auditors, to recommend for
shareholder approval the appointment and, where appropriate, replacement of our
independent auditors and to pre-approve audit engagement fees and all permitted
non-audit services and fees. Under Israeli law, our shareholders have the
authority to appoint and remove our independent auditors.

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

Investment Committee

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

Internal Auditor

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

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D.
Employees

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

|                             |  |  |                    |      |  |     |      |  |       |      | 
|---------------------------- |  |  | ------------------ | ---- |  | --- | ---- |  | ----- | ---- | 
|                             |  |  | As of December 31, |     
|                             |  |  |                    |     
|Category
  of Activity       |  |  |                    | 2003 |  |     | 2004 |  |       | 2005 | 
|                             |  |  |                    |      |  |     |      |  |       |      | 
|Research and
  Development   |  |  | 290                |      |  | 424 |      |  | 598   |     
|Operations                   |  |  | 215                |      |  | 306 |      |  | 482   |     
|Marketing                    |  |  | 101                |      |  | 119 |      |  | 170   |     
|Finance and
  Administration |  |  | 62                 |      |  | 71  |      |  | 93    |     
|                             |  |  |                    |      |  |     |      |  |       |     
|Total                        |  |  | 668                |      |  | 920 |      |  | 1,343 |     
|                             |  |  |                    |      |  |     |      |  |       |     

|                        |  |  |      |                    |  |      |     |  |      |       | 
|----------------------- |  |  | ---- | ------------------ |  | ---- | --- |  | ---- | ----- | 
|                        |  |  |      | As of December 31, | 
|                        |  |  |      |                    | 
|Geographical
  Location |  |  | 2003 |                    |  | 2004 |     |  | 2005 |      
|                        |  |  |      |                    |  |      |     |  |      |       | 
|United
  States         |  |  |      | 308                |  |      | 383 |  |      | 617   | 
|Israel                  |  |  |      | 353                |  |      | 443 |  |      | 616   | 
|Europe                  |  |  |      | 5                  |  |      | 89  |  |      | 93    | 
|Rest of The
  World     |  |  | 2    |                    |  | 5    |     |  | 17   |      
|                        |  |  |      |                    |  |      |     |  |      |       | 
|Total                   |  |  |      | 668                |  |      | 920 |  |      | 1,343 | 
|                        |  |  |      |                    |  |      |     |  |      |       | 

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

E.
Share Ownership

Mr.
Barry Shaked, our President, Chief Executive Officer and Chairman of our board
of directors, holds, as of June 30, 2006, 917,572 of our ordinary shares, which
equals approximately 4.7% of our issued share capital.

Mr.
Brian Cooper, a director and our former Vice President, holds, as of June 30,
2006, 774,635 of our ordinary shares, which equals approximately 4.0% of our
issued share capital.

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

All
other directors and executive officers hold as of June 30, 2006, a total of
72,374 of our ordinary shares, which equals approximately 0.4% of our issued
share capital.

In
addition, as of June 30, 2006, Mr. Shaked held options to purchase a total of
up to 580,414 of our ordinary shares granted to him on January 1, 2003, January
1, 2004, January 1, 2005 and January 1, 2006 pursuant to a shareholders
resolution dated May 28, 1998, authorizing the grant to him, on January 1 of
each year, of options to purchase one percent of our issued capital. The
exercise price for each share according to this resolution is the Nasdaq
closing price on December 31 of the year ending just before the date of grant.
These options have a term of four years from the date of grant and are
exercisable as follows: 33% - starting one year following the date of grant;
33% - starting two years following the date of grant; and 34% - starting three
years following the date of grant.

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

|                                                             |  |                                  |  |                 |  |  |                 | 
|------------------------------------------------------------ |  | -------------------------------- |  | --------------- |  |  | --------------- | 
|Amount of Shares for 
  which the Options are 
  Exercisable |  | Exercise Price
  in U.S. dollars |  | Expiration Date | 
|                                                             |  |                                  |  |                 | 
|80,000                                                       |  |                                  |  | 9.01            |  |  | January 1, 2007 | 
|129,767                                                      |  |                                  |  | 23.19           |  |  | January 1, 2008 | 
|176,557                                                      |  |                                  |  | 21.86           |  |  | January 1, 2009 | 
|194,090                                                      |  |                                  |  | 24.46           |  |  | January 1, 2010 | 

As
of June 30, 2006, other directors and executive officers held options to
purchase a total of up to 460,500 of our ordinary shares under our Second 1998
Share Option Plan and the 2004 Israeli Share Option Plan (which are described
below), as follows:

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

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

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

Options
to purchase 105,000 of our ordinary shares at an exercise price of $18.56 per
share. Options to purchase 75,000 shares of these options are fully vested, and
the remaining amount will vest in two equal portions on December 31, 2006 and
December 31, 2007. These options will expire on June 30, 2008.

Options
to purchase 66,000 of our ordinary shares at an exercise price of $23.02 per
share. Options to purchase 22,000 shares of these options are fully vested, and
the remaining amount will vest in three equal portions on December 31, 2006,
December 31, 2007 and December 31, 2008. These options will expire on June 30,
2009.

Our Share Option Plans

Second 1998 Share Option Plan

Our
Second 1998 Share Option Plan, or Second 1998 Plan, provides for the granting
of incentive share options to employees, and for the granting of non-statutory
options to employees, directors and consultants. Unless terminated sooner, the
Second 1998 Plan will terminate automatically in May 2012. As of June 30,
2006, options to purchase 5,547,975 ordinary shares have been granted under the
Second 1998 Plan, out of which options to purchase 1,521,108 (excluding options
already exercised or expired) ordinary shares were outstanding, and 423,525
ordinary shares remained available for future grants. These figures include
options to purchase 85,795 ordinary shares granted (net of forfeited options)
under our Second 1998 Plan in June 2005, at an exercise price of $23.02 of
which one-third vested on December 31, 2005, and the remaining two thirds shall
vest in three equal portions on December 31, 2006, December 31, 2007 and
December 31, 2008. These options will expire on June 30, 2009. As of June 30,
2006, 3,055,367 options granted under our Second 1998 Plan have been exercised.

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

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

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

2004 Israeli Share Option Plan

Our
2004 Israeli Share Option Plan provides for the granting of options to
employees, directors and consultants under either Section 102 or Section 3(9)
of the Israeli Income Tax Ordinance. As of June 30, 2006, options to purchase
764,000 ordinary shares were granted under the 2004 Israeli Share Option Plan.
600,000 options were granted at an exercise price of $18.56, of which one-third
vested on December 31, 2004, two-ninths vested on December 31, 2005 and the
remaining four-ninths will vest in two equal portions on December 31, 2006 and
December 31, 2007. These options will expire on June 30, 2008. In addition,
options to purchase 164,000 shares were granted at an exercise price of $23.02,
of which one-third vested on December 31, 2005 and the remaining two-thirds
will vest in three equal portions on December 31, 2006, December 31, 2007 and
December 31, 2008. These options will expire on June 30, 2009. The options
granted under our 2004 Israeli Share Option Plan are all subject to the
capital gains taxation route under Section 102 of the Income Tax Ordinance
[New Version], 1961, which generally provides for a reduced tax rate of 25% on
gains realized upon the exercise of options and sale of underlying shares,
subject to the fulfillment of certain procedures and conditions including the
deposit of such options (or shares issued upon their exercise) for a requisite
period of time with a trustee approved by the Israeli tax authorities. For as
long as the shares issued upon exercise of such options are registered in the
name of the trustee, the voting rights with respect to such shares shall remain
with the trustee. Under the capital gains taxation route, we are not entitled
to recognize a deduction for tax purposes on the gain recognized by the
employee upon sale of the shares underlying the options. As of June 30,
2006, 25,289 options granted under our 2004 Israeli Share Option Plan have been
exercised, 30,747 options were forfeited and 707,964 options remained
outstanding..

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

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

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Stock Option Plan of Subsidiaries

On
December 4, 2000, the board of directors of one of our subsidiaries,
StoreAlliance.com Ltd., approved an employee stock option plan. Pursuant
to this subsidiary plan, as of May 31, 2006, 233,922 ordinary shares, or
approximately 6.6% of the issued and outstanding share capital of the
subsidiary as of such date, are reserved for issuance upon the exercise of
options granted to some of our and the subsidiarys employees. The options vest
as follows: 33.33% after the first year after their grant, another 33.33% after
the second year and another 33.33% after the third year, but only during the
period the employee is employed either by us or by the subsidiary. In addition,
the options are not exercisable prior to the earliest of the following events:
(1) the consummation of a public offering of the subsidiarys securities,
(2) a merger or acquisition of the subsidiary, or (3) the lapse of
seven years from the date of grant. Any vested options not exercised within the
later of 90 days of (a) the end of the optionees status as our or
the subsidiarys employee, or (b) the first to occur of such
exerciseability events, will expire. The rights of ordinary shares obtained
upon exercise of the options will be identical to those of the other ordinary
shares of the subsidiary. Any option not exercised within 10 years of the
grant date thereof will expire. Some of the options under this subsidiary plan
are subject to the terms stipulated by Section 102 of the Israeli Income
Tax Ordinance (as in effect prior to January 1, 2003). Among other things, the
Section 102 to the Income Tax Ordinance provides that the subsidiary will be
allowed to claim as an expense for tax purposes the amounts credited to the
employees as a benefit, when the related tax is payable by the employee.

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

As
of May 31, 2006, options to purchase 269,922 ordinary shares of the subsidiary
were outstanding under the above subsidiary employee plans, at exercise prices
ranging from NIS0.01 per share to $5.55 per share. The rest of the above
options were forfeited.

On
December 1, 2004, the board of directors of our subsidiary StoreNext USA
approved an employee stock option plan. Pursuant to this plan, options to
purchase up to 1,500,000 shares of StoreNext USA may be granted to employees
and service providers of the subsidiary or any affiliate. In addition, the plan
stipulates that options, may not be exercised prior to: (1) the conversion of
the corporate entity of StoreNext USA from a limited liability company to a
C-corporation; or (2) the consummation of an initial public offering of
StoreNext USAs securities; or (3) a merger or a significant change of control
in StoreNext USA; or (4) five years from the date of grant.

On
December 14, 2004, StoreNext USA granted options to acquire 1,169,000 of its
shares to its employees and directors. These options bear an exercise price of
$0.3748 per share, which reflects the market value according to an independent
valuation. These options will fully vest seven years from grant or upon an
initial public offering or change of control or, in the option committees
discretion, accelerated vesting in the event of a merger, a sale or a
disposition. In addition, these options will vest upon an initial public
offering of the majority interest of StoreNext USA. The options will terminate
and expire ten years from grant.

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

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ITEM
7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTION

A.
Major Shareholders

The
following table sets forth, as of June 30, 2006, certain information known to
us with respect to beneficial ownership of our ordinary shares by (1) each
shareholder known by us to be the beneficial owner of five percent or more of
our ordinary shares and (2) all of our executive officers and directors as
a group. As of June 30, 2006, 19,498,621 of our ordinary shares were outstanding.

|                                                      |  |                               |           |                                                |  |      |  
|----------------------------------------------------- |  | ----------------------------- | --------- | ---------------------------------------------- |  | ---- | -
|Name                                                  |  | Number of ordinaryshares held |           | Percentage ofoutstanding ordinaryshares (1)(2)
|                                                      |  |                               |           |                                               
|Bank Leumi Funds (3)                                  |  |                               | 1,614,540 |                                                |  | 8.3  | %
|Bank Hapoalim Funds (4)                               |  |                               | 1,062,230 |                                                |  | 5.4  | %
|Barry Shaked (5)                                      |  |                               | 1,142,935 |                                                |  | 5.8  | %
|All directors and executive
  officers as a group (6) |  |                               | 2,359,798 |                                                |  | 11.7 | %



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless
  otherwise indicated, each person named or included in the group has sole
  power to vote and sole power to direct the disposition of all shares listed
  as beneficially owned.                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(2) | Amounts include shares that
  are not currently outstanding but are deemed beneficially owned because of
  the right to purchase them pursuant to options exercisable on June 5, 2006 or
  within 60 days thereafter. Pursuant to SEC rules, shares deemed
  beneficially owned by virtue of an individuals right to purchase them are
  also treated as outstanding when calculating the percent of the class owned
  by such individual and when determining the percent owned by any group in
  which the individual is included.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(3) | This information is based
  solely on information provided to us by Bank Leumi pursuant to Israeli law
  with respect to the aggregate holdings of various of its affiliated mutual
  funds and provident funds. The method used to compute holdings under Israeli
  law does not necessarily bear the same result as the method used to compute
  beneficial ownership under SEC rules and regulations.                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(4) | This information is based
  solely on information provided to us by Bank Hapoalim pursuant to Israeli law
  with respect to the aggregate holdings of various of its affiliated mutual
  funds and provident funds. The method used to compute holdings under Israeli
  law does not necessarily bear the same result as the method used to compute
  beneficial ownership under SEC rules and regulations.                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(5) | Includes options to
  purchase up to 225,363 shares, held by Mr. Shaked, directly or
  indirectly, that are exercisable on June 30, 2006 or within 60 days thereafter.                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(6) | Includes options to
  purchase 595,197 shares that are exercisable currently or within 60 days
  after June 30, 2006 at
  exercise prices that range from $9.01 to $23.19.                                                                                                                                                                                                                                                                                                                                                           

As
of May 12, 2006, 7,460,303 of our ordinary shares were held in the United
States, by 26 record holders with mailing addresses in the United States,
owning an aggregate of approximately 38% of our outstanding ordinary shares.
The number of record holders in the United States is not representative of the
number of beneficial holders nor is it representative of where such beneficial
holders are resident since many of these ordinary shares were held of record by
brokers or other nominees.

67

---

---



B.
Related Party Transactions

None.

C.
Interests of Expert and Counsel

Not
Applicable.

ITEM
8    FINANCIAL INFORMATION

See
Item 18.

Legal Proceedings

P.O.S.
Restaurant Solutions Ltd.

In
August 2000, we, together with our subsidiary P.O.S. (Restaurant Solutions)
Ltd., or 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 $645,000) against two former employees
and directors of PRS who currently own the minority interest in PRS. This claim
alleges that the defendants caused us and PRS severe damages due to the manner
of their conduct as employees and directors of PRS and by developing software
that infringed on our rights. In November 2004, the Supreme Court ruled that
some of the causes of action in the claim are under the Tel-Aviv District
Courts jurisdiction and some are under the Tel-Aviv District Labor Courts
jurisdiction.

In
April 2001, these minority shareholders of PRS filed a claim in the Tel-Aviv
District Court, which was subsequently amended in November 2002, against PRS
and against us in the amount of approximately $500,000 in respect of sums they
claim they are entitled to as shareholders of PRS. This claim is pending. In
addition, they filed a motion that the claim be recognized as a derivative
claim of PRS against us for payment of an alleged debt in the amount of
approximately $3,500,000. In response to this motion, in March 2005, the
Tel-Aviv District Court rejected the claim. The minority shareholders have
filed a motion requesting clarification that this court ruling does not reject
the entire claim filed in April 2001 but only the motion that the claim be
recognized 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 us from PRS. After being added as a
party, we filed a motion to dismiss the suit, In January 2006, the District Court
erased this claim due to passiveness of the filers.

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

We
believe that we have meritorious defenses against all these claims and that
they will not have any material effect on our financial position and/or
profitability.

Retail
Control Systems Inc.

In
1998, prior to our acquisition of RCS, a legal claim was filed in the Court of
Common Pleas of Allegheny, Pennsylvania, against RCS by a customer for an
amount of approximately $1,300,000, including consequential damages and loss of
revenue. A settlement of the claim has been agreed between the parties whereby
RCS will pay the claimant the sum of $125,000. This settlement has been
approved by the United States Bankruptcy Court in January 2006.

An
additional legal claim filed against RCS in the Circuit Court of the
Seventeenth Judicial Circuit, County of Winnebago, Illinois, prior to its
acquisition by us, by a dealer who sold one of RCSs products early in 1994,
and claims that RCS promised features and enhancements were never delivered.
The damages claimed in this suit are in excess of $200,000.

These
claims are handled by RCSs errors and omissions insurers. The limit of
liability under the relevant errors and omissions insurance policy was
$1,000,000 per claim and in aggregate. We believe RCS has meritorious defenses
against these claims and that they will not have any material effect on our
financial position and/or profitability.

68

---

---



PalmPoint

In
December 2002, a legal claim for the total amount of approximately $240,000 was
filed in the Magistrates Court of Beer-Sheva against our 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. A settlement of the claim has been agreed between the parties
whereby PalmPoint will pay the claimant the sum of approximately $70,000. This
settlement has been approved by the Magistrates Court of Beer-Sheva. We
believe this claim will not have any material effect on our financial position
and/or profitability.

TCI
Solutions Inc.

In
2003, Fleming PCT, a customer of TCI Solutions, Inc. filed for bankruptcy
protection. Certain debtors of Fleming PCT filed a claim in the United States
Bankruptcy Court for the District of Delaware alleging certain preferential
payments were made to TCI Solutions, which we acquired in April 2005. The
debtors were seeking to recover from us approximately $364,320. We are in the
process of negotiating a settlement agreement with the parties and thus we
believe this claim will not have any material effect on our financial position
and/or profitability.

Retalix
Italia

In
August, 2005, an Italian competitor of Retalix Italia has approached the
Company and Retalix Italia claiming that the acquisition of M.P.S. Millennium
Pos Solution S.r.l. (MPS) by Retalix Italia in July, 2005, formed an act of
unfair competition. No further action has been taken by the above party, in
connection with its above allegation to date. In addition, in April, 2006, the
above competitor exercised arbitration proceedings in order to enforce its
claims of co-ownership to a certain product of M.P.S., as well as indemnity for
certain damages allegedly suffered by him within this context. In May, 2006 MPS
has requested the arbitral court to reject all claims filed by the above party.
The Company believes that these claims will not result in any material expense
and therefore no provision was recorded in regard to these claims as of
December 31, 2005.

IDS

In
June, 2006, a fairly large customer in the U.S., filed in the District Court of
Madison County, Nebraska, a complaint against the Company and IDS, in which it
asserts claims for misrepresentation and concealment, breach of contract and
breach of warranties arising from its contract with the Company and IDS. The
customer seeks unspecified damages and injunctive relief. We are together with
our legal advisors are in the process of studying this complaint. As of July
2006, the balance of debt of this customer for services supplied by us amounted
to approximately $1.6 million.

We
are also parties to several other claims filed against us or letters of dispute
submitted to us by former or current customers and service providers. In the
opinion of the management, these claims represent financial risks are of sums
that are not material to us either individually or in aggregate. Thus we
believe that they will not have any material effect on our financial position
and/or profitability.

Dividend Policy

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

Significant Changes

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

69

---

---



ITEM
9    THE OFFER AND LISTING

A. Offer and
Listing Details

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

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

|                                 |  |      |       |     |   |       | 
|-------------------------------- |  | ---- | ----- | --- | - | ----- | 
|                                 |  | High |       | Low |  
|                                 |  |      |       |     |  
|                                
|2001                             |  | $    | 17.20 |     | $ | 8.25  | 
|                                
|2002                             |  |      | 17.00 |     |   | 8.72  | 
|                                
|2003                             |  |      | 23.19 |     |   | 8.75  | 
|                                
|2004                             |  |      | 24.74 |     |   | 16.45 | 
|                                
|2005                             |  |      | 26.99 |     |   | 20.17 | 
|                                
|2004:                            |  |      |       |     |   |       | 
|                                
|First Quarter                    |  | $    | 24.74 |     | $ | 20.05 | 
|                                
|Second Quarter                   |  |      | 22.48 |     |   | 18.01 | 
|                                
|Third Quarter                    |  |      | 20.74 |     |   | 16.45 | 
|                                
|Fourth Quarter                   |  |      | 22.15 |     |   | 16.72 | 
|                                
|2005:                            |  |      |       |     |   |       | 
|                                
|First Quarter                    |  | $    | 25.89 |     | $ | 20.72 | 
|                                
|Second Quarter                   |  |      | 24.27 |     |   | 20.17 | 
|                                
|Third Quarter                    |  |      | 25.10 |     |   | 21.54 | 
|                                
|Fourth Quarter                   |  |      | 26.99 |     |   | 23.30 | 
|                                
|2006:                            |  |      |       |     |   |       | 
|                                
|First Quarter                    |  | $    | 26.65 |     | $ | 23.54 | 
|                                
|Most
  recent six months:        |  |      |       |     |   |       | 
|                                 |  |      |       |     |   |       | 
|January 2006                     |  | $    | 26.65 |     | $ | 25.28 | 
|                                
|February 2006                    |  |      | 25.85 |     |   | 24.09 | 
|                                
|March 2006                       |  |      | 25.69 |     |   | 23.54 | 
|                                
|April 2006                       |  |      | 27.07 |     |   | 24.00 | 
|                                
|May 2006                         |  |      | 25.59 |     |   | 23.16 | 
|                                
|June 2006                        |  |      | 24.00 |     |   | 21.03 | 
|                                
|July 2006, through July 21, 2006 |  |      | 22.17 |     |   | 16.50 | 

On  July  21, 2006,  the last reported sale price of our ordinary  shares on the  Nasdaq Global  Select
Market was $16.53  per share.

70

---

---



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

|                                 |  |      |               |     |  |               | 
|-------------------------------- |  | ---- | ------------- | --- |  | ------------- | 
|                                 |  | High |               | Low | 
|                                 |  |      |               |     | 
|                                
|2001                             |  |      | NIS  
  72.00 |     |  | NIS  
  34.81 | 
|                                
|2002                             |  |      | 77.20         |     |  | 41.11         | 
|                                
|2003                             |  |      | 101.40        |     |  | 43.25         | 
|                                
|2004                             |  |      | 110.00        |     |  | 73.79         | 
|                                
|2005                             |  |      | 122.40        |     |  | 90.95         | 
|                                
|2004:                            |  |      |               |     |  |               | 
|                                
|First Quarter                    |  |      | NIS
  110.00  |     |  | NIS  
  89.90 | 
|                                
|Second Quarter                   |  |      | 102.40        |     |  | 85.90         | 
|                                
|Third Quarter                    |  |      | 93.71         |     |  | 73.79         | 
|                                
|Fourth Quarter                   |  |      | 95.33         |     |  | 73.95         | 
|                                
|2005:                            |  |      |               |     |  |               | 
|                                
|First Quarter                    |  |      | NIS
  112.90  |     |  | NIS  
  94.88 | 
|                                
|Second Quarter                   |  |      | 116.10        |     |  | 90.95         | 
|                                
|Third Quarter                    |  |      | 113.20        |     |  | 97.24         | 
|                                
|Fourth Quarter                   |  |      | 122.40        |     |  | 107.60        | 
|                                
|2006:                            |  |      |               |     |  |               | 
|                                
|First Quarter                    |  |      | NIS
  122.40  |     |  | NIS
  109.00  | 
|                                
|Most
  recent six months:        |  |      |               |     |  |               | 
|                                
|                                 |  |      |               |     |  |               | 
|January 2006                     |  |      | NIS
  121.40  |     |  | NIS
  115.20  | 
|                                
|February 2006                    |  |      | 121.10        |     |  | 114.60        | 
|                                
|March 2006                       |  |      | 121.00        |     |  | 109.00        | 
|                                
|April 2006                       |  |      | 123.40        |     |  | 111.00        | 
|                                
|May 2006                         |  |      | 115.10        |     |  | 106.60        | 
|                                
|June 2006                        |  |      | 107.80        |     |  | 95.69         | 
|                                
|July 2006, through July 21, 2006 |  |      | 99.18         |     |  | 74.91         | 

On July  21, 2006, the last reported sale price of our ordinary  shares on the Tel Aviv Stock Exchange
was NIS 74.91  per share.

B. Plan of
Distribution

Not
applicable.

