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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 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, 2004

OR

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

Commission file No.0-29742

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

ISRAEL(Jurisdiction of incorporation or organization)

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

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

Not Applicable

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

Ordinary Shares, nominal value NIS 1.0 per share

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

Not Applicable

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

17,577,432 Ordinary Shares, nominal value NIS 1.0 par value per share

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

# YES x NO o

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

# ITEM 17 o ITEM 18 x

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                                       | 6-17 
|       | A. Selected Financial Data                                    | 6-7  
|       | B. Capitalization and Indebtedness                            | 7    
|       | C. Reasons for the Offer and Use of Proceeds.                 | 7    
|       | D. Risk Factors.                                              | 7-17 
|       | Item 4. INFORMATION ON THE COMPANY                            | 19-38
|       | A. History and Development of the Company                     | 19   
|       | B. Business Overview                                          | 20-37
|       | C. Organizational Structure                                   | 38   
|       | D. Property, Plants and Equipment                             | 38   
|       | Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 39-50
|       | A. Operating Results                                          | 39-45
|       | B. Liquidity and Capital Resources                            | 45-48
|       | C. Research and Development, Patents and Licenses, Etc        | 48-50
|       | D. Trend Information                                          | 50   
|       | E. Off -Balance Sheet Arrangements                            | 50   
|       | F. Tabular Disclosure of Contractual Obligations              | 50   
|       | Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 51-55
|       | A. Directors and Senior Management                            | 51-52
|       | B. Compensation                                               | 52-53
|       | C. Board Practices                                            | 53-55
|       | D. Employees                                                  | 55   
|       | E. Share Ownership.                                           | 55-58

2

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|        |                                                                                       |      
|------- | ------------------------------------------------------------------------------------- | -----
|        | Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 58-59
|        | A. Major Shareholders                                                                 | 58   
|        | B. Related Party Transactions                                                         | 59   
|        | C. Interests of Expert and Counsel                                                    | 59   
|        | Item 8. FINANCIAL INFORMATION                                                         | 59-60
|        | Item 9. THE OFFER AND LISTING                                                         | 61-62
|        | A. Offer and Listing Details                                                          | 61   
|        | B. Plan of Distribution                                                               | 62   
|        | C. Markets                                                                            | 62   
|        | D. Selling Shareholders                                                               | 62   
|        | E. Dilution                                                                           | 62   
|        | F. Expenses of the Issue                                                              | 62   
|        | Item 10. ADDITIONAL INFORMATION                                                       | 62-74
|        | A. Share Capital                                                                      | 62   
|        | B. Memorandum and Articles of Association                                             | 62-67
|        | C. Material Contracts                                                                 | 67   
|        | D. Exchange Controls                                                                  | 67   
|        | E. Taxation                                                                           | 67-74
|        | F. Dividends and Paying Agents                                                        | 74   
|        | G. Statement by Experts                                                               | 74   
|        | H. Documents on Display                                                               | 74   
|        | I. Subsidiary Information                                                             | 74   
|        | Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 75-77
|        | Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 77   
|PART II |                                                                                      
|        | Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 77   
|        | Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 77   

3

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|         |                                                                                  |   
|-------- | -------------------------------------------------------------------------------- | --
|PART III |                                                                                  |   
|         | Item 15. CONTROLS AND PROCEDURES                                                 | 77
|         |                                                                                  |   
|         | Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                       | 78
|         | Item 16B. CODE OF ETHICS                                                         | 78
|         | Item 16C. PRINCIPAL ACCOUNANT FEES AND SERVICES                                  | 78
|         | Item 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES                 | 78
|         | Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 78
|         | Item 17. FINANCIAL STATEMENTS                                                    | 79
|         | Item 18. FINANCIAL STATEMENTS                                                    | 79
|         | Item 19. EXHIBITS                                                                | 80

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

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

# 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
DataThe selected consolidated statement
of income data set forth below with respect to the years ended December 31, 2000,
2001, 2002, 2003 and 2004 and the selected consolidated balance sheet data as of
December 31, 2000, 2001, 2002, 2003 and 2004 set forth below have been derived from
our consolidated financial statements that were audited by Kesselman & Kesselman,
a member of PricewaterhouseCoopers International Limited. The selected consolidated
financial data set forth below should be read in conjunction with Item 5 
Operating and Financial Review and Prospects and our consolidated financial
statements and notes to those statements for the years 2002, 2003 and 2004 included
elsewhere in this annual report. Historical results are not necessarily indicative of the
results to be expected in the future.

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

6

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

# B. Capitalization and
Indebtedness

Not applicable.

# C. Reasons for Offer and
Use of Proceeds

Not applicable.

# D. Risk Factors

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

# Risks Related To Our
Business

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

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

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

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

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

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

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

7

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

| |  | the
uncertainty regarding the adoption of our current and future products, including our
relatively          new Application Service Provider, or ASP, and e-market applications;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | seasonality
in customer purchasing and deployment patterns.
| | - | -----------------------------------------------------------

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

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

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

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

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

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

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

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

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

| |  | the
ability of the new platforms to support the multiple sites and heavy data traffic of our
         largest customers;
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | the
ability of our development staff to learn how to efficiently and effectively develop
products          using the new  platforms;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | our
ability to transition our customer base to the products based on  new platforms when
these are          available;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | the
ability of the new platforms achieve market acceptance; and
| | - | ---------------------------------------------------------------

| |  | the
continued commitment of suppliers to enhancing and marketing the new platforms.
| | - | -----------------------------------------------------------------------------------

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

8

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

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

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

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

| |  | appeal
to larger retailers who have multiple divisions requiring multiple implementation
projects;
| | - | --------------------------------------------------------------------------------------------------

| |  | require
the execution of implementation procedures in multiple layers of software;
| | - | ----------------------------------------------------------------------------------

| |  | offer
a retailer more deployment options and other configuration choices; and
| | - | -----------------------------------------------------------------------------

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

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

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

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

| |  | problems
combining the acquired operations, technologies or products;
| | - | ---------------------------------------------------------------------

| |  | unanticipated
costs or liabilities;
| | - | -----------------------------------

| |  | diversion
of management's attention;
| | - | ------------------------------------

| |  | adverse
effects on existing business relationships with suppliers and customers;
| | - | --------------------------------------------------------------------------------

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

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

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

9

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

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

| |  | rapid
technological advances in hardware and software  development;
| | - | -------------------------------------------------------------------

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

| |  | changing
customer needs; and
| | - | ----------------------------

| |  | frequent
new product introductions and enhancements.
| | - | ----------------------------------------------------

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

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

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

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

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

| |  | 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.

10

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

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

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

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

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

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

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

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

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.

11

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

| |  | potentially
weak protection of intellectual property rights;
| | - | ------------------------------------------------------------

| |  | economic
and political instability;
| | - | -----------------------------------

| |  | import
or export licensing requirements;
| | - | ----------------------------------------

| |  | trade
restrictions;
| | - | -------------------

| |  | difficulties
in collecting accounts receivable;
| | - | -----------------------------------------------

| |  | longer
payment cycles;
| | - | ----------------------

| |  | unexpected
changes in regulatory requirements and tariffs;
| | - | ----------------------------------------------------------

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

| |  | fluctuations
in exchange rates; and
| | - | -----------------------------------

| |  | potentially
adverse tax consequences.
| | - | -------------------------------------

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.