C. Markets

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

71

---

---



D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

ITEM 10    ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

Our
memorandum of association and articles of association were amended on November
1, 2005. The following is a summary description of certain provisions of our
amended memorandum of association and articles of association, and certain
relevant provisions of the Israel Companies Law which apply to us:

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

Objects and Purposes

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

We
are authorized to issue 30,000,000 ordinary shares par value NIS 1.0 per share,
of which 19,498,621 ordinary shares were outstanding as of June 30, 2006.

Directors

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

Election of Directors

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

Remuneration of Directors

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

Powers of the Board of Directors

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

72

---

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

Dividend and Liquidation Rights

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

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

Redeemable Shares

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

Fiduciary Duties of
Office Holders

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

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

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

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

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

Approval of Certain Transactions Under
Israeli Law

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

73

---

---



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

|  |                                                                                                    
|- | ---------------------------------------------------------------------------------------------------
|  | Under
  Israeli law, an extraordinary transaction is a transaction:                                
|  |                                                                                                    
| | other than
  in the ordinary course of business;                                                   
|  |                                                                                                    
| | otherwise
  than on market terms; or                                                               
|  |                                                                                                    
| | that is
  likely to have a material impact on the companys profitability, assets or
  liabilities.

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

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

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

| |  |   |                                                                                                                                                                                                                                                                                                                                                  
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the securities issued amount to 20% or more of the companys
  outstanding voting rights before the issuance;                                                                                                                                                                                                                                    
| |  |   |                                                                                                                                                                                                                                                                                                                                                  
| |  |  | some or all of the consideration is other than cash or listed
  securities or the transaction is not on market terms; and                                                                                                                                                                                                                        
| |  |   |                                                                                                                                                                                                                                                                                                                                                  
| |  |  | the transaction will increase the relative holdings of a shareholder
  that holds five percent or more of the companys outstanding share capital or
  voting rights or that it will cause any person to become, as a result of the
  issuance, a holder of more than five percent of the companys outstanding
  share capital or voting rights.

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

Changing the Rights Attached to Shares

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

Shareholders Meetings

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

74

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

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

Duties of Shareholders

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

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

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

Exculpation,
Insurance and Indemnification of Office Holders

Exculpation of Office
Holders

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

Insurance of Office Holders

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

|  |                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a breach of
  his duty of care to us or to another person;                                                                                                                            
|  |                                                                                                                                                                                       
| | a breach of
  his duty of loyalty to us, provided that the office holder acted in good
  faith and had reasonable cause to assume that his act would not prejudice our
  interests; or
|  |                                                                                                                                                                                       
| | a financial
  liability imposed upon him in favor of another person.                                                                                                                  

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Indemnification of Office Holders

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | a financial
  liability imposed on him in favor of another person by any judgment,
  including a settlement or an arbitration award approved by a court, which
  indemnification may be approved (i) after the liability has been incurred or
  (ii) in advance, provided that the undertaking to indemnify is limited to
  events that the board of directors believes are foreseeable in light of
  actual operations at the time of providing the undertaking and to a sum or
  criterion that the board of directors determines to be reasonable under the
  circumstances;                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | reasonable
  litigation expenses, including attorneys fees, expended by the office holder
  as a result of an investigation or proceeding instituted against him by a
  competent authority, provided that such investigation or proceeding concluded
  without the filing of an indictment against him and either (A) concluded
  without the imposition of any financial liability in lieu of criminal
  proceedings or (B) concluded with the imposition of a financial liability in
  lieu of criminal proceedings but relates to a criminal offense that does not
  require proof of criminal intent; and
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | reasonable
  litigation expenses, including attorneys fees, expended by the office holder
  or charged to him by a court, in proceedings we institute against him or
  instituted on our behalf or by another person, a criminal charge from which
  he was acquitted, or a criminal charge in which he was convicted for a criminal
  offense that does not require proof of criminal intent.                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In
  addition, our articles of association provide that the commitment in advance
  to indemnify an office holder in respect of a financial obligation imposed
  upon him in favor of another person by a court judgment (including a
  settlement or an arbitrators award approved by court) shall in no event
  exceed, in the aggregate, a total of indemnification (for all persons we have
  resolved to indemnify for the matters and circumstances described therein)
  equal to one quarter (25%) of our total shareholders equity at the time of
  the actual indemnification.

Limitations on Exculpation, Insurance and
Indemnification

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

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

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

Anti-Takeover Provisions; Mergers and
Acquisitions

The
Companies Law provides for mergers, provided that each party to the transaction
obtains the approval of its board of directors and shareholders. For purposes
of the shareholder vote of each party, unless a court rules otherwise, the
merger will not be deemed approved if a majority of the shares not held by the
other party, or by any person who holds 25% or more of the shares or the right
to appoint 25% or more of the directors of the other party, have voted against
the merger. Upon the request of a creditor of either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that as a result of the merger the surviving
company will be unable to satisfy the obligations of that party. Finally, a
merger may not be completed unless at least 70 days have passed from the time
that the requisite proposals for approval of the merger have been filed with
the Israeli Registrar of Companies.

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

The
Companies Law also provides that an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 25% shareholder of the company, unless there is
already another 25% shareholder of the company. Similarly, the Companies Law
provides that an acquisition of shares in a public company must be made by
means of a tender offer if as a result of the acquisition the purchaser would
become a 45% shareholder of the company, unless there is already a majority
shareholder of the company. These requirements do not apply if the acquisition
is made in a private placement. The tender offer must be extended to all
shareholders, but the offerer is not required to purchase more than 5% of the
companys outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (1) at least 5% of
the companys outstanding shares will be acquired by the offerer and (2) the
number of shares tendered in the offer exceeds the number of shares whose
holders objected to the offer.

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

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

C. Material
Contracts

TCI Solutions Acquisition

On April 1,
2005, we acquired approximately 73.4% of the issued and outstanding shares (on
an as-converted-to-common-stock basis) of TCI Solutions, a provider of retail
store and headquarters solutions, including pricing, promotions, inventory, management
and DSD solutions for the grocery industry, for approximately $14.5 million in
cash and 715,730 of our ordinary shares. A portion of the cash consideration
was placed in escrow to secure certain representations and warranties of the
sellers.

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

IDS Acquisition

On April 1,
2005, we also acquired substantially all of the assets of IDS, a provider of
ERP and distribution solutions for the food service, convenience store and
grocery industries, for approximately $37.4 million in cash, assumption of
certain of IDSs liabilities and 497,364 of our ordinary shares. Of the shares
representing the aggregate consideration, 207,236 shares will be eligible for
release from escrow only if certain future customer retention milestones are
met as of April 1, 2007.

D. Exchange Controls

Exchange Controls and Other Limitations
Affecting Security Holders

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

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

E. Material Tax Considerations

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

U.S.
Taxation

Subject to the limitations described in the next
paragraph,
the following discussion describes the material U.S. federal income tax
consequences to a U.S. holder arising from the purchase, ownership and
disposition of our ordinary shares. A U.S. holder is a holder of ordinary
shares that is: (1) an individual citizen or resident of the United States, (2)
a corporation (or other entity treated as a corporation for U.S. federal tax
purposes) or partnership (other than a partnership that is not treated as a
United States person under any applicable Treasury regulations) created or
organized under the laws of the United States or the District of Columbia or
any political subdivision thereof, (3) an estate, the income of which is
includable in gross income for U.S. federal income tax purposes regardless of
its source, (4) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust, and one or more U.S.
persons have the authority to control all substantial decisions of the trust,
or (5) a trust that has a valid election in effect to be treated as a U.S.
person. This summary is for general information purposes only and does not
purport to be a comprehensive description of all of the U.S. federal income tax
considerations that may be relevant to a decision to purchase our ordinary
shares. This summary generally considers only U.S. holders that will own our
ordinary shares as capital assets. Except to the limited extent discussed
below, this summary does not consider the U.S. tax consequences to a person that
is not a U.S. holder, nor does it describe the rules applicable to determine a
taxpayers status as a U.S. holder.

This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, existing and proposed Treasury regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all as in effect on
the date hereof and all of which are subject to change, possibly on a
retroactive basis and open to differing interpretations. This discussion does
not address all aspects of U.S. federal income taxation that may be relevant to
any particular shareholder based on such shareholders particular
circumstances. In particular, this discussion does not address the tax
treatment of a U.S. holder who is: (1) a bank, life insurance company,
regulated investment company, or other financial institution or financial
services entity; (2) a broker or dealer in securities or foreign currency; (3)
a person who acquires our ordinary shares in connection with employment or
other performance of services; (4) a U.S. holder that is subject to the
alternative minimum tax; (5) a U.S. holder that holds the ordinary shares as a
hedge or as part of a hedging, straddle, conversion or constructive sale
transaction; (6) a tax-exempt entity; (7) real estate investments; (8) a U.S.
holder that expatriates out of the United States; and (9) a person having a
functional currency other then U.S. dollar. This discussion does not address
the tax treatment of a U.S. holder that owns, directly or constructively, at
any time, shares representing 10% or more of our voting power. Additionally,
the tax treatment of persons who hold ordinary shares through a partnership or
other pass-through entity are not considered, nor are the possible application
of U.S. federal gift or estate taxes or alternative minimum tax or any aspect
of state, local or non-U.S. tax laws. Each prospective investor is advised to
consult his or her own tax advisor with respect to the specific U.S. federal
and state income tax consequences to such person of purchasing, holding or
disposing of the ordinary shares.

Distributions on Ordinary Shares

Since 1995,
we have not paid cash dividends on our ordinary shares, and we do not intend to
pay cash dividends in the foreseeable future. In the event that we do pay
dividends, and subject to the discussion under the headings    Passive Foreign
Investment Companies below, a U.S. holder will be required to include in gross
income as ordinary income the amount of any distribution paid on ordinary
shares (including the amount of any Israeli tax withheld on the date the
distribution), to the extent that such distribution does not exceed our current
and accumulated earnings and profits, as determined for U.S. federal income tax
purposes. The amount of a distribution which exceeds our earnings and profits
will be treated first as a non-taxable return of capital, reducing the U.S.
holders tax basis for the ordinary shares to the extent thereof, and then as
capital gain. Corporate holders generally will not be allowed a deduction for
dividends received. In general, preferential tax rates not exceeding 15% for
qualified dividend income and long-term capital gains are applicable for U.S.
holders that are individuals, estates or trusts. For this purpose, qualified
dividend income means, inter alia,
dividends received from a qualified foreign corporation. A qualified foreign
corporation is a corporation that is entitled to the benefits of a
comprehensive tax treaty with the United States which includes an exchange of
information program. The U.S. Internal Revenue Service, or IRS, has stated that
the Israel/U.S. Tax Treaty satisfies this requirement and we believe we are
eligible for the benefits of that treaty.

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

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

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

Disposition of Shares

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

In general,
gain realized by a U.S. holder on a sale, exchange or other disposition of
ordinary shares generally will be treated as U.S. source income for U.S.
foreign tax credit purposes (see discussion below under Israeli
Taxation-Application of the Israel/U.S. Tax Treaty to Capital Gains Tax.). A loss
realized by a U.S. holder on the sale, exchange or other disposition of
ordinary shares is generally allocated to U.S. source income. However, Treasury
regulations require the loss to be allocated to foreign source income to the
extent certain dividends were received by the taxpayer within the 24-month
period preceding the date on which the taxpayer recognized the loss. The
deductibility of a loss realized on the sale, exchange or other disposition of
ordinary shares is subject to limitations.

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Passive Foreign Investment Companies

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

|  |                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 75% or more
  of our gross income, including the pro rata share of our gross income for any
  company, U.S. or foreign, in which we are considered to own 25% or more of
  the shares by value, in a taxable year is passive income; or                                                                            
|  |                                                                                                                                                                                                                                                                                                                    
| | at least 50%
  of the assets, averaged over the year and generally determined based upon
  value, including the pro rata share of the assets of any company of which we
  are considered to own 25% or more of the shares by value, in a taxable year
  are held for the production of, or produce, passive income.

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

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

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

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

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

We
believe that we were not a PFIC for 2005 and do not anticipate being a PFIC in
2006. The tests for determining PFIC status, however, are applied annually, and
it is difficult to make accurate predictions of future income and assets which
are relevant to this determination. Accordingly, there can be no assurance that
we will not become a PFIC. U.S. holders who hold ordinary shares during a period
when we are a PFIC will be subject to the foregoing rules, even if we cease to
be a PFIC, subject to certain exceptions for U.S. holders who made a QEF or
mark-to-market election. U.S. holders are strongly urged to consult their tax
advisors about the PFIC rules, including the eligibility, manner and
consequences to them of making a QEF or mark-to-market election with respect to
our ordinary shares in the event that we qualify as a PFIC.

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Backup Withholding

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

Non-U.S. Holders of
Ordinary Shares

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

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

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

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

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

Taxation of our U.S.
Subsidiaries

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

We
operate in the United States through several corporations. Retalix
Holdings, Inc., or Retalix USA Holdings, is the U.S. parent, which is
wholly-owned by Retalix Ltd. Retalix USA Holdings owns 100% of the stock
of several U.S. corporations  Retalix USA Inc., RCS, BASS (BASS  through
Retalix USA Inc.), OMI, TCI, SCM and 50.01% (95% as March 31, 2006) of a
U.S. limited liability company  StoreNext USA. StoreNext USA is treated as a
partnership for U.S. federal tax purposes. As such, 50.01% (95% as of March 31,
2006) of StoreNext USAs results are included in the Retalixs U.S. federal
income tax return. Retalix USA Holdings and its wholly-owned subsidiaries have
elected to file U.S. federal income tax returns on a consolidated company
basis. U.S. federal income taxes are imposed on the taxable income of the U.S.
consolidated group at progressive income tax rates ranging from 15% to 35%. The
corporation is subject to the same U.S. federal income tax rates on capital
gain income. The U.S. companies are subject to state income/franchise taxes in
the states in which they do business. Depending on each states requirements,
taxes may be imposed on a consolidated, combined or separate company basis.

81

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Israeli Taxation

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

General Corporate
Tax Structure

Israeli
companies are generally subject to corporate tax at the rate of 34% of the
taxable income for the 2005 tax year. Following an amendment to the Tax
Ordinance, which came into effect on January 1, 2006, the corporate tax rate is
scheduled to decrease as follows:, 31% for 2006 tax year, 29% for 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010
tax year and thereafter. Israeli companies are generally subject to capital
gains tax at a rate of 25% for capital gains (other than gains deriving from
the sale of listed securities) derived after January 1, 2003. However, the
effective tax rate payable by a company that derives income from an approved
enterprise may be considerably less, as further discussed below.

Law for the
Encouragement of Capital Investments, 1959

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

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

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

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

|                               |  |                       |  |                    |  |                      | 
|------------------------------ |  | --------------------- |  | ------------------ |  | -------------------- | 
|Percent of
  Foreign Ownership |  | Rate of
  Reduced Tax |  | Reduced Tax Period |  | Tax Exemption Period | 
|                               |  |                       |  |                    |  |                      | 
|0-25%                          |  | 25%                   |  | 5 years            |  | 2 years              | 
|25-49%                         |  | 25%                   |  | 8 years            |  | 2 years              | 
|49-74%                         |  | 20%                   |  | 8 years            |  | 2 years              | 
|74-90%                         |  | 15%                   |  | 8 years            |  | 2 years              | 
|90-100%                        |  | 10%                   |  | 8 years            |  | 2 years              | 

82

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

A
portion of our production facilities has been granted the status of Approved
Enterprise. Income arising from our Approved Enterprise facilities is tax-free
under the alternative package of benefits described above (for the first 2
years) and entitled to reduced tax rates (for the next five years). We have
derived, and expect to continue to derive, a substantial portion of our income
from our Approved Enterprise facilities. The tax benefits attributable to our
current Approved Enterprises are scheduled to expire gradually through 2011.

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

Amendment of the
Investments Law

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

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

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Similar to
  the currently available alternative route, exemption from corporate tax on
  undistributed income for a period of two to ten years, depending on the
  geographic location of the Benefited Enterprise within Israel, and a reduced
  corporate tax rate of 10% to 25% for the remainder of the benefits period,
  depending on the level of foreign investment in each year. Benefits may be
  granted for a term of from seven to ten years, depending on the level of
  foreign investment in the company. If the company pays a dividend out of
  income derived from the Benefited Enterprise during the tax exemption period,
  such income will be subject to corporate tax at the applicable rate
  (10%-25%). The company is required to withhold tax at the source at a rate of
  15% from any dividends distributed from income derived from the Benefited
  Enterprise; and
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | A special
  tax route enabling companies owning facilities in certain geographical
  locations in Israel to pay corporate tax at the rate of 11.5% on income of
  the Benefited Enterprise. The benefits period is ten years. Upon payment of
  dividends, the company is required to withhold tax at source at a rate of 15%
  for Israeli residents and at a rate of 4% for foreign residents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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

The
amendment changes the definition of foreign investment in the Investments
Law so that the definition now also includes the purchase of shares of a company
from another shareholder, provided that the companys outstanding and paid-up
share capital exceeds NIS 5 million. Such changes to the aforementioned
definition will take effect retroactively from 2003.

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

As
a result of the amendment, tax-exempt income that will be generated under the
provisions of the new Law will subject us to taxes upon distribution or
liquidation and we may be required to record deferred tax liability with
respect to such tax-exempt income. We are currently evaluating the impact the
amendment will have on us. This may materially increase our provision for
income taxes in 2006 and subsequent years.

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Tax Benefits for
Research and Development

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

Law for the
Encouragement of Industry (Taxes), 1969

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

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

|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
| | Deduction of
  all costs related to shares issue in a stock market and patents over an
  three-year period for tax purposes;                
|  |                                                                                                                                             
| | Amortization
  of the cost of purchased know-how and patents over an eight-year period for
  tax purposes;                                  
|  |                                                                                                                                             
| | The option
  to file a consolidated tax return with related Israeli industrial companies
  that satisfy conditions described in the law; and
|  |                                                                                                                                             
| | Accelerated
  depreciation rates on equipment and buildings.                                                                                

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

Special Provisions
Relating to Taxation Under Inflationary Conditions

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

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There is a special tax
  adjustment for the preservation of equity whereby some corporate assets are
  classified broadly into fixed assets and non-fixed assets. Where a companys
  equity, as defined in such law, exceeds the depreciated cost of fixed assets,
  a deduction from taxable income that takes into account the effect of the
  applicable annual rate of inflation on such excess is allowed up to a ceiling
  of 70% of taxable income in any single tax year, with the unused portion
  permitted to be carried forward on a linked basis. If the depreciated cost of
  fixed assets exceeds a companys equity, then such excess multiplied by the
  applicable annual rate of inflation is added to taxable income.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Subject to specific
  limitations, depreciation deductions on fixed assets and losses carried
  forward are adjusted for inflation based on the increase in the consumer
  price index.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Capital gains on specific
  traded securities are normally subject to reduced tax rates for individuals
  and are taxable at corporate tax rates for companies. As of January 1, 2006,
  the relevant provisions governing taxation of companies on capital gains
  deriving from the sale of traded securities are included in the Tax Ordinance
  and the Adjustments Law no longer includes provisions in this regard.                                                                                                                                                                                                                                                                                                                 

Capital Gains Tax
Applicable to Resident and Non-Resident Shareholders

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

84

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Generally,
up until the 2006 tax year, capital gains tax was imposed on Israeli resident
individuals at a rate of 15% on real gains derived on or after January 1, 2003
from the sale of shares in, among others, (i) Israeli companies publicly traded
on a recognized stock market in a country that has a treaty for the prevention
of double taxation with Israel (such as Nasdaq), or (ii) companies dually
traded on both the TASE and Nasdaq or another recognized stock market outside
of Israel (such as Retalix). This tax rate was contingent upon the shareholder
not claiming a deduction for financing expenses in connection with such shares
(in which case the gain was generally taxed at a rate of 25%), and did not
apply to: (1) dealers in securities; (2) shareholders that report in accordance
with the Adjustments Law; or (3) shareholders who acquired their shares prior
to an initial public offering; or (4) the sale of shares to a relative (as
defined in the Tax Ordinance).

As
of January 1, 2006, the tax rate applicable to capital gains derived from the
sale of shares, whether listed on a stock market or not, is 20% for Israeli
individuals, unless such shareholder claims a deduction for financing expenses
in connection with such shares, in which case the gain will generally be taxed
at a rate of 25%. Additionally, if such shareholder is considered a
significant shareholder at any time during the 12-month period preceding
such sale, i.e., such shareholder holds directly or indirectly, including with
others, at least 10% of any means of control in the company, the tax rate will
be 25%. Israeli companies are subject to the corporate tax rate on capital gains
derived from the sale of shares, unless such companies were not subject to the
Adjustments Law (or certain regulations) at the time of publication of the
aforementioned amendment to the Tax Ordinance that came into effect on January
1, 2006, in which case the applicable tax rate is 25%. However, the foregoing
tax rates will not apply to: (i) dealers in securities; and (ii) shareholders
who acquired their shares prior to an initial public offering (that may be
subject to a different tax arrangement).

The
tax basis of shares acquired prior to January 1, 2003 will be determined in
accordance with the higher of the average closing share price in the three
trading days preceding January 1, 2003, and the cost of the shares. However, a
request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.

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

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

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

Taxation of Dividends Applicable to
Non-Resident Shareholders

Non-residents
of Israel are subject to Israeli income tax on income accrued or derived from
sources in Israel, including passive income such as dividends, royalties and
interest. On distributions of dividends, other than bonus shares and stock
dividends, income tax is withheld at the source at the following rates: (i) for
dividends distributed prior to January 1, 2006 - 25%; (ii) for dividends
distributed on or after January 1, 2006 - 20%, or 25% for a shareholder that is
considered a significant shareholder at any time during the 12-month period
preceding such distribution, unless a different rate is provided in a treaty
between Israel and the shareholders country of residence. As aforesaid,
dividends of income generated by an Approved Enterprise are subject to
withholding tax at a rate of 15%.

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

85

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F. Dividends and Paying Agents

Not
applicable.

G. Statements by Experts

Not
applicable.

H. Documents on Display

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

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

I. Subsidiary Information

Not
applicable.

ITEM 11    QUANTATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

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

As
of December 31, 2005, we had the following open foreign currency forward
contracts all of up to six months in term and maturing between January to June
2006:

|                          |  |             |  |                           |  |               | 
|------------------------- |  | ----------- |  | ------------------------- |  | ------------- | 
|Sell                      |  | Buy         |  |                           |  |               | 
|                          |  |             |  |                           |  |               | 
|In millions               |  | In millions |  | Transaction date          |  | Forward date  | 
|                          |  |             |  |                           |  |               | 
|                          |  |             |  |                           |  |               | 
|Pounds
  Sterling 1.0     |  | $1.8        |  | October and November 2005 |  | January 2006  | 
|                          |  |             |  |                           |  |               | 
|New
  Israeli Shekels 4.0 |  | $0.9        |  | November 2005             |  | February 2006 | 
|                          |  |             |  |                           |  |               | 
|New
  Israeli Shekels 6.9 |  | $1.5        |  | December 2005             |  | June 2006     | 
|                          |  |             |  |                           |  |               | 
|Euros
  0.6               |  | $0.7        |  | October 2005              |  | January 2006  | 
|                          |  |             |  |                           |  |               | 
|Australian
  Dollars 0.7  |  | $0.5        |  | December 2005             |  | March 2006    | 

The
fair value of these outstanding contracts as of December 31, 2005 reflects
a liability in the amount of $71,000, which was charged to financial expenses.

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

86

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The table below presents principal amounts
and related weighted average rates by periods of maturity for our investments
in deposits (primarily included in cash and cash equivalents in our
consolidated financial reports) and marketable securities held as of December
31, 2005.

(In thousands, except percentages)

|                                                                      |  |         |            |          |      |                      |  |                      |       |  |      |     |  |      |        |  |   |        | 
|--------------------------------------------------------------------- |  | ------- | ---------- | -------- | ---- | -------------------- |  | -------------------- | ----- |  | ---- | --- |  | ---- | ------ |  | - | ------ | 
|                                                                      |  |         |            | Maturity |      | Total
  book
  value |  | Total
  fair
  value |      
|                                                                      |  |         |            |          |      |                      | 
|                                                                      |  |         |            | 2006     |      | 2007-8               |  | 2009-10              |       |  |     
|                                                                      |  |         |            |          |      |                      |  |                      |       |  |      |     | 
|Corporate securities held to maturity bearing fixed interest rate (1) |  |         | Book value |          | $    | 5,104                |  | $                    | 1,120 |  | $    | 936 |  | $    | 7,160  |  | $ | 7,197  | 
|                                                                      |  | WAYM *  |            |          | 3.37 | %                    |  | 5.11                 | %     |  | 7.05 | %   |  | 4.05 | %      |  |   |       
|Marketable Securities (1)                                             |  |         | Book value |          | $    | 5,815                |  |                      | -     |  |      | -   |  | $    | 5,815  |  | $ | 5,815  | 
|                                                                      |  | WAY**   |            |          | 5.36 | %                    |  | -                    |       |  | -    |     |  | 5.36 | %      |  |   |       
|Dollar linked money
  market funds and deposits (2)                   |  |         | Book value |          | $    | 49,513               |  |                      | -     |  |      | -   |  | $    | 49,513 |  | $ | 49,513 | 
|                                                                      |  | WAIR*** |            |          | 3.81 | %                    |  | -                    |       |  | -    |     |  | 3.81 | %      |  |   |       
|New Israeli Shekels
  linked Deposits (2)                             |  |         | Book value |          | $    | 1,502                |  |                      | -     |  |      | -   |  | $    | 1,502  |  | $ | 1,502  | 
|                                                                      |  | WAIR*** |            |          | 2.39 | %                    |  | -                    |       |  | -    |     |  | 2.39 | %      |  |   |       
|British Pounds Sterling
  linked Deposits (2)                         |  |         | Book value |          | $    | 2,294                |  |                      | -     |  |      | -   |  | $    | 2,294  |  | $ | 2,294  | 
|                                                                      |  | WAIR*** |            |          | 4.23 | %                    |  | -                    |       |  | -    |     |  | 4.23 | %      |  |   |       
|Euro linked deposits (2)                                              |  |         | Book value |          | $    | 1,984                |  |                      | -     |  |      | -   |  | $    | 1,984  |  | $ | 1,984  | 
|                                                                      |  | WAIR*** |            |          | 1.11 | %                    |  | -                    |       |  | -    |     |  | 1.11 | %      |  |   |       
|Australian Dollars Linked deposits (2)                                |  |         | Book value |          | $    | 399                  |  |                      | -     |  |      | -   |  | $    | 399    |  | $ | 399    | 
|                                                                      |  | WAIR*** |            |          | 4.25 | %                    |  | -                    |       |  | -    |     |  | 4.25 | %      |  |   |       
|                                                                      |  |         |            |          |      |                      |  |                      |       |  |      |     |  |      |        |  |   |        | 
|Total                                                                 |  |         | Book value |          | $    | 66,611               |  | $                    | 1,120 |  | $    | 936 |  | $    | 68,667 |  | $ | 68,704 | 
|                                                                      |  | WAY**** |            |          | 3.82 | %                    |  | 5.11                 | %     |  | 7.05 | %   |  | 3.87 | %      |  |   |       
|                                                                      |  |         |            |          |      |                      |  |                      |       |  |      |     |  |      |        |  |   |        | 

|     |                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------
|*    | Weighted
  average yield to maturity                                                                                           
|     |                                                                                                                                
|**   | Weighted
  average yield as per the performance of 2005                                                                        
|     |                                                                                                                                
|***  | Weighted
  average interest rate                                                                                               
|     |                                                                                                                                
|**** | Weighted
  average yield                                                                                                       
|     |                                                                                                                                
|(1)  | Classified
  in the consolidated financial statements attached herein as marketable
  securities and marketable debt securities
|     |                                                                                                                                
|(2)  | Classified
  in the consolidated financial statements attached herein as cash and cash
  equivalents                           

87

---

---



Foreign Currency Risk

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

The
following table sets forth our non-dollar assets and liabilities as of December
31, 2005:
(in thousands)

|            |  |                    |   |                             |  |  |  |   |        |  | 
|----------- |  | ------------------ | - | --------------------------- |  |  |  | - | ------ |  | 
|Currency    |  | Israeli
  Currency |   | Other
  non-dollar currency | 
|            |  |                    |   |                             | 
|            |  |                    |   |                             |  |  |  |   |        |  | 
|Assets      |  |                    | $ | 17,648                      |  |  |  | $ | 14,503 |  | 
|            |  |                    |   |                             |  |  |  |   |        |  | 
|Liabilities |  |                    | $ | 19,122                      |  |  |  | $ | 5,909  |  | 

Interest
Rate Risk

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

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

ITEM
12    DESCRIPTION OF SECURITIES OTHER THEN EQUITY SECURITIES

Not
applicable.

PART II

ITEM
13    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not
applicable.

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

Not
applicable.

88

---

---



PART III

ITEM
15    CONTROLS AND PROCEDURES

As
of the end of the period covered by this annual report, we performed an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e)under the Exchange Act). The
evaluation was performed with the participation of our key corporate senior management and
under the supervision and with the participation of our chief executive officer and chief
financial officer. Based on this evaluation, our principal executive officer and principal
financial officer became aware of several revisions that were required to our previously
announced quarterly and annual financial statements for 2005. These revisions reflected
changes in timing of the recognition of revenues, accounting treatment for open contracts of
acquired entities and activities, reallocations among Retalixs classes of revenues
and other expense issues.

Based
upon the these revisions, our chief executive officer and our chief financial officer have
concluded that our disclosure controls and procedures were not effective as of December
31, 2005 because at that time we did not have effective controls designed and in place to
ensure that these items were accounted for and reported in accordance with generally
accepted accounting principles. In order to address the failure to have effective controls
designed and in place as described above, we 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. In addition, we intend to use
more relevantly experienced external evaluation firms in connection with accounting due
diligence processes and purchase price allocations in order to insure key accounting
issues are addressed.

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, 2005, in 2006, we began implementing new
internal controls as described above.

ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM
16B. CODE OF ETHICS

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

ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Kost,
Forer, Gabbay & Kasierer, a member firm of Ernst & Young, has served as
our principal independent public accountants since April 2005. Kesselman &
Kesselman, a member of PricewaterhouseCoopers International Limited, served as
our principal independent public accountants from 1997 until April 2005. The
following table presents the aggregate fees for professional audit services and
other services rendered by our principal auditors in 2004 and 2005:

|                   |  |                                                   |      |  |       |  | 
|------------------ |  | ------------------------------------------------- | ---- |  | ----- |  | 
|                   |  | Year Ended
  December 31,
  (U.S. $ in thousands) |     
|                   |  |                                                   |      |  |      
|                   |  |                                                   | 2004 |  | 2005  |  | 
|                   |  |                                                   |      |  |       |  | 
|                   |  |                                                   |      |  |       |  | 
|Audit Fees         |  |                                                   | 152  |  | 1,108 |  | 
|Audit Related Fees |  |                                                   | 76   |  | 119   |  | 
|Tax Fees           |  |                                                   | 23   |  | 24    |  | 
|                   |  |                                                   |      |  |       |  | 
|Total              |  |                                                   | 251  |  | 1,251 |  | 
|                   |  |                                                   |      |  |       |  | 

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

89

---

---



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

With
respect to each pre-approved service actually requested to be provided, an
executive officer is required to notify the audit committee in writing and
state whether, in the executive officers view, the provision of such service
by the outside auditor would impair its independence. The audit committee has
the ultimate authority to determine which services to pre-approve. All of the
services provided by our principal independent public accountants during 2004
and 2005 were pre-approved by our audit committee.

ITEM
16D. EXEMPTION FROM LISTING STANDARDS FOR AUDIT COMMITTEES

None.

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

None.

ITEM
17    FINANCIAL STATEMENTS

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

ITEM
18    FINANCIAL STATEMENTS

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

90

---

---



ITEM
19    EXHIBITS

| |     |                        |                                                                     
| | --- | ---------------------- | --------------------------------------------------------------------
| | (a) | Financial
  Statements
|
| |     |                        | 1. Reports
  of Independent Registered Public Accounting Firm       
| |     |                        | 2.
  Consolidated Balance Sheets                                    
| |     |                        | 3.
  Consolidated Statements of Income                              
| |     |                        | 4.
  Statements of Changes in Shareholders Equity                  
| |     |                        | 5.
  Consolidated Statements of Cash Flows                          
| |     |                        | 6. Notes to
  Consolidated Financial Statements                     
| |     |                        | 7. Reports
  of Independent Auditors of Certain Associated Companies
| |     |                        |                                                                     
| | (b) | Exhibits              

| |             |                                                                                                                                                                                                     
| | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit No. | Exhibit                                                                                                                                                                                             
| |             |                                                                                                                                                                                                     
| | *1.1        | Memorandum of Association of Registrant, as
  amended.                                                                                                                                              
| | *1.2        | Articles of Association of Registrant, as
  amended.                                                                                                                                                
| | **4.1       | Employment Agreement dated December 1,
  1999, between Point of Sale Limited and Danny Moshaioff.                                                                                                   
| | **4.2       | Agreement dated December 30, 1999, between
  Point of Sale Limited and the Corex Development Company (C. D. C.) Limited.                                                                            
| | ***4.3      | Second 1998 Share Option Plan.                                                                                                                                                                      
| | ****4.4     | 2004 Israeli Share Option
  Plan.                                                                                                                                                                   
| | *****4.5    | Stock Purchase Agreement,
  dated as of April 1, 2005, among Retalix Ltd., TCI Solutions, Inc., certain
  selling shareholders of TCI Solutions, Inc., and Retalix Holdings Inc.                    
| | ******4.6   | Agreement and Plan of Merger, dated as of April 1, 2005, by and among
  Retalix Ltd., Retalix Holdings Inc., RTLX LLC, Survivor RTLX LLC and TCI
  Solutions, Inc.                                  
| | *****4.7    | Asset Purchase Agreement, dated as of April 1, 2005, among Retalix
  Ltd., Integrated Distribution Solutions, LLC, certain owners of Integrated
  Distribution Solutions, LLC, and Retalix SCM, Inc.
| | 8           | Principal Subsidiaries of Retalix Ltd.                                                                                                                                                              
| | 12.1        | Certification required by Rule 13a-14(a)
  under the Exchange Act, as adopted pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.                                                          
| | 12.2        | Certification required by Rule 13a-14(a)
  under the Exchange Act, as adopted pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.                                                          
| | 13.1        | 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 Kost Forer Gabbay &
  Kasierer, a member of Ernst & Young Global.                                                                                                                        
| | 15.2        | Consent of Kesselman & Kesselman, a
  member of PricewaterhouseCoopers International Limited.                                                                                                       
| | 15.3        | Consents of Mayer Hoffman McCann P.C.                                                                                                                                                               

| |        |                                                                                                                                                              
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       
| | *      | Previously
  filed as an exhibit to Retalixs report on Form 6-K filed on November 2, 2005,
  and incorporated herein by reference.                          
|
| | **     | Previously
  filed as an exhibit to Retalixs annual report on Form 20-F for the fiscal
  year ended December 31, 1999, and incorporated herein by reference.
|
| | ***    | Previously
  filed as an exhibit to Retalixs Registration Statement on Form F-1, dated
  July 10, 1998, and incorporated herein by reference.               
|
| | ****   | Previously
  filed as an exhibit to Retalixs annual report on Form 20-F for the fiscal
  year ended December 31, 2003, and incorporated herein by reference.
|
| | *****  | Previously
  filed as exhibit 2.1 to Retalixs registration statement on Form F-3 filed on
  June 2, 2005, and incorporated herein by reference.             
|
| | ****** | Previously
  filed as exhibit 99.2 to Retalixs registration statement on Form F-3/A filed
  on September 30, 2005, and incorporated herein by reference.    

91

---

---



SIGNATURES

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

|                    |                                                                                            
|------------------- | -------------------------------------------------------------------------------------------
|                    | 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                                                 

92

---

---



RETALIX LTD.2005 ANNUAL REPORT

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-10 
|Notes
  to consolidated financial statements              | F-11 - F-48

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

---

---

---

---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

RETALIX
Ltd.

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

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

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

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

F-2

---

---



RETALIX LTD.CONSOLIDATED BALANCE SHEETS

|                                                                         |  |                       |         |      |  |         | 
|------------------------------------------------------------------------ |  | --------------------- | ------- | ---- |  | ------- | 
|                                                                         |  | December
  31         |        
|                                                                         |  |                       |        
|                                                                         |  | 2005                  |         | 2004 | 
|                                                                         |  |                       |         |      | 
|                                                                         |  | U.S. $ in
  thousands |        
|                                                                         |  |                       |        
|                                                                         |  |                       |        
|A  s
  s  e  t  s                                                        |  |                       |         |      |  |         | 
|CURRENT
  ASSETS(note
  11):                                             |  |                       |         |      |  |         | 
|Cash and cash
  equivalents                                              |  |                       | 55,692  |      |  | 91,413  | 
|Marketable
  securities (notes 8c; 12b):                                 |  |                       | 10,919  |      |  | 14,331  | 
|Accounts
  receivable (note 12a):                                        |  |                       |         |      |  |         | 
|Trade                                                                    |  |                       | 38,836  |      |  | 26,024  | 
|Other                                                                    |  |                       | 4,502   |      |  | 3,415   | 
|Inventories                                                              |  |                       | 1,787   |      |  | 755     | 
|Deferred income
  taxes (note 10g):                                      |  |                       | 8,098   |      |  | 3,650   | 
|                                                                         |  |                       |         |      |  |         | 
|T o t a l  current assets                                                |  |                       | 119,834 |      |  | 139,588 | 
|                                                                         |  |                       |         |      |  |         | 
|NON-CURRENT
  ASSETS (note
  11):                                        |  |                       |         |      |  |         | 
|Marketable debt
  securities (note 12b):                                 |  |                       | 2,056   |      |  | 6,125   | 
|Deferred income
  taxes (note 10g):                                      |  |                       | 2,064   |      |  | 1,768   | 
|Long-term
  receivables (note 12c):                                      |  |                       | 2,617   |      |  | 2,561   | 
|Amounts funded
  in respect of employee rights upon retirement (note 7): |  |                       | 5,402   |      |  | 4,553   | 
|Other                                                                    |  |                       | 751     |      |  | 523     | 
|                                                                         |  |                       |         |      |  |         | 
|T o t a l  non  
  current assets                                       |  |                       | 12,890  |      |  | 15,530  | 
|                                                                         |  |                       |         |      |  |         | 
|PROPERTY, PLANT AND EQUIPMENT,net  (note 3):                             |  |                       | 12,311  |      |  | 10,407  | 
|                                                                         |  |                       |         |      |  |         | 
|GOODWILL (note 4)                                                        |  |                       | 101,209 |      |  | 39,774  | 
|                                                                         |  |                       |         |      |  |         | 
|OTHER INTANGIBLE ASSETS,
  net of accumulated amortization (note 4):     |  |                       |         |      |  |         | 
|                                                                         |  |                       |        
|Customer base                                                            |  |                       | 17,497  |      |  | 1,966   | 
|                                                                         |  |                       |        
|Other                                                                    |  |                       | 7,915   |      |  | 2,687   | 
|                                                                         |  |                       |         |      |  |         | 
|                                                                         |  |                       | 25,412  |      |  | 4,653   | 
|                                                                         |  |                       |         |      |  |         | 
|T o t a l  assets                                                        |  |                       | 271,656 |      |  | 209,952 | 
|                                                                         |  |                       |         |      |  |         | 

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

F-3

---

---



RETALIX LTD.CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------- | ---- |  | ------- | 
|                                                                                                                                                                                                                                                                    |  | December
  31         |        
|                                                                                                                                                                                                                                                                    |  |                       |        
|                                                                                                                                                                                                                                                                    |  | 2005                  |         | 2004 | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      | 
|                                                                                                                                                                                                                                                                    |  | U.S. $ in
  thousands |        
|                                                                                                                                                                                                                                                                    |  |                       |        
|                                                                                                                                                                                                                                                                   
|Liabilities
  and shareholders equity                                                                                                                                                                                                                              |  |                       |         |      |  |         | 
|CURRENT
  LIABILITIES
  (note 11):                                                                                                                                                                                                                                  |  |                       |         |      |  |         | 
|Short-term bank
  credit                                                                                                                                                                                                                                            |  |                       | 3,981   |      |  | 7,565   | 
|Current
  maturities of long-term bank loans (note 5)                                                                                                                                                                                                               |  |                       | 248     |      |  | 4,801   | 
|Accounts payable
  and accruals:                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|Trade                                                                                                                                                                                                                                                               |  |                       | 11,701  |      |  | 10,251  | 
|Employees and
  employee institutions                                                                                                                                                                                                                               |  |                       | 5,820   |      |  | 5,122   | 
|Liabilities of
  executory contracts (note 6)                                                                                                                                                                                                                       |  |                       | 259     |      |  | 1,048   | 
|Accrued expenses                                                                                                                                                                                                                                                    |  |                       | 6,301   |      |  | 3,591   | 
|Other                                                                                                                                                                                                                                                               |  |                       | 7,744   |      |  | 4,298   | 
|Deferred
  revenues                                                                                                                                                                                                                                                 |  |                       | 15,564  |      |  | 4,949   | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|T o t a l  current liabilities                                                                                                                                                                                                                                      |  |                       | 51,618  |      |  | 41,625  | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|LONG-TERM LIABILITIES
  (note 11):                                                                                                                                                                                                                                  |  |                       |         |      |  |         | 
|Long-term loans,
  net of current maturities (note 5)                                                                                                                                                                                                               |  |                       | 1,059   |      |  | 1,493   | 
|Employee rights
  upon retirement (note 7)                                                                                                                                                                                                                          |  |                       | 9,250   |      |  | 8,435   | 
|Deferred tax
  liability (note 10g)                                                                                                                                                                                                                                 |  |                       | 2,852   |      |  | -       | 
|Deferred
  revenues                                                                                                                                                                                                                                                 |  |                       | 619     |      |  | -       | 
|Executry
  contracts, net of current maturities (note 6)                                                                                                                                                                                                            |  |                       | -       |      |  | 259     | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|T o t a l  long-term
liabilities                                                                                                                                                                                                                                    |  |                       | 13,780  |      |  | 10,187  | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|T o t a l  liabilities                                                                                                                                                                                                                                              |  |                       | 65,398  |      |  | 51,812  | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|COMMITMENTS,  PLEDGES AND CONTINGENT
  LIABILITIES (note 8)                                                                                                                                                                                                         |  |                       |         |      |  |         | 
|MINORITY INTERESTS                                                                                                                                                                                                                                                  |  |                       | 1,841   |      |  | 1,969   | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|SHAREHOLDERS EQUITY
  (note 9):                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|Share capital  
  Ordinary shares of NIS 1.00 par value (authorized: December 31, 2005
    30,000,000 shares; December 31, 2004   25,000,000 shares; issued and
  outstanding: December 31, 2005   19,409,003 shares; December 31,
  2004   17,577,432 shares) |  |                       | 5,132   |      |  | 4,717   | 
|Additional paid
  in capital                                                                                                                                                                                                                                        |  |                       | 150,042 |      |  | 116,277 | 
|Retained
  earnings                                                                                                                                                                                                                                                 |  |                       | 49,531  |      |  | 34,910  | 
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                                       |  |                       | (288    | )    |  | 267     | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|T o t a l  shareholders equity                                                                                                                                                                                                                                     |  |                       | 204,417 |      |  | 156,171 | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 
|T o t a l  liabilities and shareholders equity                                                                                                                                                                                                                     |  |                       | 271,656 |      |  | 209,952 | 
|                                                                                                                                                                                                                                                                    |  |                       |         |      |  |         | 

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

F-4

---

---



RETALIX LTD.CONSOLIDATED STATEMENTS OF INCOME

|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------- | ------- | ---- |  | ------- | - |  | ------ | -
|                                                                                                             |  | Year ended
  December 31                                   |        
|                                                                                                             |  |                                                            |        
|                                                                                                             |  | 2005                                                       |         | 2004 |  | 2003    |  
|                                                                                                             |  |                                                            |         |      |  |         |  
|                                                                                                             |  | U.S. $  in
  thousands
  (except share and per share data) |        
|                                                                                                             |  |                                                            |        
|                                                                                                             |  |                                                            |        
|REVENUES:(note 14a)                                                                                          |  |                                                            |         |      |  |         |   |  |        |  
|Product sales                                                                                                |  |                                                            | 91,692  |      |  | 77,494  |   |  | 58,432 |  
|Services and
  projects                                                                                      |  |                                                            | 95,679  |      |  | 45,460  |   |  | 33,625 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|T o t a l  revenues                                                                                          |  |                                                            | 187,371 |      |  | 122,954 |   |  | 92,057 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|COST OF REVENUES:                                                                                            |  |                                                            |         |      |  |         |   |  |        |  
|Cost of product
  sales                                                                                      |  |                                                            | 31,521  |      |  | 23,246  |   |  | 16,576 |  
|Cost of services
  and projects                                                                              |  |                                                            | 34,465  |      |  | 18,890  |   |  | 12,440 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|T o t a l  cost of revenues                                                                                  |  |                                                            | 65,986  |      |  | 42,136  |   |  | 29,016 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|GROSS PROFIT                                                                                                 |  |                                                            | 121,385 |      |  | 80,818  |   |  | 63,041 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|OPERATING EXPENSES:                                                                                          |  |                                                            |         |      |  |         |   |  |        |  
|Research and
  development - net                                                                             |  |                                                            | 44,683  |      |  | 34,096  |   |  | 18,344 |  
|Selling and
  marketing                                                                                      |  |                                                            | 33,382  |      |  | 24,798  |   |  | 21,542 |  
|General and
  administrative (note 15a)                                                                      |  |                                                            | 23,131  |      |  | 15,944  |   |  | 13,345 |  
|Other general
  income (expenses) - net  (note 15c)                                                          |  |                                                            | -       |      |  | 15      |   |  | (62    | )
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|T o t a l  operating expenses                                                                                |  |                                                            | 101,196 |      |  | 74,823  |   |  | 53,293 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|INCOME FROM OPERATIONS                                                                                       |  |                                                            | 20,189  |      |  | 5,995   |   |  | 9,748  |  
|FINANCIAL INCOME (EXPENSES),
  net (note 15b):                                                               |  |                                                            | 202     |      |  | 85      |   |  | (95    | )
|GAIN
  ARISING FROM ISSUANCE OF SHARES BY A SUBSIDIARY AND AN ASSOCIATED COMPANY(note
  2i and 2j)           |  |                                                            | 83      |      |  | 200     |   |  | 1,068  |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|INCOME BEFORE TAXES ON INCOME                                                                                |  |                                                            | 20,474  |      |  | 6,280   |   |  | 10,721 |  
|TAXES ON INCOME
  (note 10)                                                                                  |  |                                                            | 5,912   |      |  | 1,553   |   |  | 2,639  |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|INCOME AFTER TAXES ON INCOME                                                                                 |  |                                                            | 14,562  |      |  | 4,727   |   |  | 8,082  |  
|SHARE IN LOSSES OF AN ASSOCIATED
  COMPANY                                                                   |  |                                                            | (130    | )    |  | (137    | ) |  | (90    | )
|MINORITY INTERESTS IN LOSSES OF
  SUBSIDIARIES                                                               |  |                                                            | 189     |      |  | 247     |   |  | 288    |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|NET INCOME                                                                                                   |  |                                                            | 14,621  |      |  | 4,837   |   |  | 8,280  |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|EARNINGS PER SHARE  
  in U.S. $ (note 15d):                                                                |  |                                                            |         |      |  |         |   |  |        |  
|Basic                                                                                                        |  |                                                            | 0.78    |      |  | 0.31    |   |  | 0.67   |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|Diluted                                                                                                      |  |                                                            | 0.74    |      |  | 0.29    |   |  | 0.63   |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|WEIGHTED AVERAGE NUMBER OF SHARES
  USED IN COMPUTATION OF EARNINGS PER SHARE    in thousands
  (note 15d): |  |                                                            |         |      |  |         |   |  |        |  
|Basic                                                                                                        |  |                                                            | 18,710  |      |  | 15,746  |   |  | 12,323 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  
|Diluted                                                                                                      |  |                                                            | 19,659  |      |  | 16,552  |   |  | 13,083 |  
|                                                                                                             |  |                                                            |         |      |  |         |   |  |        |  