13

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

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

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

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

# Risks Related To Our
Location In Israel

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

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

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

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

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

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

14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

| |  | adequate
service of process has been effected and the defendant has had a reasonable opportunity
to               present his arguments and evidence;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment and the enforcement of the judgment are not contrary to the law, public policy,
              security or sovereignty of the state of Israel;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | the
judgment was not obtained by fraud and does not conflict with any other valid judgment in
the               same matter between the same parties; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
action between the same parties in the same matter is not pending in any Israeli court at
the time the lawsuit is instituted in the foreign court.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# Risks Related to Our
Ordinary Shares

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

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

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

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

| |  | announcements
concerning us or our competitors;
| | - | -----------------------------------------------

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

| |  | general
market conditions, and changes in market conditions in our industry; and
| | - | --------------------------------------------------------------------------------

| |  | the
general state of the securities market.
| | - | -------------------------------------------

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

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

If
our shareholders sell substantial amounts of our ordinary shares, including shares issued
upon the exercise of outstanding employee options, or if the perception exists that we or
our shareholders may sell a substantial number of our ordinary shares, the market price of
our ordinary shares may fall.  In April 2004, we registered on a shelf
registration statement with the SEC 4,100,000 of our ordinary shares, of which we sold
3,450,000 in a public offering in May 2004. Any substantial sales of our ordinary shares
in the public market also might make it more difficult for us to sell equity or equity
related securities in the future at a time and in a place we deem appropriate.

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

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

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

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

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# ITEM 4 
INFORMATION ON THE COMPANY

# A. History and
Development of the Company

Both
our legal and commercial name is Retalix Ltd. During 2000, we changed our name from Point
of Sale Ltd. to our current name. We were incorporated on March 5, 1982, under the laws of
the State of Israel. We are domiciled in Israel. Our legal form is a company limited by
shares. We operate under the laws of the State of Israel. Our registered office is located
at 10 Zarhin Street, Raanana 43000, Israel, and our telephone number is
+972-9-776-6677. Our agent in the United States is Retalix USA Inc. Its address is 6100
Tennyson Parkway, Suite 150, Plano, TX 75024.

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

| |  | OMI.
In January 2004, we acquired OMI, a provider of supply chain execution and warehouse
management systems for the retail food industry. Warehouse management systems are
designed to help food retailers manage the various order fulfillment processes that take
place in their warehouses and distribution centers. OMI 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. OMI has over 50 customers in the retail food industry,
including such leading retailers as A&P (The Great Atlantic &Pacific Tea
Company), Food Lion, Giant Eagle, Kroger and Winn Dixie. As part of the acquisition, we
retained 67 of OMIs employees. We believe the acquisition of OMI will enable us to
enter into the supply chain execution and warehouse management systems markets for
retailers, broaden our customer base and expand our suite of products. In early 2004, we
also acquired the independent operations of the distributors of OMIs products in
Israel and Europe.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | UNIT.
In August 2004, we acquired 51% of UNIT S.p.A., or UNIT, a supplier of specialized
software and hardware solutions for the food and fuel retail industries in Italy. UNIT
employs approximately 59 employees and is headquartered in Italy. In December 2004, we
acquired the remaining 49% of UNIT. UNIT is now in the process of being registered and
launched as Retalix Italia S.p.A, and will focus on the delivery, deployment and support
of the Retalix advanced enterprise-wide retail solutions to the Italian food and fuel
retail market.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | BASS.
In September 2001, we acquired BASS Inc., or BASS, a provider of POS and back-office
systems designed to fit the needs of the small supermarket chains and single store,
independent grocers. BASS, which is now operating as Retalix Dayton, employs
approximately 67 employees and is headquartered in Dayton, Ohio. The acquisition of BASS
complemented our earlier acquisition of Retail Control Systems described below, enabling
us to further penetrate the Tier 3 and Tier 4 North American retail food market sectors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retail
Control Systems. In September 2000, we acquired Retail Control Systems Inc., or
RCS, a provider of POS and back-office systems designed to meet the needs of mid- and
small-size independent supermarkets in the United States. RCS, which is now operating as
Retalix Pittsburgh, employs approximately 59 people in Pennsylvania, Ohio and Washington,
D.C. Its flagship product is ScanMaster, which is distributed primarily through StoreNext
USAs distribution channel. The acquisition of RCS enabled us to accelerate our
penetration of the market for POS systems for Tier 3 and Tier 4 and independent food
retailers in North America.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | PalmPoint.
Through a series of transactions from 1999 through 2002, we acquired PalmPoint Ltd., or
PalmPoint, which develops software solutions for hand-held devices, such as Palm and PC
pocket computers. The PalmPoint products, branded as the Retalix PocketOffice suite,
support in-store retail applications, such as price verification, ordering, receiving and
inventory management and operate on the Microsoft Windows CE platform.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# B. Business Overview

Overview

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

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

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

We
believe that we are unique within the retail food software industry as we offer software
solutions that can serve the needs of the entire range of food retailers, from
multi-national supermarket and major convenience store chains to independent grocers. We
are able to serve such a diverse customer base because we have designed our applications
to include multiple levels of functionality that can be adapted to the various sizes and
forms of retail operations of our customers. To date, our software solutions have been
installed in more than 33,000 supermarkets and grocers, convenience stores and major fuel
retailers in 50 countries, serving more than 260,000 checkout lanes. Our customers include
leading supermarket and grocery chains such as Albertsons, Hy-Vee and Publix in the United
States, Delhaize, Sainsburys and Tesco in Europe, and large convenience stores and
major fuel retailers such as Alon Fina, Caseys and Pilot Oil in the United States
and Husky Oil in Canada. In addition, we estimate that our software is currently installed
at approximately 11,000 independent grocers out of the total U.S. market of approximately
20,000 independent grocers. Our sales have grown from $36.1 million in 2000 to
$124.4 million in 2004.

On
January 2, 2004, we acquired OMI, a provider of supply chain execution and warehouse
management systems for the retail food industry. Warehouse management systems manage the
various fulfillment processes that take place in retailers warehouses and
distribution centers. We believe the acquisition of OMI enables 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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. Moreover, the integration of our in-store
solutions with OMIs warehouse management solution will significantly improve the
replenishment decisions made at the warehouse. Warehouse management systems typically base
replenishment decisions upon the movement of goods from the warehouse to the store,
without considering inventory and sales at the store. We believe that the combination of
our in-store solutions with OMIs applications will enable retailers to optimize
their replenishment decisions based on point of sale data, thereby reducing lost sales due
to out-of-stock, on the one hand, and, 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 who offer aggressive pricing as well as greater
shopping convenience and superior customer service. The largest retailers, such as
WalMart, are increasingly using their size and scale to realize cost savings and operating
efficiencies from their supply chain, which they then pass on to the consumer in the form
of lower prices. This trend creates an industry dynamic whereby more and more consumers
are attracted to these price-cutting retailers, thus accelerating these retailers
revenue growth and allowing them to further increase their economies of scale.