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

F-5

---

---



RETALIX LTD.STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- |  | ---------------------------------- |  | ------------------------------- |  | --------------------------------------------------- |  | ---- | ----- | ------- | -
|                                                                                                                  |  | Share
  capital                     |  |                                    |  |                                 |  |                                                     |  |      |      
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |      
|                                                                                                                  |  | Ordinary
  shares                   |  |                                    |  |                                 |  | Accumulated
  other
  comprehensive
  Income (loss) |  |      |      
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |     
|                                                                                                                  |  | Number
  of
  shares in
  thousands |  | Amount                             |  | Additional
  paid-in 
  capital |  | Retained
  earnings                                 |  |      | Total |        
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|                                                                                                                  |  |                                     |  | U . S .  $  i n  t h o u s a n d s | 
|                                                                                                                  |  |                                     |  |                                    | 
|                                                                                                                  |  |                                     |  |                                    | 
|BALANCE AT
  JANUARY 1, 2003                                                                                      |  | 11,993                              |  | 3,483                              |  | 31,252                          |  | 21,793                                              |  |      |       | 56,528  |  
|CHANGES
  DURING 2003:                                                                                            |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Net income                                                                                                        |  |                                     |  |                                    |  |                                 |  | 8,280                                               |  |      |       | 8,280   |  
|Differences from translation of non dollar currency
financial
  statements of an associated company               |  |                                     |  |                                    |  |                                 |  |                                                     |  | 5    |       | 5       |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Comprehensive income                                                                                              |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       | 8,285   |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Surplus arising from issuance of options granted to
non-employee                                                  |  |                                     |  |                                    |  | 368                             |  |                                                     |  |      |       | 368     |  
|Gain on issuance of share capital of a newly formed
associated company
  to a third party                         |  |                                     |  |                                    |  | 69                              |  |                                                     |  |      |       | 69      |  
|Issuance of share capital in respect of acquisition
of minority
  interest in a subsidiary                        |  | 13                                  |  | 3                                  |  | 135                             |  |                                                     |  |      |       | 138     |  
|Issuance of share capital to employees resulting
from exercise of
  options                                       |  | 971                                 |  | 218                                |  | 8,939                           |  |                                                     |  |      |       | 9,157   |  
|Tax benefits relating to employees and other option
grants                                                        |  |                                     |  |                                    |  | 1,101                           |  |                                                     |  |      |       | 1,101   |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|BALANCE AT DECEMBER 31, 2003                                                                                      |  | 12,977                              |  | 3,704                              |  | 41,864                          |  | 30,073                                              |  | 5    |       | 75,646  |  
|CHANGES DURING 2004:                                                                                              |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Net income                                                                                                        |  |                                     |  |                                    |  |                                 |  | 4,837                                               |  |      |       | 4,837   |  
|Differences from translation of non dollar currency
financial
  statements of a subsidiary and associated company |  |                                     |  |                                    |  |                                 |  |                                                     |  | 262  |       | 262     |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Comprehensive income                                                                                              |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       | 5,099   |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Surplus arising from issuance of options granted to
non-employee                                                  |  |                                     |  |                                    |  | 217                             |  |                                                     |  |      |       | 217     |  
|Issuance of share capital in respect of acquisition
of a subsidiary                                               |  | 254                                 |  | 57                                 |  | 5,942                           |  |                                                     |  |      |       | 5,999   |  
|Issuance of share capital to employees resulting
from exercise of
  options                                       |  | 896                                 |  | 204                                |  | 10,149                          |  |                                                     |  |      |       | 10,353  |  
|Issuance of share capital in a public offering net
of $3,243,000 share
  issuance expenses                        |  | 3,450                               |  | 752                                |  | 58,105                          |  |                                                     |  |      |       | 58,857  |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|BALANCE AT DECEMBER 31, 2004                                                                                      |  | 17,577                              |  | 4,717                              |  | 116,277                         |  | 34,910                                              |  | 267  |       | 156,171 |  
|CHANGES DURING 2005:                                                                                              |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Net income                                                                                                        |  |                                     |  |                                    |  |                                 |  | 14,621                                              |  |      |       | 14,621  |  
|Differences from translation of non dollar currency
financial
  statements of a subsidiary and associated company |  |                                     |  |                                    |  |                                 |  |                                                     |  | (555 | )     | (555    | )
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Comprehensive income                                                                                              |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       | 14,066  |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|Surplus arising from issuance of options granted to
non-employee                                                  |  |                                     |  |                                    |  | 167                             |  |                                                     |  |      |       | 167     |  
|Issuance of share capital in respect of acquisition
of a subsidiary,
  net of issuance expenses                   |  | 1,006                               |  | 230                                |  | 23,633                          |  |                                                     |  |      |       | 23,863  |  
|Issuance of share capital to employees resulting
from exercise of
  options                                       |  | 826                                 |  | 185                                |  | 9,965                           |  |                                                     |  |      |       | 10,150  |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  
|                                                                                                                 
|BALANCE AT DECEMBER 31, 2005                                                                                      |  | 19,409                              |  | 5,132                              |  | 150,042                         |  | 49,531                                              |  | (288 | )     | 204,417 |  
|                                                                                                                  |  |                                     |  |                                    |  |                                 |  |                                                     |  |      |       |         |  

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

F-6

---

---



(Continued) - 1

RETALIX LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                 |  |                          |   |        |   |        |  
|------------------------------------------------------------------------------------------------ |  | ------------------------ | - | ------ | - | ------ | -
|                                                                                                 |  | Year ended
  December 31 |  
|                                                                                                 |  |                          |  
|                                                                                                 |  | 2005                     |   | 2004   |   | 2003   |  
|                                                                                                 |  |                          |   |        |   |        |  
|                                                                                                 |  | U.S. $ in thousands      |  
|                                                                                                 |  |                          |  
|                                                                                                
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                            |  |                          |   |        |   |        |  
|Net income                                                                                       |  | 14,621                   |   | 4,837  |   | 8,280  |  
|Adjustments required to reconcile net
  income to net cash provided by operating activities:     |  |                          |   |        |   |        |  
|Minority interests in losses of
  subsidiaries                                                   |  | (189                     | ) | (247   | ) | (288   | )
|Depreciation and amortization                                                                    |  | 6,422                    |   | 2,552  |   | 2,323  |  
|Gain arising from issuance of shares by a
  subsidiary and an associated company                 |  | (83                      | ) | (200   | ) | (1,068 | )
|Share in losses of an associated company                                                         |  | 130                      |   | 137    |   | 90     |  
|Tax benefits relating to employee and other
  option grants                                      |  | -                        |   | -      |   | 1,101  |  
|Compensation expenses resulting from shares
  and options granted to employees and non employees |  | 167                      |   | 299    |   | 307    |  
|Changes in accrued liability for employee
  rights upon retirement                               |  | 989                      |   | 1,085  |   | 934    |  
|Losses (gains) on amounts funded in respect
  of employee rights upon retirement                 |  | 155                      |   | (166   | ) | (311   | )
|Deferred income taxes - net                                                                      |  | (1,498                   | ) | (980   | ) | (2,358 | )
|Net increase in marketable securities                                                            |  | (2,969                   | ) | (1,903 | ) | (536   | )
|Amortization of discount (premium) on
  marketable debt securities                               |  | 92                       |   | 66     |   | (42    | )
|Other                                                                                            |  | (565                     | ) | 116    |   | 149    |  
|Changes in operating assets and
  liabilities:                                                   |  |                          |   |        |   |        |  
|Decrease (increase) in accounts
receivable:                                                      |  |                          |   |        |   |        |  
|Trade (including the non-current portion)                                                        |  | (5,212                   | ) | 1,538  |   | (2,540 | )
|Other                                                                                            |  | (926                     | ) | (734   | ) | (697   | )
|Increase (decrease) in accounts payable and
  accruals:                                          |  |                          |   |        |   |        |  
|Trade                                                                                            |  | (300                     | ) | (94    | ) | (309   | )
|Employees, employee institutions and other                                                       |  | 2,149                    |   | (49    | ) | 5,633  |  
|Decrease (increase) in inventories                                                               |  | (1,045                   | ) | 388    |   | 810    |  
|Increase (decrease) in deferred revenues
  (including the non-current portion)                   |  | 558                      |   | (445   | ) | 260    |  
|                                                                                                 |  |                          |   |        |   |        |  
|                                                                                                
|Net cash provided by operating activities -
  forward                                            |  | 12,496                   |   | 6,200  |   | 11,738 |  
|                                                                                                 |  |                          |   |        |   |        |  

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

F-7

---

---



(Continued) - 2

RETALIX LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                |  |                        |   |         |   |         |  
|----------------------------------------------------------------------------------------------- |  | ---------------------- | - | ------- | - | ------- | -
|                                                                                                |  | Year ended December 31 |  
|                                                                                                |  |                        |  
|                                                                                               
|                                                                                                |  | 2005                   |   | 2004    |   | 2003    |  
|                                                                                                |  |                        |   |         |   |         |  
|                                                                                                |  | U.S. $ in thousands    |  
|                                                                                                |  |                        |  
|                                                                                                |  |                        |  
|Net cash provided by operating activities -
  brought forward                                   |  | 12,496                 |   | 6,200   |   | 11,738  |  
|                                                                                                |  |                        |   |         |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |  |                        |   |         |   |         |  
|Short-term bank deposits - net                                                                  |  | -                      |   | -       |   | (5      | )
|Maturity of marketable debt securities held
  to maturity                                       |  | 12,111                 |   | 10,801  |   | 4,757   |  
|Investment in marketable debt securities
  held to maturity                                     |  | (1,876                 | ) | (20,784 | ) | (7,121  | )
|Acquisition of subsidiaries consolidated
  for the first time (a)                               |  | (50,312                | ) | (13,781 | ) | -       |  
|Additional investments in subsidiaries                                                          |  | (3,764                 | ) | (2,504  | ) | -       |  
|Purchase of property, plant, equipment and
  other assets                                       |  | (3,069                 | ) | (1,826  | ) | (1,008  | )
|Proceeds from sale of property, plant and
  equipment                                           |  | 25                     |   | 63      |   | 150     |  
|Amounts funded in respect of employee
  rights upon retirement, net                             |  | (905                   | ) | (644    | ) | (290    | )
|Long-term loans granted to employees                                                            |  | (54                    | ) | (28     | ) | (27     | )
|Collection of long-term loans from
  employees                                                  |  | 168                    |   | 155     |   | 297     |  
|                                                                                                |  |                        |   |         |   |         |  
|Net cash used in investing activities                                                           |  | (47,676                | ) | (28,548 | ) | (3,247  | )
|                                                                                                |  |                        |   |         |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |                        |   |         |   |         |  
|Proceeds from issuance of shares in a public
offering, net of
  $3,243,000 share issuance costs |  | -                      |   | 58,857  |   | -       |  
|Long-term bank loans received from banks                                                        |  | -                      |   | -       |   | 2,278   |  
|Proceeds from issuance of shares of subsidiary to a
third
  party                               |  | -                      |   | -       |   | 2,458   |  
|Repayment of long-term bank loans                                                               |  | (4,698                 | ) | (3,467  | ) | (10,257 | )
|Issuance of share capital to employees
  resulting from exercise of options                     |  | 10,150                 |   | 10,135  |   | 9,157   |  
|Short-term bank credit - net                                                                    |  | (5,809                 | ) | 1,887   |   | 5,556   |  
|Minority investment in a subsidiary                                                             |  | 34                     |   | 34      |   | -       |  
|                                                                                                |  |                        |   |         |   |         |  
|Net cash provided by (used in) financing
  activities                                           |  | (323                   | ) | 67,446  |   | 9,192   |  
|                                                                                                |  |                        |   |         |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                         |  | (218                   | ) | 222     |   | -       |  
|                                                                                                |  |                        |   |         |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                          |  | (35,721                | ) | 45,320  |   | 17,683  |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                     |  | 91,413                 |   | 46,093  |   | 28,410  |  
|                                                                                                |  |                        |   |         |   |         |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT END
  OF YEAR                                           |  | 55,692                 |   | 91,413  |   | 46,093  |  
|                                                                                                |  |                        |   |         |   |         |  

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

F-8

---

---



(Continued) - 3

RETALIX LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:

|                                                                                                                              |  |                        |   |         |   |       | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | ------- | - | ----- | 
|                                                                                                                              |  | Year ended December 31 |  
|                                                                                                                              |  |                        |  
|                                                                                                                              |  | 2005                   |   | 2004    |   | 2003  | 
|                                                                                                                              |  |                        |   |         |   |       | 
|                                                                                                                              |  | U.S. $ in thousands    |  
|                                                                                                                              |  |                        |  
|                                                                                                                             
|(a) Supplementary disclosure of cash flow
  information -                                                                     |  |                        |   |         |   |       | 
|Fair
  value of assets acquired and liabilities assumed of subsidiaries and
  activities acquired at the date of acquisition: |  |                        |   |         |   |       | 
|Working
  capital (excluding cash and cash equivalents)                                                                       |  | (1,441                 | ) | (2,716  | ) | -     | 
|Deferred
  revenues                                                                                                           |  | 10,677                 |   | 1,822   |   | -     | 
|Deferred income taxes                                                                                                         |  | (396                   | ) | (728    | ) | -     | 
|Property plant and equipment, net                                                                                             |  | (1,867                 | ) | (699    | ) | -     | 
|Amounts
  funded in respect of employee rights upon retirement                                                                |  | -                      |   | (9      | ) | -     | 
|Accrued
  liability for employee rights upon retirement                                                                       |  | -                      |   | 1,711   |   | -     | 
|Long-term
  loan                                                                                                              |  | -                      |   | 1,469   |   | -     | 
|Short-
  term bank credit                                                                                                     |  | 2,230                  |   | -       |   | -     | 
|Minority
  interests in subsidiary                                                                                            |  | -                      |   | 141     |   | -     | 
|Goodwill
  and other intangible assets arising on acquisition                                                                 |  | (84,211                | ) | (21,013 | ) | -     | 
|Issuance
  of the Companys share capital                                                                                     |  | 23,863                 |   | 5,410   |   | -     | 
|Increase in account payable- other                                                                                            |  | 833                    |   | 831     |   | -     | 
|                                                                                                                              |  |                        |   |         |   |       | 
|                                                                                                                              |  | (50,312                | ) | (13,781 | ) | -     | 
|                                                                                                                              |  |                        |   |         |   |       | 
|                                                                                                                             
|(b) Supplementary disclosure of cash flow
  information -                                                                     |  |                        |   |         |   |       | 
|cash paid during the period for:                                                                                              |  |                        |   |         |   |       | 
|                                                                                                                             
|Interest                                                                                                                      |  | 1,895                  |   | 861     |   | 1,123 | 
|                                                                                                                              |  |                        |   |         |   |       | 
|Income tax                                                                                                                    |  | 4,236                  |   | 1,818   |   | 1,328 | 
|                                                                                                                              |  |                        |   |         |   |       | 

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

|   |                                                                                                                                                                                                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1) | On April 1, 2005, the
  Company acquired substantially all of the assets of Integrated Distribution
  Solutions Inc. (IDS), in consideration for cash, as well as the issuance of
  share capital of the Company in the total amount of approximately $ 6,882,000.                                                   
|   |                                                                                                                                                                                                                                                                                                                        
|2) | On April 1, 2005, the
  Company acquired approximately 73.4% of the issued and outstanding shares (on
  an as-converted-to-common-stock basis) of TCI Solutions Inc. (TCI), in
  consideration for cash, as well as the issuance of share capital of the
  Company in the total amount of approximately $ 16,980,000.
|  
|3) | During 2004, the Company
  acquired 100% of the shares of OMI International, Inc. in consideration for
  the issuance of share capital of the Company in the total amount of
  $5,410,000.                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                        
|4) | In February 2004, the
  Companys subsidiary in the U.K. acquired the supply chain management
  distribution activities of OMI International Ltd. These activities were
  acquired in consideration for cash, as well as the issuance of share capital
  of the Company in the total amount of approximately $ 590,000.

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

F-9

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---



(Concluded) - 4

RETALIX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS



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

|   |                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5) | In the year ended December
  31, 2003, 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.
|   |                                                                                                                                                                                                                                    
|6) | 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 the
consolidated financial statements.

F-10

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------- | ------------------------------ | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANTACCOUNTINGPOLICIES:
|              |                               
|              | a.                             | General:
|              |                                |         
|              |                                | 1)       | Nature of operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                |          | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Retalix Ltd. (the Company), an Israeli corporation
  whose shares are listed on the Nasdaq Global Select Market (under the symbol
  RTLX) and on the Tel-Aviv Stock Exchange (TASE), separately and together
  with its subsidiaries and an associated company (the Group), develops,
  manufactures and markets integrated enterprise-wide, open software solutions
  for the sales operations and supply chain management operations of food and
  fuel retailers, including supermarkets, convenience stores and fuel stations
  as well as suppliers and manufacturers in the food industry.
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                |          | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | As to the Groups geographical segments and
  principal customers, see note 14.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                |          | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Subsidiary - over which the Company has control and
  over 50% of the ownership                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                |          | d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Associated company - an investee company (which is
  not a subsidiary), over which financial and operational policy the Company
  exerts material influence.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                | 2)       | Accounting principles and use of estimates in the
  preparation of financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                |          | The financial statements have been prepared in
  accordance with accounting principles generally accepted (GAAP) in the
  United States of America (U.S. GAAP).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                |          | The preparation of financial statements in
  conformity with GAAP requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities, and the
  disclosure of contingent assets and liabilities at the dates of the financial
  statements as well as the reported amounts of revenues and expenses during
  the reporting years. Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                | 3)       | Functional currency:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              |                                |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                |          | The currency of the primary economic environment in
  which the operations of the Group and almost each member of the Group (except
  for one subsidiary and the associated company) are conducted is the U.S.
  dollar (dollar; $). Most of the Groups revenues 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. 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 Financial Accounting Standards Board (FASB) Statement No. 52 Foreign
  Currency Translation (FAS 52):

F-11

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---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------- | ----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANTACCOUNTINGPOLICIES(continued):
|              |                                          
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Assets and liabilities are translated at year end
  exchange rates, while operating results items are translated at average
  exchange rates during the year. Differences resulting from translation are
  presented in shareholders equity under accumulated other comprehensive
  income. The financial statements of the associated company are included in
  the financial statements of the Company in accordance with the equity method,
  based on translation into dollars in accordance with FAS 52: the resulting
  translation adjustments are presented under shareholders equity- accumulated
  other comprehensive income.                                                                                                                                                                                                                                                                                                                   
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              | b.                                        | Principlesofconsolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The consolidated financial statements include the
  accounts of the Company and its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                           | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Intercompany balances and transactions have been
  eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                           | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | As for goodwill and other intangible assets arising
  on business combinations, see h. below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                           | 4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The Company evaluates its interests in other entities to determine whether any entity is a variable
interest entity (VIE) within the meaning of FIN 46(R) Consolidation of Variable Interest Entities.
If the Company concludes that an entity is a variable interest entity, the Company evaluates its
interest in such entity to determine whether the Company is the primary beneficiary of the entity. If
the Company is the primary beneficiary of a variable interest entity, the Company consolidates such
entity and reflects the interest of other beneficiaries of that entity as a minority interest. If the
Company concludes that an entity is a variable interest entity and that the Company is not the primary
beneficiary, the Company does not consolidate the entity.
The Companys consolidated financial statements include VIE for which the Company is the primary
beneficiary and of which it holds majority of voting interest.
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              | c.                                        | Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           | The Group considers all highly liquid investments,
  which include short-term bank deposits with an original maturity date of
  three months or less that are not restricted as to withdrawal or use, to be cash
  equivalents.                                                                                                                                                                                                                                    
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | d.                                        | Marketablesecurities:                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           | The Company accounts for investments in marketable
  securities in accordance with FASB Statement No. 115, Accounting for Certain
  Investments in Debt and Equity Securities.                                                                                                                                                                                                                                                                                   
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           | Investments in marketable bonds are classified as
  held to maturity because the Company has the positive intent and ability to
  hold to maturity and are stated at amortized cost with the addition of
  computed interest accrued to balance sheet date (such interest represents the
  computed yield on cost from acquisition to maturity). Interest and
  amortization of premium discount for debt securities are carried to financial
  income or expenses.
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           | Investments in other marketable securities that are
  classified as trading securities are stated at market value. The
  changes in market value of these securities are carried to financial income
  or expenses.                                                                                                                                                                                                                                              
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | e.                                        | Investment in an associated company:                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           | This investment is accounted for by the equity
  method and included among other non-current assets.                                                                                                                                                                                                                                                                                                                                                               
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | f.                                        | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           | Inventories that include purchased products value
  hardware are included in finished goods and are valued at the lower of cost
  or market. Cost is determined on a first-in, first-out basis.                                                                                                                                                                                                                                                                  

F-12

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RETALIX LTDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                           |                                |                                                                                                                                           
|------------- | ----------------------------------------- | ------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANTACCOUNTINGPOLICIES(continued):
|              |                                          
|              | g.                                        | 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 |  | 20-33           | 
| | Vehicles                           |  | 15              | 
| | Office furniture and equipment     |  | 6-25 (mainly 6) | 
| | Building                           |  | 4               | 

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | h. | Goodwill and other intangible
  assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Goodwill is the excess of the purchase price over
  the fair value of identifiable net assets acquired in business combinations
  accounted for as purchases. The goodwill is not amortized to earnings, but
  instead is subject to periodic testing for impairment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Other intangible assets are amortized over a period
  of one to fifteen years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | FASB Statement No. 142, Goodwill and Other
  Intangible Assets (FAS 142) requires goodwill and indefinite-lived
  intangible assets to be tested for impairment at least annually or between
  annual tests if certain events or indicators of impairment occur. The
  impairment test consists of a comparison of the fair value of an intangible
  asset with its carrying amount. If the carrying amount of an intangible asset
  exceeds its fair value, an impairment loss is recognized in an amount equal
  to that excess. Goodwill is tested for impairment at the reporting unit level
  by a comparison of the fair value of a reporting unit with its carrying
  amount. During 2003, 2004 and 2005, no impairment losses were identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | As to the Companys test for impairment of goodwill,
  see note 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | i. | Impairment of assets due to changes
  in circumstances:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Group applies FASB Statement No. 144,
  Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144).
  FAS 144 requires that long-lived assets, which are to be held and used by an
  entity be reviewed for impairment whenever events or changes in circumstances
  indicate that the carrying amount of the assets may not be recoverable. 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. In 2005, no impairment
  indicators have been identified.                       