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

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

The information system
needs of food and fuel retailers

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

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

| |  | capture
and analyze data to enable advanced forecasting capability and thereby to optimize the
ordering and inventory stocking process; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | extend
supply chain visibility to include suppliers, enabling retailers to share data and
collaborate with suppliers in supply chain decisions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

However,
in order to deter customers from shifting their patronage to the largest chains, smaller
retailers require more than increased operating efficiencies and competitive pricing. In
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
are increasingly seeking retail information systems that can, in addition to achieving
operating efficiencies, also:

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

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| |  | 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 retail food and fuel
software opportunity

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

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

Our Solutions

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

Our integrated solutions
span the retailers entire retail organization

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

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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 mining capabilities enable retailers to explore and analyze detailed
customer transactions, allowing them to closely monitor customer spending patterns and to
target promotions to their loyalty program members.

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

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

The
retail food industry is characterized by a very high volume of customer transactions that
retailers are required to process quickly and efficiently. We believe that retailers view
their POS systems as mission-critical to their operations, as these systems must be
continuously functioning to process customer transactions. The malfunction or failure of a
retailers POS systems for even a few minutes could result in substantial lost sales,
as well as significant customer dissatisfaction. Moreover, the data generated in these
transactions are equally mission-critical, the loss of which could significantly impair a
retailers internal reporting and accounting systems. As a result, retailers require
highly robust and resilient POS solutions that will allow them to continue to operate
despite system failures, as well as to avoid the risk of being unable to process customer
transactions as well as the risk of data loss. We have developed a software architecture
designed to support the high volume, multiple retail format environments of the largest
food retailers and major fuel retailers, capable of supporting 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 in-store solutions
support multiple retail formats and customer service points

Our
in-store solutions offer retailers the ability to support multiple retail formats and
customer service points at a single retail site. This enables retailers to use a single
software solution to operate different retailing formats such as grocery, fuel,
convenience store, car wash and Quick Service (or QSRs), and to support a variety of
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
providing consistency across the consumer touch-points and 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 joint venture
operations 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. These ASP solutions, which we
refer to as 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.

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

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

Our software solutions can support
the multi-national operations of leading Tier 1 food and major 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 major 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 have stores near national borders, as well as multi-national
retailers that prefer licensing software from a single vendor for all their locations.

Our enterprise solutions
can be easily integrated with existing IT infrastructures

The
modular nature of our architecture and our tools for building open interfaces to external
systems, including software protocol standards such as XML and web services, streamlines
the introduction of our enterprise and in-store solutions into existing IT environments.
Retailers can purchase systems that fit their current needs and budgets, and then add
additional modules as their business needs evolve over time. Our open architecture means
that our solutions are hardware neutral, capable of working with systems from most major
hardware vendors, including IBM, NCR, Fujitsu, 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
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 Growth Strategy

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

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

We
offer our customers enterprise-wide software solutions that allow them to collect, manage
and analyze information across their entire retail enterprise, from the warehouse to the
checkout counter. With the introduction of ReMA in 2003, we extended our product offering
from in-store solutions to include integrated enterprise level and head office
applications. Our in-store back-office and enterprise systems are closely integrated, both
sharing and drawing upon the same central data repository. With our acquisition of OMI, we
have further expanded our product offering to include supply chain execution and warehouse
management systems. We are progressing as planned in migrating our acquired supply chain
execution and warehouse management systems into new technology and integrating them into
our existing suite of solutions to create a synchronized suite of solutions from warehouse
to checkout. 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 food and fuel industries.

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

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

| |  | based
on open standards software architecture and are hardware neutral;
| | - | -----------------------------------------------------------------------

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

| |  | able
to support  multiple  retail  formats  such as grocery,  fuel and QSRs with one single
                  solution; and
| | - | ---------------------------------------------------------------------------------------------------------------------------

| |  | able
to support multi-national retailers who require a standardized solution which can be
easily deployed across their multiple regions and countries.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

In
the past, our sales to smaller chains and independent grocers were primarily limited to
POS applications. Leveraging the ability of ReMA to support multiple enterprises from a
single data center, we are now able to offer our 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 our StoreNext joint ventures in return for a monthly subscription fee.
These Connected Services enable Tier 3 and Tier 4 retailers to enjoy many of the benefits
of enterprise and back-office applications that were originally designed for Tier 1 and
Tier 2 retailers, without the need to make a significant upfront investment in the systems
and personnel required to run these applications in-house. To date, our StoreNext USA had
signed up over 1,000 retailers and StoreNext Israel has signed up over 700 retailers. We
intend to continue to market Connected Services to this retail sector in an effort to
increase the revenues we generate from our Tier 3 and Tier 4 customer base.

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

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

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Continue broadening
market penetration through strategic acquisitions

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

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

Currently
our primary geographic markets are North America, Israel and Europe, particularly the
United Kingdom and Scandinavia. In 2004, we have announced significant new sales, viewed
as market entries in new markets, such as France and Italy in Europe, and China, Japan and
India in Asia. We plan to continue to establish our presence in these new markets, as well
as expand into new 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, that have similar retail characteristics to the food and fuel retail market
sectors, in an effort to broaden our addressable market.

Our Products

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

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

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

Warehouse Management
Solutions: Suite of supply chain execution and warehouse management software solutions
that provide retailers and wholesalers 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.

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

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

|Product                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Key Features &
Functionality                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Target Markets                                                                                                                                                                                                                                                                                 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                
|In-Store SolutionsStoreLine 
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
  StoreLine.net 
(in development) 
                             
                             
                             
                             
                             
  StorePoint 
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
  RPO (Retalix Pocket 
  Office) 
                             
                             
                             
  RBO (Retalix Back Office) 
                             
                             
                             
                             
                             
  ScanMaster |  POS and Front Office      
solution                     Client server, Windows    
operating system            
                            
                            
                            
                            
                            
                            
                             POS solution               Web-based, open           
architecture                 Based on "thin client'    
architecture                 Developed on the          
Microsoft .Net platform POS, Front Office and     
Back Office solution         Client server, Windows    
operating system            
                            
                            
                            
                            
                            
                            
                             Mobile, hand-held suite   
of front-office and         
back-office applications     Microsoft Windows CE      
platform                     Client server, Windows    
operating system            
                            
                            
                            
                             POS solution               Client server, Windows    
operating system |  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 Allows retailers to run 
POS applications remotely  Reduces total cost of
ownership of in-store IT
infrastructure Highly scalable 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 Allows employees to     
perform front-office and  
back-office functions     
from their in-store
location Functionally rich       
back-office applications   Interfaces to several
types of POS formats Integrated with
StoreLine Highly configurable      Multi-language and tax   Broad set of customer
loyalty functionality
support Integrated with
self-checkout systems |  Supermarkets and
grocers  All Tiers Supermarkets and
grocers  All Tiers Convenience store, Quick
Service Restaurant, and
fuel retailers Supermarkets and
grocers  All Tiers Convenience stores Supermarkets and
grocers  Tier 2  Tier 4 Supermarkets and
grocers  Tier 3 & Tier 4

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Enterprise SolutionsReMA 
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
  Retalix Host 
                           
                           
                           
                           
                           
                           
                           
                           Warehouse Management
  Solutions
  TRICEPS Warehouse 
  Management 
                           
                           
                           
  BICEPS Purchasing 
  Management 
                           
                           
                           
                           
                           
  PROMPT Invoice Matching 
                           
                           
                           
                           
                           
                           
                           
  MDS Yard and Dock 
  Management 
                           
                           
                           
                           
                           
                           
  ABS Advanced Billing and 
  Order Management 
                           
                           
                           
                           
                           