F-13

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---



RETALIX LTDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- | ----------------------------------------- | ------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANTACCOUNTINGPOLICIES(continued):
|              |                                          
|              | j.                                        | Incometaxes:
|              |                                           |             
|              |                                           | 1)           | The Company accounts for income taxes in accordance
  with FASB Statement No. 109, Accounting for Income Taxes (FAS 109).
  Deferred income taxes are determined by the asset and liability method based
  on the estimated future tax effects of differences between the financial
  accounting and the tax bases of assets and liabilities under the applicable
  tax law. Deferred tax balances are computed using the tax rates expected to
  be in effect at time when these differences reverse. Valuation allowances in
  respect of the deferred tax assets are provided when it is more likely than
  not that all or a portion of the deferred income tax assets will not be
  realized. See note 10g for additional information regarding the composition
  of the deferred taxes.
|              |                                           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|              |                                           | 2)           | Upon the distribution of dividends from the
  tax-exempt income of Approved Enterprises (see also notes 9c and 10g),
  the amount distributed will be subject to tax at the rate that would have
  been applicable had the Company 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 inter-company dividend distribution from foreign
  subsidiaries; no additional deferred income taxes have been provided, since
  it is the Groups policy not to distribute, in the foreseeable future,
  dividends which would result in additional tax liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                                           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|              |                                           | 4)           | Taxes which would apply in the event of disposal of
  investments in foreign subsidiaries have not been taken into account in
  computing the deferred income taxes, as it is the Companys policy to hold
  these investments, not to realize them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-14

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RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------- | ----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANTACCOUNTINGPOLICIES(continued):
|              |                                          
|              | k.                                        | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | The Group derives its revenues primarily from the
  licensing of integrated software products, and to some extent from the sale
  of complementary computer and other hardware equipment, all of which it
  classifies as revenues from product sales. The Group also derives revenues
  from maintenance and other professional services which are principally
  software changes and enhancements requested by customers as well as on-line
  application, information and messaging services, mostly associated with
  products sold by the Group and which it classifies as revenues from services
  and projects.                                                                                                                                                                                                                                 
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | Revenues from sales of product and software license
  agreements are recognized when all of the criteria in Statement of Position
  (SOP) 97-2, Software Revenue Recognition as amended by SOP 98-9,
  Modification of SOP 97-2, Software Revenue Recognition With Respect to
  Certain Transactions, herein referred to as SOP 97-2, are met. Revenues from
  products and license fees are recognized when persuasive evidence of an
  agreement exists, delivery of the product has occurred, the fee is fixed or
  determinable, no further obligations exist and collectibility is probable. In
  software arrangements that require significant customization, integration and
  development, revenue is recognized in accordance with SOP 81-1, Accounting
  for Performance of Construction-Type and Certain Production-Type Contracts.
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | Where software license arrangements involve multiple
  elements, the arrangement consideration is allocated using the residual
  method. Under the residual method, revenue is recognized for the delivered
  elements when (1) Vendor Specific Objective Evidence (VSOE) of the fair
  values of all the undelivered elements exists, and (2) all revenue
  recognition criteria of SOP 97-2, as amended, are satisfied. Under the
  residual method ,any discount in the arrangement is allocated to the
  delivered element. The Companys VSOE of fair value for maintenance is based
  on a consistent renewal percentage. Revenues from maintenance services are
  recognized ratably over the contractual period or as services are performed.                                                                                                
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | Revenues from professional services that are not
  bundled or linked to a software sale accounted for under SOP 97-2 are
  recognized as services are performed in accordance with the provisions of
  Staff Accounting Bulletin No. 104 of the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | Hardware sales are recognized on a gross price
  basis, in accordance with Emerging Issues Task Force (EITF) 99-19,
  Reporting Gross Revenue as a Principal versus Net as an Agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | In cases where the products are sold to smaller
  retailers, through resellers, revenues are recognized as the products are
  supplied to the resellers as per the method sometimes referred to as the
  sell-in method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | In specific cases where resellers have right of
  return or the company is required to repurchase the products or in case the
  company guarantees the resale value of the products, revenues are recognized
  as the products are delivered by the resellers as per the method sometimes
  referred as the sell through method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | Revenues from on-line application, information and
  messaging services, are recognized as rendered in accordance with the
  provisions of Staff Accounting Bulletin No. 104 of the Securities and
  Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           | Deferred revenue includes advances and payments
  received from customers, for which revenue has not yet been recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-15

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------- | ----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANTACCOUNTINGPOLICIES(continued):
|              |                                          
|              | l.                                        | Researchanddevelopment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                           | Research and development expenses are charged to
  expenses as incurred. Participations received from the Government of Israel
  for development of approved projects are recognized as a reduction of
  expenses when the related costs are incurred. Development costs incurred
  subsequent to the establishment of technological feasibility are capitalized
  in accordance with the principles set forth in FASB Statement No. 86,
  Accounting for the Costs of Computer Software to be Sold, Leased or
  Otherwise Marketed. Based on the Companys product development process
  technological feasibility is established upon completion of a working model
  i.e. only when all planning, designing, coding and testing have been
  completed according to design specifications. Costs incurred by the Company
  between completion of the working models and the point at which the products
  are ready for general release have been insignificant. Therefore, all
  research and development costs have been expensed.
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | m.                                        | Issuance of shares by investee
  companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                           | Capital gains arising from the issuance of shares by
  investee companies to third parties are reflected in the statements of 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | n.                                        | Allowance for doubtful accounts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                           | The allowance for doubtful accounts is determined
  for specific debts which are doubtful of collection. In determining the
  allowance for doubtful accounts, the Group considers, among other things, its
  past experience with such customers, the economic environment, the industry
  in which such customers operate, financial information available on such
  customers, etc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | o.                                        | Earnings per share (EPS):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                           | Basic EPS is computed by dividing net income by the
  weighted average number of shares outstanding during the year. Diluted EPS
  reflects the increase in the weighted average number of shares outstanding
  that would result from the assumed exercise of options, calculated using the
  treasury-stock method in accordance with FASB Statement No. 128, Earnings
  Per Share (FAS 128). The options of 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.                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | p.                                        | Comprehensive income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                           | Comprehensive income, presented in shareholders
  equity, includes currency translation adjustments of non-dollar currency
  financial statements of a subsidiary and of an associated company
  (accumulated balance at December 31, 2005 and December 31, 2004 is ($288,000)
  and $267,000, respectively).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-16

---

---



RETALIX LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------- | ------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANT ACCOUNTING POLICIES(continued):
|              |                                            
|              | q.                                          | Stock based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                             | The Group accounts for employee stock-based
  compensation in accordance with Accounting Principles Board Opinion (APB)
  No. 25, Accounting for Stock Issued to Employees and related
  interpretations. In accordance with FASB Statement No. 123, Accounting for
  Stock-Based Compensation (FAS 123), the Group discloses pro-forma
  information on the net income and earning per share assuming the Group had
  accounted for employee stock option grants using the fair value-based method
  defined in FAS 123. The Group accounts for equity awards issued to
  non-employees in accordance with the provision of FAS 123, and EITF 96-18,
  Accounting for Equity Instruments that are Issued to other than Employee for
  Acquiring or in Conjunction with Selling Goods or Services and related
  interpretations.
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                             | 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                       |       
| |   |                                                                                                                                                                           |  |                                              |       
| |   |                                                                                                                                                                           |  | 2005                                         |        | 2004 |  | 2003   |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |  
| |   |                                                                                                                                                                           |  | U.S. $ in thousands, except
  per share data |       
| |   |                                                                                                                                                                           |  |                                              |       
| |   |                                                                                                                                                                           |  |                                              |       
| |   | Net income, as reported                                                                                                                                                   |  |                                              | 14,621 |      |  | 4,837  |   |  | 8,280  |  
| |   | Add (deduct) - stock based employee compensation expenses
(income),
  included in reported net income                                                                     |  |                                              | 167    |      |  | 229    |   |  | (63    | )
| |   | Deduct - stock based employee compensation expenses
determined under
  the fair value method for all awards *                                                             |  |                                              | (3,999 | )    |  | (4,826 | ) |  | (1,911 | )
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| |   | Pro forma net income                                                                                                                                                      |  |                                              | 10,789 |      |  | 240    |   |  | 6,306  |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| |   | Earnings per share:                                                                                                                                                       |  |                                              |        |      |  |        |   |  |        |  
| |   | Basic - as reported                                                                                                                                                       |  |                                              | 0.78   |      |  | 0.31   |   |  | 0.67   |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| |   | Basic - pro forma                                                                                                                                                         |  |                                              | 0.58   |      |  | 0.02   |   |  | 0.51   |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| |   | Diluted - as reported                                                                                                                                                     |  |                                              | 0.74   |      |  | 0.29   |   |  | 0.63   |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| |   | Diluted - pro forma                                                                                                                                                       |  |                                              | 0.55   |      |  | 0.01   |   |  | 0.48   |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| |   |                                                                                                                                                                           |  |                                              |        |      |  |        |   |  |        |  
| | * | 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 | 
| |  |  |                                      |  |                        | 
| |  |  |                                      |  | 2005                   |  | 2004    |  | 2003 | 
| |  |  |                                      |  |                        |  |         |  |      | 
| |  |  | Dividend yield                       |  | 0%                     |  | 0%      |  | 0%   | 
| |  |  | Expected
  volatility                |  | 35%-37%                |  | 28%-43% |  | 53%  | 
| |  |  | Risk free
  interest rate            |  | 4%                     |  | 2%-3%   |  | 2%   | 
| |  |  | Expected holding
  period (in years) |  | 3                      |  | 3-4     |  | 3    | 

F-17

---

---



RETALIX LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- | ------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANT ACCOUNTING POLICIES(continued):
|              |                                            
|              | r.                                          | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                             | These costs are charged to selling and marketing
  expenses as incurred. Advertising expenses totaled $2,716,872, $1,368,000 and
  $938,000 in the years ended December 31, 2005, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | s.                                          | Derivative financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                             | The Company has only limited involvement with
  foreign exchange derivative financial instruments (forward exchange
  contracts). These contracts do not qualify for hedge accounting under U.S.
  GAAP. As a result, changes in the fair value of derivatives are reflected in
  the statements of income and included in financial expenses - net.                                                                                                                                                                                                                                                                        
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | t.                                          | 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 qualify as a sales transaction under the
  provisions of FASB Statement No.140, Accounting for Transfers and Servicing of
  Financial Assets and Extinguishments of Liabilities (FAS 140). The
  resulting costs are charged to financial expenses - net, as incurred. The
  expenses resulting from these sales in the years ended December 31, 2005 and
  2004 amounted to $1,835,512 and $658,000, respectively, and are included in
  financial expenses.
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | u.                                          | Recently issued accounting
  pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                             | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | In December 2004, the FASB issued Statement No. 123
  (revised 2004), Share-Based Payment (FAS 123(R)). FAS 123(R) will provide
  investors and other users of financial statements with more complete and
  neutral financial information by requiring that the compensation cost
  relating to share-based payment transactions be recognized in financial
  statements. That cost will be measured based on the fair value of the equity
  or liability instruments issued. FAS 123(R) covers a wide range of
  share-based compensation arrangements including share options, restricted
  share plans, performance-based awards, share appreciation rights and employee
  share purchase plans. FAS 123(R) replaces SFAS No. 123, Accounting for
  Stock-Based Compensation (FAS 123), and supersedes APB No. 25, Accounting
  for Stock Issued to Employees (APB 25). FAS 123, as originally issued in
  1995, established as preferable a fair-value-based method of accounting for
  share-based payment transactions with employees. However, that Statement
  permitted entities the option of continuing to apply the guidance in APB 25,
  as long as the footnotes to financial statements disclosed what net income
  would have been had the preferable fair-value-based method been used. The
  Company will be required to apply FAS 123(R) as of the first annual reporting
  period that begins after June 15, 2005. As permitted by FAS 123, the Company
  currently accounts for share-based payments to employees using APB 25s
  intrinsic value method. Accordingly, the adoption of FAS 123(R)s fair value
  method will have a significant impact on the Companys result of operations,
  although it will have no impact on its overall financial position. The Company
  plans to adopt FAS 123(R) using the modified prospective method. The
  modified prospective method requires compensation cost to be recognized
  beginning with the effective date (a) based on the requirements of FAS 123(R)
  for all share-based payments granted after the effective date and (b) based
  on the requirements of FAS 123 for all awards granted to employees prior to
  the effective date of FAS 123(R) that remain unvested on the effective date.
  The impact of adoption of FAS 123(R) on future periods cannot be predicted at
  this time because it will depend on levels of share-based payments granted in
  the future. However, had the Company adopted FAS 123(R) in prior periods, the
  impact of that standard would have approximated the impact of FAS 123 as described
  in the disclosure of pro forma net income and earnings per share in Note 1(q)
  to the financial statements.

F-18

---

---



RETALIX LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                              |                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------- | -------------------------------------------- | ------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1       | SIGNIFICANT ACCOUNTING POLICIES (continued):
|              |                                             
|              |                                              | 2)                                                                                                | In
  May 2005, the FASB issued Statement No. 154,Accounting Changes and Error
  Corrections (FAS 154), a replacement of APB No. 20, Accounting
  Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim
  Financial Statements. FAS 154 provides guidance on the accounting for and
  reporting of accounting changes and error corrections. APB No. 20 previously
  required that most voluntary changes in accounting principles be recognized
  by including in net income for the period of the change, the cumulative
  effect of changing to the new accounting principle. FAS 154 requires
  retroactive application to prior periods financial statements of a voluntary
  change in accounting principles unless it is impracticable. FAS 154 is
  effective for accounting changes and corrections of errors made in fiscal
  years beginning after December 15, 2005. The Company does not expect that the
  adoption of FAS 154 will have a material impact on its financial position or
  results of operations.                                                                                                                                                                                                                                                                    
|              |                                              |                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                              | 3)                                                                                                | In
  November 2004, the FASB issued Statement No. 151, Inventory Costs, an
  Amendment of ARB No. 43, Chapter 4. (FAS 151). FAS 151 amends Accounting
  Research Bulletin (ARB) No. 43, Chapter 4, to clarify that abnormal
  amounts of idle facility expense, freight handling costs and wasted materials
  (spoilage) should be recognized as current-period charges. In addition, FAS
  151 requires that allocation of fixed production overheads to the costs of
  conversion be based on normal capacity of the production facilities. FAS 151
  is effective for inventory costs incurred during fiscal years beginning after
  June 15, 2005. The Company does not expect that the adoption of FAS 151 will
  have a material effect on its financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              |                                              |                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                              | 4)                                                                                                | In November 2005, the FASB issued FASB Staff Position (FSP) 115-1, The
  Meaning of Other-Than-Temporary Impairment and its Application to Certain
  Investments. The FSP addresses the determination as to when an investment is
  considered impaired, whether that impairment is other than temporary, and the
  measurement of an impairment loss. The FSP also includes accounting
  considerations subsequent to the recognition of other than-temporary
  impairment and requires certain disclosures about unrealized losses that have
  not been recognized as other-than-temporary impairments. The guidance in this
  FSP amends FASB Statement No. 115, Accounting for Certain Investments in
  Debt and Equity (FAS 115). The FSP replaces the impairment evaluation
  guidance of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
  Impairment and Its Application to Certain Investments, with references to
  the existing other-than-temporary impairment guidance. The FSP clarifies that
  an investor should recognize an impairment loss no later than when the
  impairment is deemed other-than-temporary, even if a decision to sell an
  impaired security has not been made. The guidance in this FSP is to be
  applied to reporting periods beginning after December 15, 2005.
|              |                                              |                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                              |                                                                                                   | As of December 31, 2005, adoption of FSP 115-1 will not have a material
  impact on the Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                              |                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              | v.                                           | Reclassification:                                                                                
|              |                                              |                                                                                                  
|              |                                              | Certain comparative figures have been reclassified
  to conform to the current year presentation.

F-19

---

---



RETALIX LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2       | ACQUISITIONS:                                                                                                                                                                                                                                        
|              |                                                                                                                                                                                                                                                      
|              | The results of the following acquisitions done by
  the Company to further expand its product offerings and market position are
  included in the Companys consolidated statement of operations as of the date
  of the acquisition of each company.
|              |                                                                                                                                                                                                                                                      
|              | a.                                                                                                                                                                                                                                                    | On
  April 1, 2005, the Company, through its subsidiary Retalix Holdings Inc.,
  acquired approximately 73.4% of the issued and outstanding shares (on an
  as-converted-to-common-stock basis) of TCI Solutions Inc. (TCI), a provider
  of retail store and headquarters solutions, including pricing, promotions,
  inventory, management and DSD solutions for the grocery industry in
  consideration of $32,600,000, comprised of $15,603,000 in cash, including
  estimated direct costs and 715,730 of the Companys Ordinary shares valued at
  approximately $16,980,000. The identified intangible assets acquired amounted
  to approximately $9,596,000 and included mainly acquired technology of
  approximately $2,810,000 and customer base of approximately $6,506,000 to be
  amortized over their estimated useful lives (4 to 15 years) - see also note
  4b. Goodwill arising on the acquisition amounted to approximately
  $31,983,000. The Company expects that this acquisition will strengthen and
  widen its product offerings and thus improve its position in its target
  markets. In addition, the Company believed it would gain the ability to
  increase sales of both its traditional products and the new products gained
  from the acquisition by cross selling into each others established markets.
  Synergies may also be realized through the use of some common corporate
  overhead resources. Accordingly, the acquisition resulted in a significant
  allocation to goodwill due to the above factors.                                                                                                                                                                                                                                                                                                                                                        
|              |                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              |                                                                                                                                                                                                                                                       | Also
  in April, 2005, the Company through its subsidiary Retalix Holdings Inc.,
  executed an agreement and plan of merger with TCI Solutions, pursuant to
  which in November 2005, TCI merged with and into one of the Companys
  subsidiaries and all outstanding common stock and Preferred stock of TCI
  (other than shares held by the Company and shares as to which appraisal
  rights had been properly perfected under Delaware law) were exchanged for an
  aggregate of approximately $2,570,000 in cash. Goodwill arising from this
  transaction amounted to approximately $2,570,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              | b.                                                                                                                                                                                                                                                    | On
  April 1, 2005, the Company through its subsidiary Retalix Holdings Inc.,
  acquired substantially all of the assets of Integrated Distribution Solutions
  Inc. (IDS), a provider of ERP and distribution solutions for the food
  service, convenience store and grocery industries in consideration of
  $44,859,000, comprised of $37,976,000 in cash, including estimated direct
  costs and 290,128 of the Companys Ordinary shares valued at approximately
  $6,883,000. In addition, the sellers were issued additional 207,236 shares
  valued at $4,916,000 that will be eligible for release from escrow only if
  certain future customer retention milestones are met as of April 1, 2007. The
  identified intangible assets acquired amounted to approximately $15,463,000
  and included mainly acquired technology of approximately $4,120,000 and
  customer base of approximately $ 10,852,000 to be amortized over their
  estimated useful lives (2 to 15 years) - see also note 4b. Goodwill arising
  on the acquisition amounted to approximately $29,383,000. The goodwill will
  be amortized for tax purposes over a period of 15 years. The Company expects
  that this acquisition will strengthen and significantly widen its product
  offerings and thus improve its position in its target markets. In addition,
  the Company believed it would gain the ability to increase sales of both its
  traditional products and the new products gained from the acquisition by
  cross selling into each others established markets. Synergies may also be
  realized through the use of some common corporate overhead resources.
  Additionally, IDSs reputation in the industry and its name recognition are
  also factors in the valuation of IDSs goodwill. Accordingly, the acquisition
  resulted in a significant allocation to goodwill due to the above factors.

F-20

---

---



RETALIX LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------- | ------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2       | ACQUISITIONS (continued):
|              |                          
|              | c.                        | In
  July 2005, the Company, through its subsidiary Retalix Italia S.p.A.,
  acquired in whole M.P.S. Millennium Pos Solution S.r.l., from an unrelated
  party in consideration of $604,000 in cash. The identified intangible assets
  acquired amounted to approximately $239,000 consisting primarily from acquired
  technology of approximately $193,000 and customer base of approximately
  $46,000, to be amortized over their estimated useful lives (5 years). - see
  also note 4b. Goodwill arising on the acquisition amounted to approximately
  $305,000.                                                                                                                                                                                                                                                                                                                                                        
|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | d.                        | In
  September 2004, the Companys subsidiary, Store Alliance.com Ltd.
  (StoreAlliance), together with The College for Retail Studies - a private
  company, established Retail College StoreNext Ltd. (The Retail College).
  The Retail College operates as a school for retail studies supplying its
  services to retailers and suppliers within the Israeli retail industry, while
  using and implementing tools and methodologies offered by StoreAlliance in
  the Israeli market.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                           | According
  to the agreement between the parties, StoreAlliance has committed to invest
  $140,000 in consideration for 67% of the companys share capital (including
  capital notes) and against a counter proportional investment of $70,000 by
  the minority interest. Such Investments are to be executed according to terms
  specified in the formation agreement. Through October 2005, Store Alliance
  has invested the full $140,000 under its above commitment.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                           | In
  November 2005, StoreAlliance invested an additional $100,000 under an
  agreement signed in August 2005 with the minority interest. This additional
  investment increased the Companys holdings in The Retail College to 75%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | e                         | In
  August 2004, the Company acquired 51% of the shares of Unit S.p.A. the name
  of which was later changed to Retalix Italia S.p.A., from an unrelated party
  in consideration of $1,800,000 in cash. In December 2004, the Company
  acquired an additional 49% of the shares of Unit and thus increased its
  holdings in Unit to 100%. This additional acquisition was made in
  consideration of $1,900,000 in cash. The identified intangible assets
  acquired amounted to approximately $600,000 and included mainly acquired
  technology of approximately $300,000 and customer base of approximately
  $300,000 to be amortized over their estimated useful lives (3 years) - see
  also note 4b. Goodwill arising on the acquisition amounted to approximately
  $2,800,000.                                                                                                                                      
|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | f.                        | In
  February 2004, the Companys subsidiary in the U.K. acquired the supply chain
  management distribution activities of OMI International Ltd (OEL). These
  activities were acquired in consideration of approximately $1,500,000 out of
  which approximately $947,000 in cash and in addition 28,188 Ordinary shares
  of the Company valued at approximately $590,000. The value of the Ordinary
  shares issued was determined based on the average market price of the
  Companys shares over several days before and after the acquisition was
  agreed and announced. The identified intangible assets acquired included
  mainly customer base of approximately $700,000 to be amortized over their
  estimated useful lives (3 years) - see also note 4b. Goodwill arising on the
  acquisition amounted to approximately $800,000. The goodwill can be amortized
  for tax purposes over a period of five years.