                           
  DemandAnalytX |  An enterprise system for  
central management of       
head-office and             
back-office applications     Web-based, open           
architecture                 Based on web services     
and thin clientarchitecture  Developed on the          
Microsoft .Net platform     
                            
                            
                            
                            
                            
                            
                             An enterprise management  
system for head-office and  
back-office applications     Client server, Windows    
operating system            
                            
                            
                            
                             Automated warehouse       
location and task           
management system            Advanced Radio Frequency  
(RF) technology              Automated procurement     
system                      
                            
                            
                            
                            
                             Automated invoice         
reconciliation system        EDI and EFT technology    
                            
                            
                            
                            
                             Automated yard and dock   
resource management system   Advanced RF, EDI and      
Advanced Ship Notice (ASN)  
technology                  
                            
                            
                             Automated billing and     
pricing system              
                            
                            
                            
                            
                            
                             Demand forecasting and    
replenishment optimization |  Broad  functionality                   
 product and 
pricing, promotions,       
loyalty, forecasting,      
ordering, receiving,
analysis and reporting Provides for central
location of the server
hosting the software,
with users throughout the
enterprise accessing
applications through
browsers Single data repository Reduces the technology
footprint and maintenance
in the retail store Provides enterprise      
level price and promotion  
management and data        
analysis and reporting Enables consistent
workflow operations and
data synchronization
between the enterprise
and store Optimizes distribution   
of warehouse resources      Provides real time
warehouse data to
warehouse managers "Just in time" and       
forward buying procurement  Invoice and purchase
order reconciliation Vendor profiling Item inventory
management Tracks invoices and      
interfaces with general    
ledger systems Provides real time
inventory levels Reduces time necessary
to resolve cost
discrepancies Real time management of  
yard / dock arrivals and   
departures Automatically directs
arrivals to optimal
storage location Manages trailer usage
and reduces bottlenecks Enables billing that     
reflects pre-determined    
margin objectives Provides custom pricing
according to item Allows multiple order
types and calculation
methods Interprets store-level   
POS data, forecasts demand  Determines and places    
optimal replenishment      
orders |  Tier 1 & Tier 2
 supermarkets Large chain convenience
stores and fuel retailers Convenience store, Quick
service restaurants and
fuel retailers Tier 1 & Tier 2
supermarkets Tier 1 & Tier 2
supermarkets Tier 1 & Tier 2
supermarkets Tier 1 & Tier 2
supermarkets Tier 1 & Tier 2
supermarkets Tier 1 & Tier 2
supermarkets Large chain convenience
stores

28

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|                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------
|ASP and Supplier Solutions
  Connected Services
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
  Supplier Solutions |  ASP based ReMA for 
enterprise and back-office 
applications
 Aggregated retail food 
industry data
 Collaborative supply 
chain functionality
 E-marketplace for retail 
food industry |  Provides retailers 
access to ReMA 
applications in return
for a monthly
subscription fee
 Allows these retailers
access to applications
that would otherwise be
too expensive or
difficult to manage
in-house
 Enables supplier to 
better understand market 
trends and consumer
demands
 Enables retailers and
suppliers to streamline
work processes, exchange
pricing, inventory and
market information |  Tier 3 & Tier 4
independent grocers
 Suppliers to all Tiers
of supermarkets and grocers

In-Store Solutions

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

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

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

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

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

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

We
have two principal in-store solutions: StoreLine for the supermarket and grocery market
and StorePoint for the convenience store and fuel retail 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
Cafe   touch-screen based POS application for in-store coffee shops and restaurants;
| | - | ---------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

StoreLine.net

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

StorePoint

StorePoint
is a fully integrated, modular open architecture POS solution for the multi-format
convenience store and fuel sectors. StorePoint supports a variety of retail formats, such
as convenience stores, fuel forecourts, quick service restaurants and self-service kiosks.
By using StorePoint, convenience stores and fuel retailers can use one integrated solution
for item scanning, fuel sales and quick service food sales. In addition, StorePoint also
provides extensive front office and back-office functionality, such as ordering and
receiving, inventory management, wet stock 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;
| | - | -------------------------------------------------------------------------------------------

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

| |  | RFS software
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 establishment.
Includes all 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, 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 ReMA, StoreLine and StorePoint solutions. 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
joint venture, with some sales to Tier 2 retailers.

Enterprise Solutions

Retalix Enterprise
Management Applications, or ReMA

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

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

| |  | product,
price and promotion management;
| | - | ----------------------------------------

| |  | store
and enterprise level inventory  management,  including  ordering,  receiving and item
                  returns; and
| | - | --------------------------------------------------------------------------------------------------------------------------

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| |  | forecasting
for product ordering.
| | - | ---------------------------------

ReMAs
key modules include:

| |  | ReMA
Inventory  provides retailers with multiple inventory management solutions,
including computer assisted ordering and item return;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | ReMA
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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ReMA
PriceLogic  provides retailers with rules-based pricing tools that increase the
efficiency of product and price management by allocating items to product and pricing
categories;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ReMA
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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Retalix Host

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

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

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.

Warehouse Management
Solutions

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

32

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TRICEPS Warehouse
Management

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

BICEPS
Purchasing Management

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

PROMPT
Invoice Matching

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

MDS
Yard and Dock Management

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

ABS
Billing and Order Management

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

DemandAnalytX

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

ASP and Supplier Solutions

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

ASP
Solutions

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

33

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Supplier
Solutions

Through
the collection of sales and inventory data obtained in providing Connected Services to
Tier 3 and Tier 4 food retailers, we provide suppliers with aggregated Tier 3 and Tier 4
retailer data, including visibility into retail inventory movement, as well as aggregated
market share information. We first established a community, or e-marketplace, for
suppliers in the retail food industry in Israel, where the number of retailer subscribers
to our Connected Services through our StoreNext Israel joint venture has reached a
critical mass. As part of this e-marketplace, retailers and suppliers are able to
collaborate and exchange data through our centralized servers, enabling the exchange of
product information, pricing, ordering, inventory and other market information. We 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.

Customers

Our
software has been deployed in over 400 retail chains worldwide, including supermarket and
grocery stores, convenience stores, fuel retailers and quick service restaurants. The
following list is a representative sample of companies that purchased an aggregate of at
least $200,000 of our products and services in 2003 and 2004 combined.

|Grocery                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Convenience Storesand Fuel Retailers                                                                                                   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Albertsons (US)                              
Costco (US)                                  
Hannaford Bros. (US)                         
K-VA-T (US)                                  
Publix (US)                                  
Schnucks (US)                                
Dierbergs (US)                               
Big Y (US)                                   
Delhaize Group (Belgium)
Sainsbury's (UK)
Tesco Stores (UK)
A.S. Watson (Europe)
Metro Cash & Carry (South Africa & Australia)
Shoprite Checkers (South Africa) | Alon Oil (US)
Casey's (US)
Irving Oil (US)
Husky Oil (Canada)
Pilot Corporation (US)
Tesoro (US)
Welcome Break (UK)
Pressbyran (Sweden)

34

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Joint Ventures

StoreNext
USA

Established
in 2002 as a joint venture with Fujitsu Transaction Solutions, StoreNext Retail
Technologies LLC, which we refer to as StoreNext USA, provides POS hardware and software
and Connected Services to the independent and small chain grocery market sectors (Tier 3
and Tier 4 retailers). As part of this joint venture, Retalix and Fujitsu jointly own and
manage the regional dealer channels for the Tier 3 and Tier 4 grocery market sectors.
Retalix supplies the joint venture with POS, back office and mobile solutions software and
Fujitsu supplies the joint venture with POS hardware. Retalix receives revenues from the
sale of its software solutions to the joint venture and shares proportionally in the joint
ventures profits. StoreNext USA has recently begun to offer Connected Services to
these Tier 3 and Tier 4 food retailers. As of December 31, 2004, we estimate that
StoreNext USA had approximately 11,000 sites installed, with about 1,000 retailers that
have signed up to Connected Services. Retalix owns 50.01% of StoreNext USA. Distributions
by StoreNext USA to its shareholders require the consent of all shareholders in certain
circumstances.