F-21

---

---



RETALIX LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------------- | ------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2       | ACQUISITIONS(continued):
|              |                         
|              | g.                       | In
  January 2004, the Company, through its subsidiary Retalix Holdings Inc.,
  acquired 100% of the shares of OMI International, Inc. (OMI), a company
  that provides supply chain management solutions and services from an
  unrelated party in consideration of $19,100,000, comprised of $13,700,000 in
  cash, including estimated direct costs and 226,040 of the Companys
  Ordinary shares valued at approximately $5,410,000. The value of the Ordinary shares issued
  was determined based on the average market price of the Companys shares over
  several days before and after the acquisition was agreed and announced.
  During October 2004, the Company paid the sellers of OMI additional $449,000 as
  part of an election made with the U.S. Internal Revenue Service the result of
  which for tax purposes, is the step-up of OMIs assets value to fair value as
  of the acquisition date. The identified intangible assets acquired amounted
  to approximately $1,700,000 and included mainly acquired technology of
  approximately $1,200,000 and customer base of approximately $400,000 to be
  amortized over their estimated useful lives (3 to 7 years) - see also note
  4b. Goodwill arising on the acquisition amounted to approximately
  $16,800,000. The goodwill can be amortized for tax purposes over a period of
  fifteen years.
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | h.                       | In
  January 2004, the Companys subsidiary, StoreAlliance, acquired 100% of the
  shares of DemandX Ltd. (DemandX) in consideration of $239,000. DemandX is
  an Israeli corporation that provides supply chain management data analysis
  services to suppliers and institutions. The identified intangible assets
  acquired included mainly customer base of approximately $66,000 to be
  amortized over its estimated useful life (3 years) - see also note 4b.
  Goodwill arising on the acquisition amounted to approximately $84,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | i.                       | 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 enable 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 $1,250,000 in consideration for its share in
  Cell-Time and the other parties have committed to grant Cell-Time rights to
  use certain of their technologies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                          | As of December 31, 2005, Dai has fulfilled in full
  its commitment to invest $1,250,000 in Cell-Time. 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 2003 in the amount of $79,000, was carried to
  additional paid in capital. In 2005 and 2004, in which Cell-Time was an
  operating entity, the gain arising from Dais investment which amounted
  $83,000 and $200,000, respectively, was carried to income on a current basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                          | The balance of the investment in Cell-Time as of
  December 31, 2005 (after taking into account the Groups share in its losses)
  is approximately $70,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-22

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------- | ------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2       | ACQUISITIONS(continued):
|              | j.                       | On
  October 23, 2003, the Company and StoreAlliance, signed an agreement with
  Isracard Ltd. (Isracard). According to the agreement, StoreAlliance issued
  Isracard 454,590 of its shares representing 13% of its issued and outstanding
  share capital in consideration of $2,525,000 ($5.6 per share). Under the
  agreement, Store Alliance also issued Isracard an option to acquire 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. This option was originally granted for twelve months from the
  closing date of the agreement and was extended on October 2004 by additional
  twelve months. The number of shares into which the option 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 option 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 option in full.
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                          | As a
  result of the Isracard investment, the Groups ownership in Store Alliance
  decreased during 2003 from 59.17% to 51.47% and the Company recorded a gain
  in the amount of $1,068,000 in the statement of income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              |                          | As
  to the employee stock option plan of StoreAlliance, see note 9b(2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | k.                       | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|              |                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | l.                       | Following are data
  relating to subsidiaries consolidated for the first time as of the
  acquisition date (including additional considerations resulting from increase
  in shareholding):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                        |  |     |        |         |  |         |   |       |      |   |  |         |  
|------------------------------------------------------- |  | --- | ------ | ------- |  | ------- | - | ----- | ---- | - |  | ------- | -
|                                                        |  | IDS |        | TCI (1) |  | MPS     |   | Total |     
|                                                        |  |     |        |         |  |         |   |       |     
|                                                       
|Current assets                                          |  |     | 4,142  |         |  | 6,961   |   |       | 211  |   |  | 11,314  |  
|Non current assets                                      |  |     | -      |         |  | 23      |   |       | -    |   |  | 23      |  
|Deferred taxes                                          |  |     | 3,942  |         |  | (3,458  | ) |       | (88  | ) |  | 396     |  
|Property and equipment, net of accumulated
depreciation |  |     | 546    |         |  | 1,253   |   |       | 68   |   |  | 1,867   |  
|Goodwill arising on
Acquisition                         |  |     | 29,383 |         |  | 31,983  |   |       | 305  |   |  | 61,671  |  
|Identified intangible assets                            |  |     | 15,463 |         |  | 9,596   |   |       | 238  |   |  | 25,297  |  
|Current liabilities                                     |  |     | (8,616 | )       |  | (11,015 | ) |       | (208 | ) |  | (19,839 | )
|Long-term liabilities                                   |  |     | -      |         |  | (5      | ) |       | -    |   |  | (5      | )
|                                                        |  |     |        |         |  |         |   |       |      |   |  |         |  
|                                                        |  |     | 44,860 |         |  | 35,338  |   |       | 526  |   |  | 80,724  |  
|                                                        |  |     |        |         |  |         |   |       |      |   |  |         |  

| |                                                                                    
| | -----------------------------------------------------------------------------------
| | (1) Including an
  additional investment of approximately $2,570,000 (see note 2a).

F-23

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------- | ------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2       | ACQUISITIONS (continued):
|              |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | m.                        | As described in a, b and c
  above, in 2005, the Group acquired 100% of the shares of IDS, TCI and M.P.S..
  The following presents certain unaudited pro forma combined condensed income
  statement information for the years ended December 31, 2005 and 2004, 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 $1,032,000 and $3,240,000 in 2005 and 2004, respectively:
|              |                          

|                    |  |                                                |         |             |  |         | 
|------------------- |  | ---------------------------------------------- | ------- | ----------- |  | ------- | 
|                    |  | 2005                                           |         | 2004        | 
|                    |  |                                                |         |             | 
|                    |  | U.S. $ in thousands 
  (except per share data) |        
|                    |  |                                                |        
|                    |  | (Unaudited)                                    |         | (Unaudited) | 
|                    |  |                                                |         |             | 
|Revenues            |  |                                                | 202,086 |             |  | 183,760 | 
|                    |  |                                                |         |             |  |         | 
|Net income          |  |                                                | 9,467   |             |  | 7,955   | 
|                    |  |                                                |         |             |  |         | 
|Earnings per share: |  |                                                |         |             |  |         | 
|Basic               |  |                                                | 0.50    |             |  | 0.47    | 
|                    |  |                                                |         |             |  |         | 
|Diluted             |  |                                                | 0.48    |             |  | 0.45    | 
|                    |  |                                                |         |             |  |         | 

| |                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | These amounts are based on
  actual results of the companies mentioned above for the years ended December
  31, 2005 and 2004.                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                         
| | 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.

|             |                                  |                                                                                               
|------------ | -------------------------------- | ----------------------------------------------------------------------------------------------
|NOTE 3      | PROPERTY,
  PLANT AND EQUIPMENT:
|             |                                  |                                                                                               
|             | a.                               | Composition of property,
  plant and equipment, grouped by major classification is as follows:

|                                   |  |                       |        |      |  |        | 
|---------------------------------- |  | --------------------- | ------ | ---- |  | ------ | 
|                                   |  | December
  31         |       
|                                   |  |                       |       
|                                   |  | 2005                  |        | 2004 | 
|                                   |  |                       |        |      | 
|                                   |  | U.S. $ in
  thousands |       
|                                   |  |                       |       
|Computers and peripheral equipment |  |                       | 15,219 |      |  | 12,492 | 
|Land and building                  |  |                       | 7,140  |      |  | 7,146  | 
|Vehicles                           |  |                       | 660    |      |  | 346    | 
|Office furniture and equipment     |  |                       | 4,671  |      |  | 3,215  | 
|Leasehold improvements             |  |                       | 1,960  |      |  | 1,416  | 
|                                   |  |                       |        |      |  |        | 
|                                   |  |                       | 29,650 |      |  | 24,615 | 
|                                   |  |                       |        |      |  |        | 
|Less - accumulated depreciation    |  |                       | 17,339 |      |  | 14,208 | 
|                                   |  |                       |        |      |  |        | 
|                                   |  |                       | 12,311 |      |  | 10,407 | 
|                                   |  |                       |        |      |  |        | 

| |    |                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | As to geographical
  locations, see note 14b.                                                                                                               
| |    |                                                                                                                                                             
| | c. | Depreciation and
  amortization expenses totaled $2,996,000, $2,207,000 and $1,966,000, in the years ended
  December 31, 2005, 2004 and 2003, respectively.

F-24

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|              |                                         |                                                                 
|------------- | --------------------------------------- | ----------------------------------------------------------------
|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 |      
|                                                                                          |  |                    |        |        |  |        |  |       |      
|                                                                                          |  | U.S $ in thousands |       
|                                                                                          |  |                    |       
|                                                                                         
|Balance as of
  January 1, 2004                                                           |  |                    | 15,626 |        |  | 3,429  |  |       | -     |   |  | 19,055  |  
|Goodwill
  attributed to new subsidiaries acquired during 2004                            |  |                    | 16,835 |        |  | 84     |  |       | 3,642 |   |  | 20,561  |  
|Differences from
  translation of non dollar currencies                                   |  |                    | -      |        |  | -      |  |       | 158   |   |  | 158     |  
|                                                                                          |  |                    |        |        |  |        |  |       |       |   |  |         |  
|Balance as of
  December 31, 2004                                                         |  |                    | 32,461 |        |  | 3,513  |  |       | 3,800 |   |  | 39,774  |  
|Goodwill
  attributed to new subsidiaries acquired during 2005 and additional investments |  |                    | 61,366 |        |  | 28     |  |       | 435   |   |  | 61,829  |  
|Differences from
  translation of non dollar currencies                                   |  |                    | -      |        |  | -      |  |       | (394  | ) |  | (394    | )
|                                                                                          |  |                    |        |        |  |        |  |       |       |   |  |         |  
|Balance as of
  December 31, 2005                                                         |  |                    | 93,827 |        |  | 3,541  |  |       | 3,841 |   |  | 101,209 |  
|                                                                                          |  |                    |        |        |  |        |  |       |       |   |  |         |  

| |                                                                                                                                                                                                                                                                                                                                                 |                      |                                                                                                                                                                                          
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company identified its
  various reporting units, which consist of geographical areas, and for which
  separately identifiable cash flow information is available. The Company uses
  a valuation model of future discounted cash flows to determine the fair value
  of the reporting units and whether any impairment of goodwill exists.
| |                                                                                                                                                                                                                                                                                                                                                 |                      |                                                                                                                                                                                          
| | b.                                                                                                                                                                                                                                                                                                                                              | Intangible
  assets:
| |                                                                                                                                                                                                                                                                                                                                                 |                     
| |                                                                                                                                                                                                                                                                                                                                                 | 1)                   | The following table
  presents the components of the Companys acquired intangible assets with
  definite lives, which are included in other assets in the consolidated
  balance sheets:

| |                                                |  |                                            |               |                       |               |                     |      |  |        |  |  |        |  |  |       | 
| | ---------------------------------------------- |  | ------------------------------------------ | ------------- | --------------------- | ------------- | ------------------- | ---- |  | ------ |  |  | ------ |  |  | ----- | 
| |                                                |  | Weighted
  average
  amortization
  period |               | Original
  amount     |               | Amortized
  balance |     
| |                                                |  |                                            |               |                       |               |                    
| |                                                |  |                                            | December
  31 |                       | December
  31 |                    
| |                                                |  |                                            |               |                       |               |                    
| |                                                |  |                                            | 2005          |                       | 2004          |                     | 2005 |  | 2004   | 
| |                                                |  |                                            |               |                       |               |                     |      |  |        |  | 
| |                                                |  | Years                                      |               | U.S. $ in
  thousands
| |                                                |  |                                            |               |                      
| |                                               
| | Software development costs                     |  |                                            | 3.0           |                       |               | 411                 |      |  | 411    |  |  | -      |  |  | -     | 
| | Software rights and web site development costs |  |                                            | 3.0           |                       |               | 2,198               |      |  | 2,198  |  |  | 82     |  |  | 158   | 
| | Customer base                                  |  |                                            | 11.2          |                       |               | 22,702              |      |  | 5,300  |  |  | 17,497 |  |  | 1,966 | 
| | Maintenance and license agreements             |  |                                            | 6.2           |                       |               | 2,638               |      |  | 2,360  |  |  | 495    |  |  | 646   | 
| | Acquired technology                            |  |                                            | 5.4           |                       |               | 10,352              |      |  | 3,233  |  |  | 6,658  |  |  | 1,339 | 
| | Distribution rights                            |  |                                            | 6.5           |                       |               | 960                 |      |  | 960    |  |  | 283    |  |  | 420   | 
| | Other identified intangible assets             |  |                                            | 2.1           |                       |               | 977                 |      |  | 484    |  |  | 397    |  |  | 124   | 
| |                                                |  |                                            |               |                       |               |                     |      |  |        |  |  |        |  |  |       | 
| | Total                                          |  |                                            | 7.8           |                       |               | 40,238              |      |  | 14,946 |  |  | 25,412 |  |  | 4,653 | 
| |                                                |  |                                            |               |                       |               |                     |      |  |        |  |  |        |  |  |       | 

F-25

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|              |                                                    |                                                                        |                                                                                                                                                                                                                                                                                                            
|------------- | -------------------------------------------------- | ---------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4       | GOODWILL
  AND OTHER INTANGIBLE ASSETS(continued):
|              |                                                   
|              |                                                    | 2)                                                                     | Intangible assets
  amortization expenses totaled $4,474,000 $2,610,000 and $2,148,000 in 2005,
  2004 and 2003, respectively.  Future
  annual amortization expenses are approximately $4,807,000, $3,264,000,
  $2,810,000, $2,239,000 and $1,431,000 in 2006, 2007, 2008, 2009 and 2010,
  respectively.
|              |                                                    |                                                                        |                                                                                                                                                                                                                                                                                                            
|NOTE 5       | LONG-TERM
  LOANS:                                
|              |                                                   
|              | a.                                                 | Long-
  term loans classified by currency of repayment are as follows:

|                                       |  |                                            |                |                       |  |       |  |  |       | 
|-------------------------------------- |  | ------------------------------------------ | -------------- | --------------------- |  | ----- |  |  | ----- | 
|                                       |  | Interest
  rate as of 
  December 31, 2005 |                | December
  31         | 
|                                       |  |                                            |                |                       | 
|                                       |  | %                                          |                | 2005                  |  | 2004  | 
|                                       |  |                                            |                |                       |  |       | 
|                                       |  |                                            |                | U.S. $ in
  thousands | 
|                                       |  |                                            |                |                       | 
|                                      
|Bank
  loan:                           |  |                                            |                |                       |  |       |  |  |       | 
|U.S Dollars                            |  |                                            | LIBOR* + 0.5%  |                       |  | -     |  |  | 2,258 | 
|EURO                                   |  |                                            | Fixed at 2%    |                       |  | 1,135 |  |  | 1,550 | 
|Israeli currency                       |  |                                            | Prime**  0.6% |                       |  | -     |  |  | 2,320 | 
|Other:                                 |  |                                            |                |                       |  |       |  |  |       | 
|Loan from shareholders of a
subsidiary |  |                                            | LIBOR*+0.75%   |                       |  | 172   |  |  | 166   | 
|                                       |  |                                            |                |                       |  |       | 
|                                       |  |                                            |                |                       |  | 1,307 |  |  | 6,294 | 
|Less - current maturities              |  |                                            |                |                       |  | 248   |  |  | 4,801 | 
|                                       |  |                                            |                |                       |  |       | 
|                                       |  |                                            |                |                       |  | 1,059 |  |  | 1,493 | 
|                                       |  |                                            |                |                       |  |       | 

| |    |                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------
| | *  | The
  $ LIBOR rate as of December 31, 2005   4.54%.                                                 
| |    |                                                                                                      
| | ** | The
  Prime rate as of December 31, 2005    6%.                                                     
| |    |                                                                                                      
| | b. | The
  loans (net of current maturities) mature in the following years after the
  balance sheet date:

|                                    |  |                     |       |      |  |       | 
|----------------------------------- |  | ------------------- | ----- | ---- |  | ----- | 
|                                    |  | December 31         |      
|                                    |  |                     |      
|                                    |  | 2005                |       | 2004 | 
|                                    |  |                     |       |      | 
|                                    |  | U.S. $ in thousands |      
|                                    |  |                     |      
|2006                                |  |                     | 204   |      |  | 233   | 
|2007                                |  |                     | 208   |      |  | 234   | 
|2008 and thereafter  (through 2011) |  |                     | 647   |      |  | 860   | 
|No maturity specified               |  |                     | -     |      |  | 166   | 
|                                    |  |                     |       |      |  |       | 
|                                    |  |                     | 1,059 |      |  | 1,493 | 
|                                    |  |                     |       |      |  |       | 

| |    |                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2005, amounted to $2,700,000.

F-26

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|              |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------- | ---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, based on the contracts terms. The current balance is to be
  amortized next year. Amortization of other liabilities totaled $1,048,000,
  $2,265,000 and $1,791,000 in 2005, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE 7       | EMPLOYEE
  RIGHTS UPON RETIREMENT:
|              |                                   
|              | a.                                 | Israeli and Italian labor
  laws generally require payment of severance pay upon dismissal of an employee
  or upon termination by the employees of employment in certain other
  circumstances.  The severance pay
  liability of the Israeli companies and one of the Italian subsidiaries in the
  Group to their employees, which reflects the undiscounted amount of the
  liability, is based upon the number of years of service and the latest
  monthly salary, and is partly covered by insurance policies and by regular
  deposits with recognized severance pay funds. The amounts funded as above are
  presented among other non-current assets. The Israeli companies in the Group
  may only make withdrawals from the amounts funded for the purpose of paying
  severance pay.
|              |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | b.                                 | Most
  of the Companys non-Israeli subsidiaries provide 401 (K) plans for the
  benefit of their employees. Under these plans, contributions are based on a
  specified percentage of pay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | c.                                 | The severance expenses
  amounted to $1,308,000, $1,399,000 and $1,249,000 in the years ended December
  31, 2005, 2004 and 2003, respectively. The 401(K) plans expenses as mentioned in b. above amounted to $825,923,
  $449,000 and $319,000 in the years ended December 31, 2005, 2004 and
  2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | d.                                 | The profits (loss) on the
  amounts funded totaled $(155,000), $ 166,000 and $ 311,000 in 2005, 2004 and
  2003, 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, 2006, $ 1,385,000 to the insurance
  companies in respect of its severance pay obligation.                                                                                                                                                                                                                                                                                                           
|              |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                                    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | The Company expects to pay
  $711,000 future benefits to its employees during 2006 to 2015 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: |  |                    |     | 
|2006                     |  |                    | 141 | 
|2007                     |  |                    | 111 | 
|2008                     |  |                    | 18  | 
|2009                     |  |                    | 204 | 
|2010                     |  |                    | 39  | 
|Thereafter               |  |                    | 198 | 
|                         |  |                    |     | 
|                         |  |                    | 711 | 
|                         |  |                    |     | 

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 2010. In addition, the Company leases vehicles under
  standard commercial leases for periods of three years per vehicle.
| |    |              |                                                                                                                                                                                                                                        
| |    |              | The
  projected charges under the above leases are mainly denominated in U.S. $, at
  rates in effect as of December 31, 2005, as follows:                                                                                             

| |                            |  |                    |  | 
| | -------------------------- |  | ------------------ |  | 
| |                            |  | U.S. $in thousands |  | 
| |                            |  |                    |  | 
| | Year ending
  December 31: |  |                    |  | 
| | 2006                       |  | 5,810              |  | 
| | 2007                       |  | 4,639              |  | 
| | 2008                       |  | 2,517              |  | 
| | 2009                       |  | 1,429              |  | 
| | 2010                       |  | 636                |  | 
| |                            |  |                    |  | 
| |                            |  | 15,031             |  | 
| |                            |  |                    |  | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |    | Office lease
  expenses totaled $3,048,000, $1,922,000 and $1,504,000 in the years ended
  December 31, 2005, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | 2) | Effective
  April 1, 1998, the Companys Chief Executive Officer (the CEO), is entitled
  to receive a bonus subject to the Companys attaining certain performance
  milestones: For the first $1,000,000 of the Companys net income, he is
  entitled to a bonus of $65,000 and for every subsequent $1,000,000 of net
  income $5,000 less than the entitlement in respect of the previous $1,000,000,
  but not less than a bonus of $35,000 for every million 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.                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | 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.

F-28

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                      | In case of
  failure of a project that was partly financed, the Company is not obligated
  to pay any such royalties. Under the terms of these funding programs,
  royalties of 3%-3.5% are payable on sales of products developed under such
  funding programs, up to 100% of the amount of funding received (dollar linked
  and bearing annual interest at the LIBOR rate). Payment of royalties on
  account of development projects funded as above is conditional upon the
  ability to generate revenues from products developed under such projects.
  Accordingly, the Group is not obligated to pay any royalties on account of
  funded projects, which fail to generate revenues.                                                                                                                                                                          
| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                      | As of
  December 31, 2005, total royalty to be paid by the Group in the future
  on account of projects funded under the Office of the Chief Scientist is
  $4,375,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b. | Contingent liabilities:                             
| |    |                                                     
| |    | Lawsuits
  against the Company and its subsidiaries:
| |    |                                                     
| |    | 1)                                                   | In August 2000, the Company, together with
  its subsidiary P.O.S. (Restaurant Solutions) Ltd., or 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 $645,000) 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 and PRS severe damages due to the manner of
  their conduct as employees and directors of PRS and by developing software
  that infringed on the Company rights. In November 2004, the Supreme Court
  ruled that some of the causes of action in the claim are under the Tel-Aviv
  District Courts jurisdiction and some are under the Tel-Aviv District Labor
  Courts jurisdiction.
| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                      | In April 2001, the minority shareholders of
  PRS filed a claim in the Tel-Aviv District Court, which was subsequently
  amended in November 2002, 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. This claim is pending. 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 response to this motion, in March 2005, the Tel-Aviv District
  Court rejected the claim. The minority shareholders have filed a motion
  requesting clarification that this court ruling does not reject the entire
  claim filed in April 2001 but only the motion that the claim be recognized 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. After being added as a party, the Company
  filed a motion to dismiss the suit. In January 2006, the District Court
  struck this claim due to passiveness of the filers.                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                      | Another claim filed by one of the minority
  shareholders in August 2000, with regard to compensation and leave redemption
  is still pending in the Tel-Aviv District Labor Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                      | The Company believes that it has
  meritorious defenses against all these claims and thus no provision was
  recorded in regard to these claims as of December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-29

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2) | In 1998, prior to the acquisition of RCS, a
  legal claim was filed in the Court of Common Pleas of Allegheny,
  Pennsylvania, against RCS by a customer for an amount of approximately
  $1,300,000, including consequential damages and loss of revenue. A settlement
  of the claim has been agreed between the parties whereby RCS will pay the
  claimant the sum of $125,000. This settlement has been approved by the United
  States Bankruptcy Court in January 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | An additional legal claim filed against RCS
  in the Circuit Court of the Seventeenth Judicial Circuit, County of
  Winnebago, Illinois, prior to its acquisition by the Company, by a dealer who
  sold one of RCSs products early in 1994, and claims that RCS promised
  features and enhancements were never delivered. The damages claimed in this
  suit are in excess of $200,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | These claims are covered under RCSs errors
  and omissions insurers. The limit of liability under the relevant errors and
  omissions insurance policy is $1,000,000 per claim and in aggregate. The
  Company believes that these claims will not result in any material expense
  and therefore no provision was recorded in regard to these claims as of
  December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 3) | In December 2002, a legal claim for the
  total amount of approximately $240,000 was filed in the Magistrates Court of
  Beer-Sheva against the 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. A
  settlement of the claim has been agreed between the parties whereby PalmPoint
  will pay the claimant the sum of approximately $70,000. In February 2006,
  this settlement has been approved by the Magistrates Court of Beer-Sheva. Accordingly,
  a provision of approximately $70,000 was recorded by PalmPoint, as of
  December 31, 2005.                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4) | In 2003, Fleming PCT, a customer of TCI filed for
  bankruptcy protection. Certain debtors of Fleming PCT filed a claim in the
  United States Bankruptcy Court for the District of Delaware alleging certain
  preferential payments were made to TCI. The debtors were seeking to recover
  from TCI approximately $364,320. The Company is in the process of negotiating
  a settlement agreement with the parties. Accordingly, a provision of
  approximately $80,000 was recorded by the Company, as of December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 5) | In August, 2005, an Italian competitor of
  Retalix Italia has approached the Company and Retalix Italia claiming that
  the acquisition of M.P.S. Millennium Pos Solution S.r.l. (MPS) by Retalix
  Italia in July, 2005, formed an act of unfair competition. No further action
  has been taken by the above party, in connection with its above allegation to
  date. In addition, in April, 2006, the above competitor exercised arbitration
  proceedings in order to enforce its claims of co-ownership to a certain
  product of M.P.S., as well as indemnity for certain damages allegedly
  suffered by him within this context. In May, 2006 MPS has requested the
  arbitral court to reject all claims filed by the above party. The Company
  believes that these claims will not result in any material expense and
  therefore no provision was recorded in regard to these claims as of December
  31, 2005.