StoreNext
Israel

Established
in 1999, StoreAlliance.com Ltd., which we refer to as StoreNext Israel, provides
Connected Services to food retailers 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 approximately 700 retailers and 500
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 joint venture of Retalix with three Israeli partners: Discount Investment
Corporation Ltd.; Isracard, a subsidiary of Bank Hapoalim, Israels largest bank; and
Coca Cola 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,
Australia and Israel, augmented by a combination of channel partners and resellers. Sales
to Tier 1 and Tier 2 supermarket chains and major fuel retailers have historically
represented the substantial majority of our revenues. We target Tier 3 and Tier 4 food
retailers indirectly through our channel partners and through our StoreNext joint ventures
in the United States and Israel. For larger supermarket and convenience store chains and
fuel retailers, we also provide professional services including project management,
implementation, application training and technical and documentation services. We also
provide development services to customize our applications to meet specific requirements
of our customers, as well as ongoing support and maintenance services.

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

Direct
Sales

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

35

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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, Finland, New Zealand, Norway, the Philippines, South Africa, Switzerland, Japan
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.

# Technology

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

Our
StoreLine and StorePoint POS software solutions are implemented using a common three-tier
architecture consisting of user interface, business logic and data and services layers.
The user interface layer consists of a collection of software modules that are the basis
for our graphical user interface and user input interface. The business logic layer
consists of a collection of business rules and procedures that can be customized through
the use of parameters. The data and services layer provides a set of modules that is
designed to interface with open database management systems and unique point-of-sale
hardware devices such as scanners, scales, fuel pumps and displays, as well as handle the
redundancy and resiliency abilities of the system.

This
three-tier architecture allows our products to be easily customized, either at the
graphical user interface or the functional levels, easily translated and configured,
scalable, and it provides resiliency and data redundancy. Additional users can be added to
our applications, with minimal loss of performance and without significantly increasing
incremental costs. This is achieved by employing a scalable, client-server architecture
based on the Windows operating system and SQL and Interbase data servers. Our software
architecture is designed to be resilient and provide data redundancy. Essential data are
protected through duplication at the server level. Furthermore, our system design allows
each POS terminal to continue to operate in situations where communications with the
in-store server or central system have been lost and, through a store and
forward mechanism, allows for data synchronization once communications are restored.

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

Retalixs
new SCM applications (enterprise buying, ordering, billing, invoice matching and warehouse
management systems) use the industry standard J2EE and are database independent. They also
offer a rich set of base services, and are built for customization to suit the specific
needs of different customers. They use the IBM Websphere application server and the DB2
database server. Future releases are planned to support WebLogic, MS-SQL Server and
Oracle.

Retalix
Yard management system is a web-based .NET application that enables organizations to
manage multiple warehouse yards from a central location.

36

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# Competition

Our
principal competition in the supermarket and grocery market for in-store solutions has
traditionally come from integrated IT vendors such as IBM, Fujitsu, NCR and Wincor-Nixdorf
(which usually provide their software integrated with their hardware), as well as local or
regional software providers. On the enterprise level, our principal competitors in the
supermarket and grocery market are TCI and SoftTechniques, as well as in-house developed
solutions. We also experience competition from independent software vendors such as JDA
and Retek. In addition, we anticipate future competition from new market entrants that
develop retail food software solutions. In the convenience store and fuel market, our
competition includes Radiant Systems Inc., Pinnacle Systems, Gilbarco
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, mutli-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.
| | - | ----------------------------------------

For
description of our revenues by geographic segments, see Note 15 to our consolidated
financial statements contained elsewhere in this annual report.

37

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# C. Organizational
Structure

We have the following subsidiaries
and related companies:

|Subsidiary                                        | Country of
Residence | Portion of ownership interest
and voting power held (%)
|------------------------------------------------- | -------------------- | -------------------------------------------------------
|Retalix Holdings Inc.                             | United States        | 100                                                    
|Retalix USA Inc.(1)                               | United States        | 100                                                    
|Retail Control Systems Inc. (1)                   | United States        | 100                                                    
|BASS Inc. (2)                                     | United States        | 100                                                    
|StoreNext Retail Technology LLC (1)               | United States        | 50.01                                                  
|OMI International, Inc. (1)                       | United States        | 100                                                    
|C-StoreMatrix.com Inc. (3)                        | United States        | 25                                                     
|PalmPoint Ltd.                                    | Israel               | 100                                                    
|Tamar Industries M. R. Electronic (1985) Ltd. (4) | Israel               | 100                                                    
|StoreAlliance.com, Ltd. (5)                       | Israel               | 51.5                                                   
|StoreNext Ltd. (6)                                | Israel               | 51.5                                                   
|TradaNet Electronic Commerce Services Ltd. (6)    | Israel               | 51.5                                                   
|IREX - Israel Retail Exchange Ltd. (6)            | Israel               | 51.5                                                   
|Cell-Time Ltd. (7)                                | Israel               | 17.1                                                   
|DemandX Ltd. (6)                                  | Israel               | 51.5                                                   
|Retail College StoreNext Ltd. (8)                 | Israel               | 34.3                                                   
|P.O.S. (Restaurant Solutions) Ltd.                | Israel               | 69                                                     
|Net Point Ltd.                                    | Israel               | 95                                                     
|Kohav Orion Advertising and Information Ltd.      | Israel               | 100                                                    
|Orlan Orion Systems Ltd.                          | Israel               | 100                                                    
|Retalix (UK) Limited                              | United Kingdom       | 100                                                    
|UNIT S.p.A                                        | Italy                | 100                                                    
|Retalix France SARL                               | France               | 100                                                    
|Retalix SA PTY Ltd.                               | South Africa         | 100                                                    
|Retalix Australia PTY Ltd.                        | Australia            | 100                                                    

(1)  Held through our wholly-owned
subsidiary, Retalix Holdings Inc.(2) Held through           our
wholly-owned subsidiary, Retalix USA Inc.(3) Ceased operations.(4)     Holds 26.8% of the issued
share capital of StoreAlliance.Com, Ltd.(5)           Including holdings
through our wholly-owned subsidiary, Tamar Industries M. R.           Electronic (1985)
Ltd.(6) Wholly owned by our subsidiary,
StoreAlliance.com           Ltd.(7) 33% owned by our subsidiary,
StoreAlliance.com Ltd.(8) 67%
owned by our subsidiary, StoreAlliance.com Ltd.

D. Property,
Plants and Equipment

In
June 1998, we purchased the rights of third parties in a long-term lease from the
Israel Lands Authority, a government agency, relating to land and approximately 2,300
square meters of office space in a building in Raanana, Israel, which houses our
Israeli headquarters. Towards the end of 1999, we acquired an additional space of
approximately 1,200 square meters in the same building. During recent years, we have also
leased additional spaces totaling approximately 1,700 square meters in the same building
to accommodate new activities and the main operations of newly acquired subsidiaries.

In
addition to our corporate headquarters in Raanana, Israel, we currently lease
approximately 44,400 square feet of office space in Plano, Texas which serves as our U.S.
headquarters. We also lease offices in Texas, Pennsylvania, Ohio and Idaho, as well as in
London, 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.

38

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# ITEM 5  OPERATING
AND FINANCIAL REVIEW AND PROSPECTS

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

# A. Operating Results

Overview

General

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

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

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

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

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

Highlights
since the beginning of 2004 include:

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

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

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

| |  | We
increased our investment in research and development, net by 86% to $34.1 million in
2004, reflecting significant investments in integrating our recently acquired warehouse
management systems into the ReMA suite of applications, as well as in developing
next-generation applications and web-based architectures targeted to the needs of both
large supermarket and convenience store chains and independent retailers. This increase
is also a result of our efforts in developing new versions of our products and solutions
based on new platforms such as the Microsoft .Net platform and the J2EE platform. We
intend to continue to invest considerable resources in research and development as we
believe that this is essential to enable us to establish ourselves as a market leader in
our fields of operation.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Sources of Revenue

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

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

Product Sales

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

Services and Projects

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

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

40

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

| |  | any
undelivered products or services are not essential to the functionality of the
                  delivered products or services;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | payment
for the delivered products or services is not contingent upon delivery of the
                  remaining products or services;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

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

| |  | there
is evidence of the fair value of each of the undelivered products or services.
| | - | ------------------------------------------------------------------------------------

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

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

Cost of Revenues

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

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

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

Operating Expenses

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

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

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

41

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

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

Other General Income
(Expenses), Net

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

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

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

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

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

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

Financial Income
(Expenses), Net

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

Share
in Losses of an Associated Company

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

Minority Interests in
Losses of Subsidiaries

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

42

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Operating Results

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

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

Comparison of 2002, 2003
and 2004

Revenues

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

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 54% of the total increase in
sales during 2004 in comparison to 2003. The increase in revenue from sales to
international customers constituted 46% of the total increase in sales during 2004 in
comparison to 2003. Revenues from sales in the Israeli market were consistent with those
achieved during 2003. Our international revenues could fluctuate from period to period in
the near term, as these sales are still affected to a great extent by a small number of
relatively large customers.

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

43

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Cost of Revenues

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

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

Operating Expenses

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

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

Research
and Development Expenses, Net.  During 2004, we increased our research and development
expenses by 86% in comparison to 2003. As a percentage of revenues, these expenses rose to
27% in 2004 compared to 20% and 22% in 2003 and 2002, respectively. This significant
growth reflects our considerable investments in integrating our recently acquired
warehouse management systems into the ReMA suite of applications, and in developing
next-generation applications and web-based architectures targeted to the needs of large
supermarket and convenience store chains as well as independent retailers. This increase
is also a result of our efforts in developing new versions of our products and solutions
based on new platforms such as the Microsoft .Net platform and the J2EE platform. In 2003
and 2002 the growth of these expenses was primarily attributable to the development of our
new ReMA applications. Although we believe that in 2004 our research and development
expenses were relatively high in comparison to what we expect in the long run as a
percentage of revenues, we intend to continue to invest considerable resources in research
and development as we believe that this is essential to enable us to establish ourselves
as a market leader in our fields of operation. We view our research and development
efforts as essential to our ability to successfully develop innovative products that
address the needs of our customers as the market for enterprise-wide retail software
solutions evolves.

Selling
and Marketing Expenses.  During 2004, we invested significant marketing efforts in
increasing awareness of our new offerings in the supply chain management area and in
establishing a presence in new markets in Europe and Asia. During 2002 and 2003, we
focused primarily on the strengthening of our sales and marketing force in the United
States by recruiting highly experienced industry personnel, in order to better target the
U.S. grocery sector. We anticipate that selling and marketing expenses will continue to
increase in absolute dollars as we expand our operations.

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

44

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---



Financial Expenses, Net

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

Corporate Tax Rate

The
general corporate tax rate in Israel is 35% for the 2004 tax year, 34% for the 2005 tax
year, 32% for the 2006 tax year and 30% for the 2007 tax year and thereafter. Our
effective tax rate, however, was 23.9% in 2004, 24.6% in 2003, and 28.9% in 2002. We enjoy
these lower effective tax rates primarily because of tax reductions to which we are
entitled under Israels Law for Encouragement of Capital Investments, 1959, with
respect to our investment programs that were granted the status of approved enterprise
under this law. Under our approved enterprise investment programs, we are entitled to
reductions in the tax rate normally applicable to Israeli companies with respect to income
generated from our approved enterprise investment programs. We expect to continue to
derive a portion of our income from our approved enterprise investment programs. We are
also entitled to certain tax exemptions in connection with our approved enterprise
investment programs. We cannot assure you that such tax benefits will be available to us
in the future at their current levels or at all.

# B. Liquidity and Capital
Resources

We
had cash and cash equivalents of approximately $91.4 million, $46.1 million and
$28.4 million, as of December 31, 2004, 2003 and 2002, respectively. Our total
cash and cash equivalents, short-term bank deposits and short- and long-term marketable
securities amounted to approximately $111.9 million as of December 31, 2004,
compared to $54.6 million as of December 31, 2003 and $34.0 million as of
December 31, 2002. This increase of financial resources is primarily attributable to
approximately $58.9 million of proceeds we received from a public offering of 3,450,000 of
our ordinary shares, which we completed in May 2004. In January 2004, we acquired OMI
for approximately $19.1 million, including related transaction expenses, of which
approximately $13.7 million was paid in cash and the balance was paid in the form of
our ordinary shares. In addition, during 2004 we acquired UNIT S.p.A. in Italy,
DemandX Ltd., the distributor of OMIs products in Israel, and the operations of
OMIs European distributor. Total cash spent on these additional acquisitions
amounted to approximately $2.6 million.

Net
Cash Provided by Operating Activities.  Net cash provided by operating activities was
approximately $6.2 million in 2004, primarily the result of net income of $6.0. Net
cash provided by operating activities was approximately $11.7 million in 2003,
primarily the result of net income of $8.3 million and an increase of
$5.0 million in accounts payable and accruals, offset by a $2.9 million increase
in accounts receivable due to growing sales and a $2.4 million decrease in deferred
income taxes. Net cash provided by operating activities in 2002, was approximately
$10.1 million, primarily the result of net income of $5.7 million and an
increase of $4.5 million in accounts payable and accruals.

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

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

Net
Cash Provided by/Used in Financing Activities.  Net cash provided by financing
activities in 2004 amounted approximately $67.4 million, primarily attributable to
our public equity offering completed in May 2004, which yielded approximately $58.9
million in proceeds. An additional factor was the issuance of ordinary shares upon the
exercise of options by employees, the proceeds from which amounted to $10.1 million. Net
cash provided by financing activities in 2003 was approximately $9.2 million,
primarily attributable to the issuance of ordinary shares upon the exercise of options by
employees, long-term bank loans and short-term bank credit received and proceeds from the
investment of Isracard in StoreNext Israel, net of the repayment of long-term bank loans.
Net cash used in financing activities in 2002 was approximately $1.9 million,
primarily attributable to the repayment of long-term bank loans net of proceeds from the
issuance of ordinary shares upon the exercise of options by employees.