F-30

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| |    |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 6)                                                                                                                                                                                                                             | In June, 2006, a fairly large customer in
  the U.S, filed in the District Court of Madison County, Nebraska, a complaint
  against the Company and IDS, in which it asserts claims for misrepresentation
  and concealment, breach of contract and breach of warranties arising from its
  contract with the Company and IDS. The customer seeks unspecified damages and
  injunctive relief. The Company and its legal advisors are in the process of
  studying this complaint. As of July 2006, the balance of debt of this
  customer for services supplied by the Company amounted to approximately $1.6
  million.
| |    |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | 7)                                                                                                                                                                                                                             | The Company and its subsidiaries are also
  parties to several other claims filed against them totaling approximately
  $165,000 as well as letters of dispute submitted to them by former or current
  customers and service providers. In the opinion of the management, these
  claims represent financial risks that are of sums that are not material to
  the Company either individually or in aggregate. The Company has recorded as
  of December 31, 2005 a provision of approximately $150,000 which it estimates
  as sufficient to cover any expenses arising from the above claims and
  disputes.         
| |    |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | c. | Pledges:                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                               
| |    | A certain
  bank account containing $4.9 million in marketable securities as of December
  31, 2005, is pledged to secure any bank credit, including but not limited to
  loans, given by the bank that holds such securities.

|             |                      
|------------ | ---------------------
|NOTE 9      | SHAREHOLDERS EQUITY:

| |    |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | -------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Share capital:
| |    |               
| |    | 1)             | The
  Companys shares confer upon the holders the right to receive notice to
  participate and vote in the general meetings of the Company and right to
  receive dividends, if and when declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 2)             | Under a
  prospectus dated April 28, 2004, an amount of 3,450,000 Ordinary Shares of
  NIS 1.00 par value of the Company were issued on May 4 and May 7, 2004 in a
  public offering, in the United States for $18 per share. The net proceeds to
  the Company of $58,857,000 are net of a 5.5% underwriting discount and
  offering expenses of $3,243,000.                                                                                                                                                                                                                                                                                                                                                   
| |    |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 3)             | As to shares
  issued in consideration for acquisitions of subsidiaries, see note 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | b. | Option plans: 
| |    |               
| |    | 1)             | Companys
  Option plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                | On March 5,
  1998, the Companys Board of Directors approved the Second 1998 Share Option
  Plan (the Second 1998 Plan). Under the Second 1998 Plan (as was amended
  from time to time) up to 5,000,000 options are available for grant to
  employees, directors and consultants of the Company, to purchase Ordinary
  shares of the Company. Each option is exercisable into one ordinary share of
  the Company. The exercise price of each option under this plan is to be at
  least equal to the fair value of one Ordinary share at the grant date. Unless
  terminated earlier, the options will expire starting from 2005 through May
  2012. These options vest over the period of 0 - 3.5 years.

F-31

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                 
|------------- | --------------------------------
|NOTE 9       | SHAREHOLDERS EQUITY(continued):

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2005, 619,561 options remained available for grant under the
  Second 1998 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Through
  December 31, 2005, 2,981,126 options had been exercised under the Second 1998
  Plan at exercise prices ranging between $7.125 and $19.125 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | On May 10,
  2004, the Companys Board of Directors approved the 2004 Israeli Share Option
  Plan (the Israeli Plan). Under the Israeli Plan up to 2,000,000 options can
  be granted to Israeli employees, directors and consultants of the Company to
  purchase Ordinary shares of the Company. Each option is exercisable into one
  Ordinary share of the Company. Unless terminated earlier, the options granted
  to date under the Israeli Plan will expire under the terms of the option
  agreements beginning in May 2004 through May 2014. These options vest over
  the period of 0 - 3.5 years.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | As of
  December 31, 2005, the Company had granted 764,000 options under the Israeli
  Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Through
  December 31, 2005, 9,912 options had been exercised under the Israeli Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Compensation expense in respect of the CEO
  entitlement to options, due to the CEOs status as a service provider, is
  determined based on the fair value of the options. Total expenses in 2005,
  2004 and 2003 in respect of these options were $167,000, $148,000 and
  $307,000, respectively.                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Following is
  a summary of the status of the option plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                                 |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          |  |  |           |   |  |       | 
|---------------------------------------------------------------- |  | --------------------- | --------- | ------------------------------------- | ------ | -------------------- |  | ---------------------------------------- | --------- | -------------------- |  | ---------------------------------------- |  |  | --------- | - |  | ----- | 
|                                                                 |  | 2005                  |           | 2004                                  |        | 2003                 | 
|                                                                 |  |                       |           |                                       |        |                      | 
|                                                                 |  | Number of 
  opttions |           | Weighted 
  average 
  exercise price |        | Number of 
  options |  | Weighted 
  average 
  exercise 
  price |           | Number of 
  options |  | Weighted 
  average 
  exercise 
  price | 
|                                                                 |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          | 
|                                                                 |  |                       |           |                                       | U.S. $ |                      |  |                                          |           | U.S. $               |  |                                          |  |  | U.S. $    |  
|                                                                 |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          |  |  |           |  
|                                                                
|Options outstanding at beginning of year                         |  |                       | 2,648,019 |                                       |        | 15.06                |  |                                          | 2,993,913 |                      |  | 14.19                                    |  |  | 3,837,329 |   |  | 13.36 | 
|Changes during the year:                                         |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          |  |  |           |   |  |       | 
|Granted - at market value                                        |  |                       | 476,556   |                                       |        | 22.59                |  |                                          | 1,179,767 |                      |  | 18.98                                    |  |  | 259,499   |   |  | 8.87  | 
|Exercised                                                        |  |                       | (825,213  | )                                     |        | 12.26                |  |                                          | (897,009  | )                    |  | 11.11                                    |  |  | (963,415  | ) |  | 9.69  | 
|Forfeited or expired                                             |  |                       | (164,364  | )                                     |        | 17.57                |  |                                          | (628,652  | )                    |  | 26.98                                    |  |  | (139,500  | ) |  | 10.11 | 
|                                                                 |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          |  |  |           |   |  |       | 
|Options outstanding at end of year                               |  |                       | 2,134,998 |                                       |        | 17.63                |  |                                          | 2,648,019 |                      |  | 15.06                                    |  |  | 2,993,913 |   |  | 14.19 | 
|                                                                 |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          |  |  |           |   |  |       | 
|Options exercisable at year-end                                  |  |                       | 1,244,117 |                                       |        | 15.99                |  |                                          | 1,765,008 |                      |  | 13.49                                    |  |  | 2,246,396 |   |  | 15.83 | 
|                                                                 |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          |  |  |           |   |  |       | 
|Weighted average fair value of options
  granted during the year |  |                       |           |                                       |        | 6.92                 |  |                                          |           |                      |  | 6.59                                     |  |  |           |   |  | 2.68  | 
|                                                                 |  |                       |           |                                       |        |                      |  |                                          |           |                      |  |                                          |  |  |           |   |  |       | 

F-32

---

---



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, 2005:

| |                          |  |                                                            |           |                                                            |  |                                                                  |  |  |      | 
| | ------------------------ |  | ---------------------------------------------------------- | --------- | ---------------------------------------------------------- |  | ---------------------------------------------------------------- |  |  | ---- | 
| | Exercise
  price
  U.S.$ |  | Number of
  options
  outstanding at
  December 31,
  2005 |           | Number of
  options
  exercisable at
  December 31,
  2005 |  | Weighted
  average
  remaining
  contractual
  life (in
  years) | 
| |                          |  |                                                            |           |                                                            |  |                                                                  | 
| | 8.75                     |  |                                                            | 14,701    |                                                            |  | 4,368                                                            |  |  | 2.33 | 
| | 9.01                     |  |                                                            | 80,000    |                                                            |  | 40,000                                                           |  |  | 1.00 | 
| | 10.00                    |  |                                                            | 239,316   |                                                            |  | 239,316                                                          |  |  | 2.33 | 
| | 14.88                    |  |                                                            | 346,433   |                                                            |  | 346,433                                                          |  |  | 2.33 | 
| | 18.56                    |  |                                                            | 909,141   |                                                            |  | 491,049                                                          |  |  | 2.50 | 
| | 21.86                    |  |                                                            | 176,556   |                                                            |  | 0                                                                |  |  | 3.00 | 
| | 23.02                    |  |                                                            | 239,084   |                                                            |  | 79,695                                                           |  |  | 3.50 | 
| | 23.19                    |  |                                                            | 129,767   |                                                            |  | 43,256                                                           |  |  | 2.00 | 
| |                          |  |                                                            |           |                                                            |  |                                                                  |  |  |      | 
| |                          |  |                                                            | 2,134,998 |                                                            |  | 1,244,117                                                        |  |  |      | 
| |                          |  |                                                            |           |                                                            |  |                                                                  |  |  |      | 

| |  |    |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | -- | ------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                      | The weighted average exercise price of the
  total 2,134,998 outstanding options under the Companys plans as of December
  31, 2005, was $17.63 and the weighted average remaining contractual life of
  these options as of December 31, 2005, was 2.5 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 2) | Stock option
  plan of subsidiaries:
| |  |    |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | a.                                   | On December 4, 2000, a subsidiarys board
  of directors approved an employee stock option plan (the Subsidiary Plan).
  Pursuant to the Subsidiary Plan, 270,000 Ordinary shares, of NIS 0.01 par
  value, of the subsidiary are reserved for issuance upon the exercise of
  270,000 options to be granted to some of the Companys and of the
  subsidiarys employees. In addition, within the context of an investment
  agreement signed on December 31, 2000, an additional 90,000 options to
  purchase 90,000 shares of NIS 0.01 par value each were granted to the
  investor. Virtually all of the above mentioned options except those granted
  to the investor vest as follows: 33.33% after the first year, another 33.33%
  after the second year and another 33.33% after the third year, (in cases
  where the optionee is an employee of the Company or its subsidiary - provided
  that the employee is still the subsidiarys or the Companys employee). In
  addition, all the above options including those granted to the investor are
  not exercisable prior to: (1) the consummation of an IPO of the subsidiarys
  securities, (2) a merger of the subsidiary or (3) seven years from the date
  of grant. The rights conferred by Ordinary shares obtained upon
  exercise of the options will be identical to those of the other Ordinary
  shares of the subsidiary. Any option not exercised within 10 years of grant
  date, will expire.

F-33

---

---



RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9       | SHAREHOLDERS EQUITY(continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              | Some of the
  options under the Subsidiary Plan are subject to the terms stipulated by
  Section 102 of the Israeli Income Tax Ordinance. Among other things, the
  Ordinance provides that the subsidiary will be allowed to claim as an expense
  for tax purposes the amounts credited to the employees as a benefit, when the
  related tax is payable by the employee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              | During 2001,
  the subsidiary granted the said 270,000 options partly at an exercise price
  per share of NIS 0.01, and to two employees at an exercise price of $5.55.
  Through December 31, 2005, 112,101 of these options were forfeited and 76,023
  were regranted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              | 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, 2005, 2004 and 2003 were $0, $81,000
  and $(63,000), 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, of NIS 0.01 par value each, were
  granted on December 31 2004, to certain employees of the subsidiary all
  subject to the taxation route for grants under Section 102 of the Income Tax
  Ordinance [New Version], 1961. All options granted under the Subsidiary 2004 Plan
  bear an exercise price of $5.55 and vest as follows: 33.33% after the first
  year, another 33.33% after the second year and another 33.33% after the third
  year (in cases where the optionee is an employee of the Company or its
  subsidiary - provided that the employee is still employed by the subsidiary
  or the Company at the date of vesting). In addition, the options are not
  exercisable prior to: (1) the consummation of an IPO of the subsidiarys
  securities, (2) a merger of the subsidiary or (3) seven years from the date
  of grant.
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              | The fair
  value of each option grant from the above grants was between $2 and $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%-3%; and weighted
  expected life of 3 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | b. | On December
  1, 2004, the board of directors of another Subsidiary approved an employee
  stock option plan (the Additional Subsidiary Plan). Pursuant to the
  Additional Subsidiary Plan, up to 1,500,000 options to purchase up to
  1,500,000 shares of the Additional Subsidiary, can be granted to its
  employees, officers and other service provider providing services to the
  Company or any affiliate. In addition, the Additional Subsidiary Plan
  stipulates that options granted pursuant to it, are not to be exercised prior to: (1) the
  conversion of the corporate entity of the Additional Subsidiary from a
  Limited Liability Company, to a C corporation or (2) the consummation of an
  IPO of the Additional Subsidiarys securities, (3) a merger or a significant
  change of control in the Additional Subsidiary or (4) five years from the
  date of grant.

F-34

---

---



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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |            | The Company
  does not intend to pay cash dividends in the foreseeable future. The
  Companys board of directors is authorized to declare dividends, subject to
  applicable law. Dividends may be paid only out of profits and other surplus,
  as defined in the Israeli Companies Law, as of the end of the most recent
  financial statements or as accrued over a period of two years, whichever is
  higher. Alternatively, if the Company does not have sufficient profits or
  other surplus, then permission to effect a distribution can be granted by
  order of an Israeli court. In any event, a distribution is permitted only if
  there is no reasonable concern that the dividend will prevent the Company
  from satisfying the Companys existing and foreseeable obligations as they
  become due.                                                                                                                                                                                                                                                                    
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 2)         | Tax-exempt
  income attributable to the Approved Enterprise cannot be distributed to
  shareholders without subjecting the Company to taxes except upon complete
  liquidation of the Company. Out of the Companys retained earnings as of
  December 31, 2005, approximately $14.8 million are tax-exempt. If such
  tax-exempt income is distributed in a manner other than upon the complete
  liquidation of the Company, it would be taxed at the reduced corporate tax
  rate applicable to such profits (25%) and an income tax liability of up to
  approximately $3.7 million would be incurred as of December 31, 2005. The
  Companys board of directors has determined that it will not distribute any
  amounts of its undistributed tax exempt income as dividend. The Company
  intends to reinvest the amount of its tax-exempt income. Accordingly, no
  deferred income taxes have been provided on income attributable to the
  Companys Approved Enterprise as the undistributed tax exempt income is
  essentially permanent in duration. See also note 10g(5).

F-35

---

---



RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                         
|------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10      | TAXES ON INCOME:                                                                                                                                                                                                           
|             
|              | a.                                                                                                                                                                                                                          | Corporate taxation in Israel:                                                                                                                                                               
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                             
|              |                                                                                                                                                                                                                             | Tax rates:                                                                                                                                                                                  
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                             
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              | 1)                                                                                                                                                                                                                                                                                                                                                                                                | Taxable income of Israeli companies is
  subject to tax at the rate of 34% in 2005, 31% in 2006, 29% in 2007, 27% in
  2008, 26% in 2009 and 25% in 2010 and thereafter.
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                         
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              | 2)                                                                                                                                                                                                                                                                                                                                                                                                | Subsidiaries outside Israel:                                                                                                                                            
|              |                                                                                                                                                                                                                            
|              | Subsidiaries that are incorporated outside of Israel are assessed for
  tax under the tax laws in their countries of residence. The inacted statutory
  tax rates applicable to subsidiaries outside Israel are as follows:
|              |                                                                                                                                                                                                                            
|              | Company incorporated in the U.S.    tax rate of 40%.                                                                                                                                                                      
|              | Company incorporated in Italy   tax rate of 33%.                                                                                                                                                                          
|              |                                                                                                                                                                                                                            
|              | b.                                                                                                                                                                                                                          | Tax benefits under the Law for the Encouragement of Capital
  Investments, 1959 (the law)                                                                                                 
|              |                                                                                                                                                                                                                            
|              |                                                                                                                                                                                                                             | 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 benefits under the laws reduced tax rates during a period of seven years
  from the year in which such enterprises first earn taxable income (limited to
  twelve years from commencement of production or fourteen years from the
  date of approval, whichever is earlier).                   
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              | The Company
  has seven approved enterprises and one of its Israeli subsidiaries has one
  approved enterprise.                                                                                                                                                                                                                                                                                  
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              | Income
  derived from the approved enterprises is tax exempt during the first two
  years of the seven-year tax benefit period as above, and is subject to a
  reduced tax rate of 25% during the remaining five years of benefits.                                                                                                                                                              
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                  
|              |                                                                                                                                                                                                                             |                                                                                                                                                                                              | As of
  December 31, 2005, the periods of benefits relating to six of the approved
  enterprises of the Company have already expired, the periods of benefits
  relating to its other one approved enterprises will expire in 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).

F-36

---

---



RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|------------- | ---------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 10      | TAXES ON INCOME (continued):
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | In the event
  of distribution of cash dividends from income which was tax exempt as above,
  the companies would have to pay the 25% income taxes in respect of the amount
  distributed (the amount distributed for this purpose includes the amount of
  the income taxes that applies as a result of the distribution (see g(5)
  below and note 9c(2)).                                                                                                                                                                                                                           
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|              |                              | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Accelerated depreciation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The
  Companies are entitled to claim accelerated depreciation in respect of
  equipment used by approved enterprises during the first five tax years of the
  operation of these assets.                                                                                                                                                                                                                                                                                                                                                                                              
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The
  entitlement to the above benefits is conditional upon the companies
  fulfillment of the conditions stipulated by the above law, the regulations
  published thereunder and the certificates of approval for the specific
  investments in approved enterprises. In the event that the Companies fail to
  comply with these conditions, the benefits may be cancelled and the companies
  may be required to refund the amount of the benefits, in whole or in part,
  with interest and adjustments for inflation based on the Israeli Consumer
  Price Index (Israeli CPI).
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                              | On April 1,
  2005, an amendment to the Law came into effect, which revised the criteria for investments qualified to receive tax
  benefits. An eligible investment program under the amendment will qualify for
  benefits as a Privileged Enterprise (rather than the previous terminology of
  Approved Enterprise) if it is an industrial facility (as defined in the
  Investments Law) that will contribute to the economic independence of the
  Israeli economy and is a competitive facility that contributes to the Israeli
  gross domestic product. The amendment does not apply to investment programs
  approved prior to December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                              | However, The
  amendment will apply to approved enterprise programs in which the year of
  election under the Investments Law is 2004 or later, unless such programs
  received approval from the Investment Center on or prior to December 31,
  2004, in which case the amendment provides that the terms and benefits
  included in any certificate of approval already granted will remain subject
  to the provisions of the law as they were on the date of such approval.
  Therefore, the Companys existing Approved Enterprise will generally not be
  subject to the provisions of the amendment. Tax-exempt income that will be
  generated under the provisions of the new Law, will subject the Company to
  taxes upon distribution or liquidation and the Company may be required to
  record deferred tax liability with respect to such tax-exempt income. The
  Companys position that its existing Approved Enterprise is not subject to
  the liquidation provisions of the new law, is supported by a legal opinion.
|              |                             

F-37

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 
|------------- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|             
|NOTE 10      | TAXES ON INCOME (continued):
|              |                             
|              | c.                           | Measurement of results for tax purposes under the Income Tax
  (Inflationary Adjustments) Law, 1985 (the Inflationary
  Adjustments Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              |                             
|              |                              | Under the
  Inflationary Adjustments law, results for tax purposes are measured in real
  terms, having regard to the changes in the Israeli CPI. The Israeli companies
  in the Group are taxed under this law. These financial statements are
  presented in dollars. The difference between the changes in the Israeli CPI
  and the exchange rate of the dollar, both on an annual and a cumulative basis
  causes a difference between taxable income and income reflected in these financial
  statements. Paragraph 9(f) of 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 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, 2005, 2004 and
  2003, is taxed at the regular rate of 34%, 35% and 36%, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              | f.                           | Carryforward tax losses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              |                              | Carryforward
  tax losses of certain subsidiaries as of December 31, 2005 and 2004 aggregate
  approximately $51,111,000 and $10,690,000, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              |                              | At December
  31, 2005, one of the Companys U.S. subsidiaries has U.S. federal net
  operating loss carryforwards of approximately $46,700,000. Federal net
  operating loss carrryforwards expire at various dates from 2007 through 2025.
  The Company has state net operating loss carryforwards of approximately
  $30,500,000. State net operating loss carryforwards expire at various
  dates from 2006 through 2025. Utilization of the Companys federal and state
  net operating losses attributable to acquired subsidiaries,
  approximately $32,500,000 and $16,300,000, respectively, are subject to
  an annual limitation under Internal Revenue Code (IRC) section 382
  determined by multiplying the value of the subsidiary stock at the time
  of acquisition by the applicable long-term tax exempt rate. The
  benefit from utilization of $35 million US carryforward tax losses will be
  credited to goodwill upon utilization.                                                                                                  

F-38

---

---



RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|              |                           
|------------- | --------------------------
|NOTE 10      | TAXESONINCOME (continued):

| | 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         |       
| |    |                                                                      |  |                     |       
| |    |                                                                      |  | 2005                |        | 2004 | 
| |    |                                                                      |  |                     |        |      | 
| |    |                                                                      |  | U.S. $ in thousands |       
| |    |                                                                      |  |                     |       
| | 1) | Provided in
  respect of the following:                              |  |                     |        |      |  |        |  
| |    | Provisions for employee rights                                       |  |                     | 830    |      |  | 564    |  
| |    | Share issuance expenses                                              |  |                     | 362    |      |  | 648    |  
| |    | Carryforward tax losses                                              |  |                     | 5,181  |      |  | 3,918  |  
| |    | Doubtful accounts                                                    |  |                     | 1,289  |      |  | 837    |  
| |    | Research and development                                             |  |                     | 4,186  |      |  | 2,559  |  
| |    | Other                                                                |  |                     | 677    |      |  | 710    |  
| |    |                                                                      |  |                     |        |      |  |        |  
| |    |                                                                      |  |                     | 12,525 |      |  | 9,236  |  
| |    | L e s s- valuation allowance                                         |  |                     | (2,052 | )    |  | (2,955 | )
| |    | Depreciable fixed assets                                             |  |                     | (226   | )    |  | (333   | )
| |    | Intangible assets                                                    |  |                     | (2,937 | )    |  | (530   | )
| |    |                                                                      |  |                     |        |      |  |        |  
| |    |                                                                      |  |                     | 7,310  |      |  | 5,418  |  
| |    |                                                                      |  |                     |        |      |  |        |  
| |    |                                                                      |  |                     |        |      |  |        |  
| | 2) | The deferred
  taxes are presented in the balance sheets as follows: |  |                     |        |      |  |        |  

| |  |  |                            |  |                     |        |      |  |       | 
| |  |  | -------------------------- |  | ------------------- | ------ | ---- |  | ----- | 
| |  |  |                            |  | December 31         |       
| |  |  |                            |  |                     |       
| |  |  |                            |  | 2005                |        | 2004 | 
| |  |  |                            |  |                     |        |      | 
| |  |  |                            |  | U.S. $ in thousands |       
| |  |  |                            |  |                     |       
| |  |  |                            |  |                     |        |      |  |       | 
| |  |  | As a current asset         |  |                     | 8,098  |      |  | 3,650 | 
| |  |  | As a non-current asset     |  |                     | 2,064  |      |  | 1,768 | 
| |  |  |                            |  |                     |        |      |  |       | 
| |  |  |                            |  |                     | 10,162 |      |  | 5,418 | 
| |  |  |                            |  |                     |        |      |  |       | 
| |  |  | As a non-current liability |  |                     | (2,852 | )    |  | -     | 
| |  |  |                            |  |                     |        |      |  |       | 
| |  |  |                            |  |                     | 7,310  |      |  | 5,418 | 
| |  |  |                            |  |                     |        |      |  |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 24%- 40%.                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 5) | As stated in
  b. above, part of the income of the Companys and a certain Israeli
  subsidiarys income is tax exempt due to the approved enterprise status
  granted to most of their production facilities. The Company has decided to
  permanently reinvest the amount of such tax exempt 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.

F-39

---

---



RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|              |                            |                                                                                                                                                                                       
|------------- | -------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10      | TAXESONINCOME (continued):
|              |                           
|              |                            | The amount
  of income taxes that would have been payable had such tax exempt income,
  earned through December 31, 2005, been distributed as dividends is
  approximately $3,700,000.
|              |                            |                                                                                                                                                                                       
|              | h.                         | Income (loss) before taxes on income and income taxes included in the
  income statements:                                                                                            

| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| | -- | ------------------------------------------------- |  | ---------------------- | ------ | ---- |  | ----- | - |  | ------ | -
| |    |                                                   |  | Year ended December 31 |       
| |    |                                                   |  |                        |       
| |    |                                                   |  | 2005                   |        | 2004 |  | 2003  |  
| |    |                                                   |  |                        |        |      |  |       |  
| |    |                                                   |  | U.S. $ in thousands    |       
| |    |                                                   |  |                        |       
| | 1) | Income
  before taxes on income:                  |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    | Israeli                                           |  |                        | 21,874 |      |  | 5,094 |   |  | 8,829  |  
| |    | Non-Israeli                                       |  |                        | (1,400 | )    |  | 1,186 |   |  | 1,892  |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        | 20,474 |      |  | 6,280 |   |  | 10,721 |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| | 2) | Income taxes
  included in the income statements: |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    | Current:                                          |  |                        |        |      |  |       |   |  |        |  
| |    | Israeli                                           |  |                        | 7,019  |      |  | 1,251 |   |  | 3,957  |  
| |    | Non-Israeli                                       |  |                        | 354    |      |  | 13    |   |  | 1,040  |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        | 7,373  |      |  | 1,264 |   |  | 4,997  |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    | Deferred:                                         |  |                        |        |      |  |       |   |  |        |  
| |    | Israeli                                           |  |                        | (1,348 | )    |  | (20   | ) |  | (2,320 | )
| |    | Non-Israeli                                       |  |                        | (113   | )    |  | 309   |   |  | (38    | )
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        | (1,461 | )    |  | 289   |   |  | (2,358 | )
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  
| |    |                                                   |  |                        | 5,912  |      |  | 1,553 |   |  | 2,639  |  
| |    |                                                   |  |                        |        |      |  |       |   |  |        |  

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 (2005-34%, 2004-35%
  and 2003-36%) and the actual tax expense:

| |                                                                                                                                                                             |  |                          |        |      |  |        |   |  |        |  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ------ | - |  | ------ | -
| |                                                                                                                                                                             |  | Year ended
  December 31 |       
| |                                                                                                                                                                             |  |                          |       
| |                                                                                                                                                                             |  | 2005                     |        | 2004 |  | 2003   |  
| |                                                                                                                                                                             |  |                          |        |      |  |        |  
| |                                                                                                                                                                             |  | U.S. $ in
  thousands    |       
| |                                                                                                                                                                             |  |                          |       
| |                                                                                                                                                                             |  |                          |       
| | Income before taxes on income, as reported
  in the income statements                                                                                                       |  |                          | 20,474 |      |  | 6,280  |   |  | 10,721 |  
| |                                                                                                                                                                             |  |                          |        |      |  |        |   |  |        |  
| | Theoretical tax expense                                                                                                                                                     |  |                          | 6,961  |      |  | 2,198  |   |  | 3,860  |  
|
| | L e s s  - tax benefits arising from
  approved enterprise status                                                                                                           |  |                          | 2,518  |      |  | 355    |   |  | 1,147  |  
| |                                                                                                                                                                             |  |                          |        |      |  |        |   |  |        |  
| |                                                                                                                                                                             |  |                          | 4,443  |      |  | 1,843  |   |  | 2,713  |  
| |                                                                                                                                                                             |  |                          |        |      |  |        |   |  |        |  
| | Increase (decrease) in taxes resulting from
  permanent differences:                                                                                                        |  |                          |        |      |  |        |   |  |        |  
| | Disallowable deductions                                                                                                                                                     |  |                          | 697    |      |  | 421    |   |  | 249    |  
| | Tax exempt income                                                                                                                                                           |  |                          | (28    | )    |  | (74    | ) |  | (448   | )
| | Increase (decrease) in taxes resulting from
  different tax rates for non - Israeli subsidiaries                                                                            |  |                          | (16    | )    |  | (12    | ) |  | 128    |  
| | Changes in valuation allowance                                                                                                                                              |  |                          | (903   | )    |  | 1,118  |   |  | 509    |  
| | Differences between the basis of
  measurement of income reported for tax purposes and the basis of measurement
  of income for financial reporting purposes - see c. above |  |                          | 1,361  |      |  | (1,650 | ) |  | (594   | )
| | Other                                                                                                                                                                       |  |                          | 358    |      |  | (93    | ) |  | 82     |  
| |                                                                                                                                                                             |  |                          |        |      |  |        |   |  |        |  
| | Taxes on income for the reported years                                                                                                                                      |  |                          | 5,912  |      |  | 1,553  |   |  | 2,639  |  
| |                                                                                                                                                                             |  |                          |        |      |  |        |   |  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i. | Taxassessments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 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. Retalix Italia  received final assessments through the year
  ended December 31, 1999. Retalix Holdings, Inc. received a final tax
  assessments for the year ended December 31, 2002. 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, 2005   |       
| |             |  |                       |       
| |             |  | Israeli
  currency    |        |          |  |           
| |             |  |                       |        |          |  |           
| |             |  | Linked to             |        |          |  | Other      |  
| |             |  | the
  Israeli         |        |          |  | non-dollar |  
| |             |  | CPI                   |        | Unlinked |  | currencies |  
| |             |  |                       |        |          |  |            |  
| |             |  | U.S. $ in
  thousands |       
| |             |  |                       |       
| |             |  |                       |        |          |  |            |   |  |        |  
| | Assets      |  |                       | 1,868  |          |  | 15,780     |   |  | 14,503 |  
| |             |  |                       |        |          |  |            |   |  |        |  
| | Liabilities |  |                       | (6,649 | )        |  | (12,473    | ) |  | (5,909 | )
| |             |  |                       |        |          |  |            |   |  |        |  

|              |                                         
|------------- | ----------------------------------------
|NOTE 12      | SUPPLEMENTARY BALANCE SHEET INFORMATION:

| |    |                      |                                             |  |                       |        |      |  |        | 
| | -- | -------------------- | ------------------------------------------- |  | --------------------- | ------ | ---- |  | ------ | 
| |    |                      |                                             |  | December
  31         |       
| |    |                      |                                             |  |                       |       
| |    |                      |                                             |  | 2005                  |        | 2004 | 
| |    |                      |                                             |  |                       |        |      | 
| |    |                      |                                             |  | U.S. $ in
  thousands |       
| |    |                      |                                             |  |                       |       
| | a. | Accounts receivable: |                                             |  |                       |        |      |  |       
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    | 1)                   | Trade:                                      |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      | Open accounts                               |  |                       | 43,240 |      |  | 29,178 | 
| |    |                      | Less - allowance for doubtful accounts      |  |                       | 4,404  |      |  | 3,154  | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       | 38,836 |      |  | 26,024 | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    | 2)                   | other:                                      |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      | Israeli Government departments and
agencies |  |                       | 1,217  |      |  | 973    | 
| |    |                      | Employees                                   |  |                       | 272    |      |  | 342    | 
| |    |                      | Prepaid expenses                            |  |                       | 2,539  |      |  | 1,356  | 
| |    |                      | other                                       |  |                       | 474    |      |  | 744    | 
| |    |                      |                                             |  |                       |        |      |  |        | 
| |    |                      |                                             |  |                       | 4,502  |      |  | 3,415  | 
| |    |                      |                                             |  |                       |        |      |  |        | 

F-42

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                                    |                        |                                                                                                                                                        
|------------- | -------------------------------------------------- | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12      | SUPPLEMENTARYBALANCE SHEET INFORMATION(continued):
|              |                                                   
|              | b.                                                 | Marketable securities:
|              |                                                    |                        |                                                                                                                                                        
|              |                                                    | 1)                     | Held to maturity bond securities - The amortized
  cost basis, aggregate fair value and the gross unrealized holding gains and
  losses are as follows:

| |                 |  |                                    |        |                    |  |                       |  |                        |     |   |  |        | 
| | --------------- |  | ---------------------------------- | ------ | ------------------ |  | --------------------- |  | ---------------------- | --- | - |  | ------ | 
| |                 |  | Amortized
  cost                   |        | Unrealized
  gains |  | Unrealized
  Losses * |  | Aggregate
  fair value |    
| |                 |  |                                    |        |                    |  |                       |  |                        |    
| |                 |  | U . S .  $  i n  t h o u s a n d s |       
| |                 |  |                                    |       
|
| | At December 31: |  |                                    |        |                    |  |                       |  |                        |     |   |  |        | 
| | 2005            |  |                                    | 7,160  |                    |  | 96                    |  |                        | (59 | ) |  | 7,197  | 
| |                 |  |                                    |        |                    |  |                       |  |                        |     |   |  |        | 
| | 2004            |  |                                    | 17,181 |                    |  | 298                   |  |                        | (64 | ) |  | 17,415 | 
| |                 |  |                                    |        |                    |  |                       |  |                        |     |   |  |        | 

| |  |                                                                 |  |                             
| |  | --------------------------------------------------------------- |  | ----------------------------
| |  | * All unrealized losses were derived during the
  current year.
| |  |                                                                 |  |                             
| |  |                                                                 |  | The bonds mature as follows:

| |                                    |  |                       |       | 
| | ---------------------------------- |  | --------------------- | ----- | 
| |                                    |  | U.S. $ in
  thousands |      
| |                                    |  |                       |      
| | 2006                               |  |                       | 5,104 | 
| | 2007                               |  |                       | 750   | 
| | 2008                               |  |                       | 370   | 
| | 2009 and thereafter (through 2010) |  |                       | 936   | 
| |                                    |  |                       |       | 
| |                                    |  |                       | 7,160 | 
| |                                    |  |                       |       | 

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

| |                                    |  |                     |        |      |  |        | 
| | ---------------------------------- |  | ------------------- | ------ | ---- |  | ------ | 
| |                                    |  | December
  31       |       
| |                                    |  |                     |       
| |                                    |  | 2005                |        | 2004 | 
| |                                    |  |                     |        |      | 
| |                                    |  | U.S. $ in thousands |       
| |                                    |  |                     |       
|
| | Among current
  assets:            |  |                     |        |      |  |        | 
| | Trading                            |  |                     | 5,815  |      |  | 3,275  | 
| | Held to maturity
  bond securities |  |                     | 5,104  |      |  | 11,056 | 
| |                                    |  |                     |        |      |  |        | 
| |                                    |  |                     | 10,919 |      |  | 14,331 | 
| | As a non-current
  asset           |  |                     |        |      |  |        | 
| | Held to maturity
  bond securities |  |                     | 2,056  |      |  | 6,125  | 
| |                                    |  |                     |        |      |  |        | 
| |                                    |  |                     | 12,975 |      |  | 20,456 | 
| |                                    |  |                     |        |      |  |        | 

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

F-43

---

---



RETALIX LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                                     |                        |                                               
|------------- | --------------------------------------------------- | ---------------------- | ----------------------------------------------
|NOTE 12      | SUPPLEMENTARY BALANCE SHEET
INFORMATION(continued):
|              |                                                     |                        |                                               
|              | c.                                                  | Long-term receivables:
|              |                                                     |                        |                                               
|              |                                                     | 1)                     | Long-term receivables are composed as follows:

|                                |  |                       |       |  
|------------------------------- |  | --------------------- | ----- | -
|                                |  | December
  31,
  2005 |      
|                                |  |                       |      
|                                |  | U.S. $ in
  thousands |      
|                                |  |                       |      
|                               
|Long-term loans to employees 2) |  |                       | 63    |  
|Long-term trade receivables     |  |                       | 2,754 |  
|Less - Unamortized discount*    |  |                       | (200  | )
|                                |  |                       |       |  
|                                |  |                       | 2,617 |  
|                                |  |                       |       |  

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

|              |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------- | ---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2005 and
  2004 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 are derived from a large number of customers. Consequently, the
  exposure to credit risks relating to trade receivables is limited. The Group
  performs ongoing credit evaluations of its customers and generally does not
  require collateral. An appropriate allowance for doubtful accounts is
  included in accounts receivable..                                                                    
|              |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                                                | The allowance for doubtful accounts is determined
  for specific debts which are doubtful of collection.                                                                                                                                                                                                                                                                                                                                   
|              |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              | b.                                             | Fair value of financial
  instruments:                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              |                                                | The fair value of the financial instruments included
  in the working capital of the Group is usually identical or close to their
  carrying value. The fair value of long-term receivables, long-term loans and
  other long-term liabilities also approximates the carrying value, since they
  bear interest at rates close to the prevailing market rates. The amounts
  funded in respect of employee rights are stated at fair value.

F-44

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| |    |                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                   
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The
  following methods and assumptions were used by the Company in estimating its
  fair value disclosures for financial instruments:                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                   
| |    | 1)                                                                                                                                                                                                                                                                                                                                                    | The carrying
  amount of cash and cash equivalents, trade receivables and trade payables
  approximates their fair values due to the short-term maturities of these
  instruments.
| |    |                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                   
| |    | 2)                                                                                                                                                                                                                                                                                                                                                    | The fair
  value of short and long-term marketable securities and bank deposits with
  quoted market prices is based on quoted market prices.                                     
| |    |                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                   
| |    | 3)                                                                                                                                                                                                                                                                                                                                                    | The fair
  value of derivative instruments is estimated by obtaining quotes from
  brokers.                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                   
| |    | As to the
  fair value of derivatives, see c. below. As to the fair value of marketable
  securities, see note12b.                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                   
| | 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 2005,
  the Company entered into four foreign currencies forward contracts for
  conversion of Pounds Sterling, Euro, Australian dollar and Israeli currency
  into a notional amount in dollars of approximately $ 5,400,000. These
  contracts were rolled over a few times during 2004 and are still outstanding
  as of December 31, 2005.
| |    |                                                                                                                                                                                                                                                                                                                                                      
| |    | The fair
  value of the open contracts as of December 31, 2005 is $71,000 and reflects
  the estimated amounts that the Group would pay to terminate the contracts 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.

F-45

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                
|------------- | -------------------------------
|NOTE 14      | SEGMENT INFORMATION(continued):

| |                        |                                                                                                   
| | ---------------------- | --------------------------------------------------------------------------------------------------
| | Geographic
  segments:
| |                       
| |                        | Summarized
  financial information by geographic segment, for 2005, 2004 and 2003 is as
  follows:

| |                                                                          |  |                          |         |      |  |         |  |  |        | 
| | ------------------------------------------------------------------------ |  | ------------------------ | ------- | ---- |  | ------- |  |  | ------ | 
| |                                                                          |  | Year ended
  December 31 |        
| |                                                                          |  |                          |        
| |                                                                          |  | 2005                     |         | 2004 |  | 2003    | 
| |                                                                          |  |                          |         |      |  |         | 
| |                                                                          |  | U.S. $ in
  thousands    |        
| |                                                                          |  |                          |        
| |                                                                          |  |                          |         |      |  |         |  |  |        | 
| | Revenues:                                                                |  |                          |         |      |  |         |  |  |        | 
| | U.S.                                                                     |  |                          | 98,385  |      |  | 79,678  |  |  | 62,621 | 
| | Israel                                                                   |  |                          | 13,800  |      |  | 11,533  |  |  | 11,559 | 
| | International*                                                           |  |                          | 75,186  |      |  | 31,743  |  |  | 17,877 | 
| |                                                                          |  |                          |         |      |  |         |  |  |        | 
| | Total revenues                                                           |  |                          | 187,371 |      |  | 122,954 |  |  | 92,057 | 
| |                                                                          |  |                          |         |      |  |         |  |  |        | 
| | * The international segment includes
  revenues from customers in Europe |  |                          | 50,532  |      |  | 22,769  |  |  | 13,681 | 
| |                                                                          |  |                          |         |      |  |         |  |  |        | 

| |    |                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------
| | 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 |       
| |               |  |                                        |       
| |               |  | 2005                                   |        | 2004 | 
| |               |  |                                        |        |      | 
| |               |  | U.S. $ in
  thousands                  |       
| |               |  |                                        |       
| |               |  |                                        |        |      |  |        | 
| | Israel        |  |                                        | 8,000  |      |  | 7,579  | 
| | U.S.          |  |                                        | 3,786  |      |  | 2,505  | 
| | International |  |                                        | 525    |      |  | 323    | 
| |               |  |                                        |        |      |  |        | 
| |               |  |                                        | 12,311 |      |  | 10,407 | 
| |               |  |                                        |        |      |  |        | 

| |    |                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------
| |    | As for
  goodwill, see note 4a.                                                                                                  
| |    |                                                                                                                                  
| | c. | Revenues from customer exceeding 10% of total revenues:                                                                          
| |    |                                                                                                                                  
| |    | In the year
  ended December 31, 2005, one customer generated revenues in excess of 10% of
  the Groups total revenues.         
| |    |                                                                                                                                  
| |    | In the years
  ended December 31, 2004, and 2003 no customer generated revenues in excess of
  10% of the Groups total revenues.

F-46

---

---



RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                                
|------------- | -------------------------------
|NOTE 15      | SELECTED INCOME STATEMENT DATA:

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

| |                                                                           |  |                          |       |      |  |       |   |  |       |  
| | ------------------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ----- | - |  | ----- | -
| |                                                                           |  | Year ended
  December 31 |      
| |                                                                           |  |                          |      
| |                                                                           |  | 2005                     |       | 2004 |  | 2003  |  
| |                                                                           |  |                          |       |      |  |       |  
| |                                                                           |  | U.S. $ in
  thousands    |      
| |                                                                           |  |                          |      
| |                                                                           |  |                          |       |      |  |       |   |  |       |  
| | The changes in allowance for doubtful
  accounts are composed as follows: |  |                          |       |      |  |       |   |  |       |  
| | Balance at beginning of year                                              |  |                          | 3,154 |      |  | 2,778 |   |  | 1,367 |  
| | Increase during the year                                                  |  |                          | 2,237 |      |  | 1,256 |   |  | 1,822 |  
| | Bad debt written off                                                      |  |                          | (987  | )    |  | (880  | ) |  | (411  | )
| |                                                                           |  |                          |       |      |  |       |   |  |       |  
| | Balance at end of year                                                    |  |                          | 4,404 |      |  | 3,154 |   |  | 2,778 |  
| |                                                                           |  |                          |       |      |  |       |   |  |       |  

| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |   |  |        |  
| | -- | ----------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- |  | ------------------------ | ------ | ---- |  | ------ | - |  | ------ | -
| |    |                                                                                                                               |                                                 |  | Year ended
  December 31 |       
| |    |                                                                                                                               |                                                 |  |                          |       
| |    |                                                                                                                               |                                                 |  | 2005                     |        | 2004 |  | 2003   |  
| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |  
| |    |                                                                                                                               |                                                 |  | U.S. $ in
  thousands    |       
| |    |                                                                                                                               |                                                 |  |                          |       
| | b. | Financial income (expenses):                                                                                                  |                                                 |  |                          |        |      |  |        |   |  |       
| |    |                                                                                                                               | Realized
  gain on marketable securities - net  |  |                          | 308    |      |  | 100    |   |  | 18     |  
| |    |                                                                                                                               | Non-dollar
  currency gains (losses) - net      |  |                          | (637   | )    |  | 218    |   |  | 374    |  
| |    |                                                                                                                               | Interest
  income                               |  |                          | 3,011  |      |  | 1,494  |   |  | 918    |  
| |    |                                                                                                                               | Interest and
  bank commissions expense         |  |                          | (2,480 | )    |  | (1,727 | ) |  | (1,405 | )
| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |   |  |        |  
| |    |                                                                                                                               |                                                 |  |                          | 202    |      |  | 85     |   |  | (95    | )
| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |   |  |        |  
| | c. | Other general income (expenses)- net:                                                                                         |                                                 |  |                          |        |      |  |        |   |  |       
| |    |                                                                                                                               | Gain (loss)
  on sale of property and equipment |  |                          | -      |      |  | 15     |   |  | (62    | )
| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |   |  |        |  
| |    |                                                                                                                               |                                                 |  |                          | -      |      |  | 15     |   |  | (62    | )
| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |   |  |        |  
| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |   |  |        |  
| | d. | Earnings per share (EPS):                                                                                                   |                                                 |  |                          |        |      |  |        |   |  |       
| |    |                                                                                                                               |                                                 |  |                          |        |      |  |        |   |  |        |  
| |    | Following
  are data relating to the nominal value of shares - basic and diluted used in
  the purpose of computation of EPS:

| |                                                                                                             |  |                                 |        |      |  |        |  |  |        | 
| | ----------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- |  | ------ |  |  | ------ | 
| |                                                                                                             |  | Year ended
  December 31        |       
| |                                                                                                             |  |                                 |       
| |                                                                                                             |  | 2005                            |        | 2004 |  | 2003   | 
| |                                                                                                             |  |                                 |        |      |  |        | 
| |                                                                                                             |  | Number of
  shares in thousands |       
| |                                                                                                             |  |                                 |       
| |                                                                                                             |  |                                 |        |      |  |        |  |  |        | 
| | Weighted average number of shares issued
  and outstanding- used in computation of basic earnings per share |  |                                 | 18,710 |      |  | 15,746 |  |  | 12,323 | 
|
| | Add incremental shares from assumed
  exercise of options                                                   |  |                                 | 949    |      |  | 806    |  |  | 760    | 
| |                                                                                                             |  |                                 |        |      |  |        |  |  |        | 
| | Weighted average number of shares used in
  computation of diluted earnings per share                       |  |                                 | 19,659 |      |  | 16,552 |  |  | 13,083 | 
| |                                                                                                             |  |                                 |        |      |  |        |  |  |        | 
| |                                                                                                             |  |                                 |        |      |  |        |  |  |        | 

F-47

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RETALIX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|              |                               
|------------- | ------------------------------
|NOTE 16      | SUBSEQUENT EVENTS (UNAUDITED):

| |    |                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | In February
  2006, the Company, through its subsidiary Retalix Holdings Inc. acquired
  substantially all of the assets of Base Products, Inc., a provider of a suite
  of hardware and software products and services for food and consumer goods
  retailer, for $2,600,000 in cash.     
| |    |                                                                                                                                                                                                                                                                                             
| | b. | In March
  2006, the Company through its subsidiary Retalix Holdings Inc., acquired an
  additional 45% of the equity of StoreNext USA and increased its holdings in
  StoreNext USA to 95%. The consideration the Company paid for this acquisition
  was approximately $4,900,000 in cash.

F-48

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRMTo 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 included in the Companys 2004 20-F/A, the Company
has restated its 2004 consolidated financial statements.

|                                                               |                                    
|-------------------------------------------------------------- | -----------------------------------
|
|
|
|
|Tel-Aviv, Israel                                               | /s/ Kesselman & Kesselman          
|March 21, 2005,                                                | Certified Public Accountants (Isr.)
|Except for the restatement related to the correction relating 
|to revenue recognition described in Note 1a., to the financial
|statements included in the Company's 2004 20-F/A,             
|as to which the date is July 21, 2006.                        



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# Report of Independent
Registered Public Accounting Firm

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

We have audited the accompanying
consolidated balance sheet of Retalix Holdings, Inc. and Subsidiaries (the
Company) (see Note 1 to the consolidated financial statements) as of December 31,
2003, and the related consolidated statements of 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 Subsidiaries as of December
31, 2003, and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in the United
States of America.

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, 2006
San Diego, California



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# Report of Independent
Registered Public Accounting Firm

To the StockholderRetalix 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 Subsidiaries as 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, 2006
San Diego, California



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