Public Offering in May
2004

We
completed a public offering of 3,450,000 of our ordinary shares at a price to the public
of $18.00 per share in May 2004. The proceeds of the offering, net of underwriting
discount and other related expenses, amounted to approximately $58.9 million. To date,
these proceeds have been invested in short-term bank deposits and investment-grade,
interest-bearing securities.

45

---

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Bank Debt

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

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

---

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

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

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

Credit Risk

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

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

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

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

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

46

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

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

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

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

|Year Ended
December 31, | Israeli Inflation
Rate
% | NIS Devaluation
Rate against the
U.S. dollar
% | Israel Inflation
Adjusted for the
Devaluation of the
NIS againt the U.S.
dollar
%
|----------------------- | ------------------------ | ---------------------------------------------- | ---------------------------------------------------------------------------------
|
|
|
|
|2000                    |                          |                                                |                                                                                  
|2001                    |                          |                                                |                                                                                  
|2002                    |                          |                                                |                                                                                  
|2003                    |                          |                                                |                                                                                  
|2004                    |                          |                                                |                                                                                  

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

Application of Critical
Accounting Policies and Use of Estimates

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

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

Revenue recognition

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

47

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Bad debt and allowance
for doubtful accounts

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

Tax provision

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

Our Functional Currency

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

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

The
financial statements of Cell-Time are included in our financial statements under the
equity method, based on translation into dollars in accordance with FAS 52; the resulting
translation adjustments are presented under shareholders equity, in the item
Accumulated other comprehensive income.

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

# Research and Development

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

48

---

---



# Proprietary Rights

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

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

# Grants from the Office
of the Chief Scientist

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

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

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

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

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

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

49

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

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

# D. Trend Information

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

E. Off Balance Sheet Arrangements

None.

F. Tabular Disclosure of Contractual Obligations

The
following table presents further information relating to our liquidity as of
December 31, 2004:

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

---

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

50

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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 December 31, 2004.

|Name                  | Age | Position                                                                 
|--------------------- | --- | -------------------------------------------------------------------------
|
|
|
|
|Barry Shaked          | 48  | President, Chief Executive Officer and Chairman of the Board             
|Danny Moshaioff       | 58  | Executive Vice President, Chief Financial Officer                        
|Avinoam Bloch         | 47  | Executive Vice President, Chief Operations Officer-International Business
|Yoni Stutzen          | 53  | Executive Vice President, International Sales                            
|Saul Simon            | 52  | Vice President, Business Development and CRM Products                    
|Elhanan (Elli) Streit | 65  | External Director                                                        
|Ilan Horesh           | 53  | External Director                                                        
|Sigal Hoffman         | 48  | Director                                                                 
|Brian Cooper          | 48  | Director                                                                 
|Ian O'Reilly          | 56  | Director                                                                 
|Amnon Lipkin-Shahak   | 61  | 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 has
served as a director in Neviot Ltd. since January 2004. Mr. Moshaioff
received a B.A. in Economics and Statistics from the Hebrew University in 1970 and an
M.B.A. from New York University in 1972.

Avinoam
Bloch has served as our Executive Vice President, Chief Operations Officer 
International 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 1998. Mr. Bloch served as an officer in the
Israeli Defense Forces from 1975 to 1979. Mr. Bloch received a B.Sc. in Computer
Science and Mathematics from the Hebrew University in 1993.

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

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

Elhanan
(Elli) Streit has served as an external director since March 2000. Since
January 1999, Mr. Streit has been a managing director of PFM International
Access Limited. Mr. Streit served as the Director of the Friends Association at the
Israel Museum from July 1996 through July 1998 and as a managing director at
Dizengoff West Africa from August 1991 through January 1996. Mr. Streit
served as an independent director in Advantech Ltd. from April 2000 to
December 2002 and as a director of Primode Ltd. from September 2000 to
December 2004. He received a B.A. in Economics and Political Science from the Hebrew
University in 1963 and an M.B.A. from the Wharton School at the University of Pennsylvania
in 1965.

Ilan
Horesh has served as an external director since March 2000. Since
November 1998, Mr. Horesh has been a director of system projects at Pelephone
Communications Ltd. From December 1997 to November 1998, Mr. Horesh
was Chief Executive Officer at Shefa  The Customers Club of Maccabi Health Services
and, from January 1994 to December 1997, Mr. Horesh was a planning and
development executive at PAZ Oil Corporation. He received a B.A. in History from Tel Aviv
University in 1984, an M.A. in Political Science from Haifa University in 1990 and an M.A.
in Business Management from Tel Aviv Management College in 1996.

51

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

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

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

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

# 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, 2004, was
approximately $1.5 million. This amount includes pension, retirement and similar
benefits in the aggregate amount of $99,000. This does not include amounts expensed by us
for business travel, professional and business associated dues and business expense
reimbursements.

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

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

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

As
compensation for his services to us, Mr. Shaked is entitled to receive, at the
beginning of each calendar year, options to purchase a number of our ordinary shares equal
to 1.0% of our then outstanding ordinary shares. One-third of these options will become
exercisable on each of the first three anniversaries of the date of grant. According to
this arrangement, in January of 2004 and January 2005, Mr. Shaked was granted
options to purchase a total of up to 129,767 and 176,556 of our ordinary shares,
respectively, at exercise prices of $23.19 and $21.86 per share, respectively. One-third
of the options granted in 2004 became exercisable on January 1, 2005, and the
remaining two-thirds will be exercisable in two equal portions from
January 1st of each of the years 2006 and 2007. Similarly, one-third of
the options granted in 2005 will be exercisable from January 1st of each
of the years of 2006, 2007 and 2008. The expiration dates of these options are
December 31, 2007 and 2008, respectively.

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.

52

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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 2004 under these arrangements for all
executive officers as a group was approximately $95,000.

During
2004, all our directors and executive officers as a group, were granted options to
purchase an aggregate of 246,434 shares under our stock option plans. The exercise prices
of these options range from $16.52 to $23.19, and their expiration dates range from
December 31, 2007 to June 30, 2008. Of these options, 50,000 became exercisable
prior to December 31, 2004, 43,256 became exercisable on January 1, 2005, 22,223 will
become exercisable on December 31, 2005, 43,256 will become exercisable on January 1,
2006, 22,222 will become exercisable on December 31, 2006, 43,255 will become exercisable
on January 1, 2007 and 22,222 will become exercisable on December 31, 2007.

# 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 companys chairman of the board may not serve as its chief
executive officer, unless otherwise approved by the shareholders for periods of up to
three years. The required shareholder approval is a majority of the shares voted on the
matter, including at least two-thirds of the shares of non-controlling shareholders voted
on the matter. Barry Shaked, one of our founders, has served as our president, chief
executive officer and chairman of the board since our inception in 1982. His most recently
approved three-year period expires in 2007.

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.

A
majority of the members of our board of directors 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. Any alternate director shall have all of the rights and obligations
of the director appointing him or her, except the power to appoint an alternate. The
alternate director may not act at any meeting at which the director appointing him or her
is present. Unless the time period or scope of any such appointment is limited by the
appointing director, such appointment is effective for all purposes and for an indefinite
time, but expires upon the expiration of the appointing directors term. To our
knowledge, no director currently intends to appoint any person as an alternate director,
except if the director is unable to attend a meeting of the board of directors.

External Directors

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

| |  | the
company;
| | - | ------------

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

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

The
term affiliation means any of:

| |  | an
employment relationship;
| | - | ---------------------------

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| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

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

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

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

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

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

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

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, operatory 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 auditors. Our audit
committee also has the authority and responsibility to oversee our independent auditors,
to recommend for shareholder approval the appointment and, where appropriate, replacement
of our independent auditors and to pre-approve audit engagement fees and all permitted
non-audit services and fees. 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, Elli Streit, Ilan Horesh and Brian
Cooper.

Investment Committee

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

# Internal Auditor

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

54

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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,
|-------------------------- | ------------------
|
|
|
|
|Research and Development   |                   
|Operations                 |                   
|Marketing                  |                   
|Finance and Administration |                   
|                           |                   
|Total                      |                   
|                           |                   

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

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 February 28, 2005, 1,021,248 of our ordinary shares,
          which equals approximately 5.8% of our issued share capital.

Mr.
          Brian Cooper, a director and our former Vice President, holds, as of February
          28, 2005, 885,287 of our ordinary shares, which equals approximately 5.0% of
our           issued share capital.

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

Other
of our directors and executive officers hold as of February 28, 2005, a total of 37,538 of
our ordinary shares, which equals approximately 0.2% of our issued share capital.

In
addition, as of February 28, 2005, Mr. Shaked held options to purchase a total of up to
425,360 of our ordinary shares granted to him on January 1, 2002, January 1, 2003, January
1, 2004 and January 1, 2005 pursuant to a shareholders resolution dated May 28, 1998,
authorizing the grant to him, on January 1 of each year, of options to purchase one
percent of our issued capital. The exercise price for each share according to this
resolution is the Nasdaq closing price on December 31 of the year ending just before the
date of grant. These options are exercisable as follows: 33%  starting one year
following the date of grant; 33%  starting two years following the date of grant;
and 34%  starting three years following the date of grant.

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

|Amount of Shares for
which the Options are
Exercisable | Exercise Price
in U.S. dollars | Expiration Date
|------------------------------------------------------ | ------------------------------ | ---------------
|39,038                                                 | 16.43                          | January 1, 2006
|79,999                                                 | 9.01                           | January 1, 2007
|129,767                                                | 23.19                          | January 1, 2008
|176,557                                                | 21.86                          | January 1, 2009

55

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| | As
of February 28, 2005, other directors and executive officers had options to purchase a
total of up to 571,084 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 200,000 of our ordinary shares, which are fully vested, at an exercise price
of $14.875 per share. The expiration date of these options is April 30, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
to purchase 147,084 of our ordinary shares, which are fully vested, at an exercise price
of $11.01 per share. The expiration date of these options is September 30, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
to purchase 30,000 of our ordinary shares at an exercise price of $11.53 per share. Two
thirds of these options are fully vested, and the remaining third will vest on April 1,
2005. These options will expire on April 1, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
to purchase 100,000 of our ordinary shares at an exercise price of $18.56 per share. One
third of these options is fully vested, and the remaining amount will vest in three equal
portions on December 31, 2005, December 31, 2006 and December 31, 2007. These options
will expire on June 30, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Our Share Option Plans

# Second 1998 Share Option
Plan

Our
Second 1998 Share Option Plan, or Second 1998 Plan, provides for the granting of incentive
share options to employees, and for the granting of non-statutory options to employees,
directors and consultants. Unless terminated sooner, the Second 1998 Plan will terminate
automatically in May 2008. As of February 28, 2005, options to purchase 5,158,552
ordinary shares have been granted under the Second 1998 Plan, out of which options to
purchase 2,148,989 (excluding options already exercised or expired) ordinary shares were
exercisable, and 609,600 ordinary shares remained available for future grants. These
figures include options to purchase 400,000 ordinary shares granted under our Second 1998
Plan in May 2004, at an exercise price of $18.56 of which one third vested on December 31,
2004, and the remaining two thirds shell vest in three equal portions on December 31,
2005, December 31, 2006 and December 31, 2007. These options will expire on June 30, 2008.
As of February 28, 2005, 2,241,411 options granted under our Second 1998 Plan have been
exercised.

The
Second 1998 Plan may be administered by our board of directors or by one or more
committees of our board of directors. Under Section 112 of the Companies Law, a
committee of the board of directors may only advise our board of directors with regard to
the grant of options, and the actual grant must be carried out by our board of directors.
The committee will, in the case of options intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the U.S. Internal Revenue
Code, consist of two or more outside directors within the meaning of
Section 162(m) of the Code. The plan administrator has the power to determine the
terms of the options granted, including the exercise price, the number of shares subject
to each option, the exercisability of the option and the form of consideration payable
upon such exercise. Our board of directors has the authority to amend, suspend or
terminate the Second 1998 Plan, provided that no such action may affect any ordinary share
previously issued and sold or any option previously granted under the Second 1998 Plan.

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

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

56

---

---



# 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 February 28, 2005, options to purchase 600,000 ordinary shares had
been granted under the 2004 Israeli Share Option Plan at an exercise price of $18.56, of
which one-third vested on December 31, 2004 and the remaining two-thirds will vest in
three equal portions on December 31, 2005, December 31, 2006 and December 31, 2007. These
options will expire on June 30, 2008. These granted options are all subject to the
capital gains taxation route under Section 102 of the Income Tax Ordinance
[New Version], 1961 , which generally provides, subject to the fulfillment of certain
procedures and conditions for a reduced tax rate of 25% on gains realized upon the
exercise of options. As of February 28, 2005, 2,066 options granted under our 2004 Israeli
Share Option Plan have been exercised.

The
2004 Israeli Share Option Plan is administered by our board of directors or by a share
incentive committee or other committee of the board, subject to applicable law. Under
Section 112 of the Companies Law, a committee of the board of directors may only
advise our board of directors with regard to the grant of options, and the actual grant
must be carried out by our board of directors. The plan administrator has the power to
determine the terms of the options granted, including the exercise price, the number of
shares subject to each option, the exercisability of the option and the form of
consideration payable upon such exercise. In the event of a merger or sale of
substantially all of our assets or stock, our board or a committee administrating the plan
has discretion as to whether to cause outstanding options to be assumed by the successor
company, substituted for successor company options or automatically vested in full.
Subject to applicable law and regulations, our board of directors has the authority to
amend, suspend or terminate the 2004 Israeli Share Option Plan, provided that no such
action may affect any ordinary share previously issued and sold or any option previously
granted under the plan.

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

# Stock Option Plan of a
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 February 28, 2005, 270,000 ordinary shares, or approximately 7.7%
of the issued and outstanding share capital of the subsidiary as of such date, are
reserved for issuance upon the exercise of options granted to some of our and the
subsidiarys employees. In addition, in connection with an investment agreement
signed on December 31, 2000, options to purchase 90,000 ordinary shares, were granted to
one of the minority shareholders of this subsidiary. The options vest as follows: 33.33%
after the first year after their grant, another 33.33% after the second year and another
33.33% after the third year, but only during the period the employee is employed either by
us or by the subsidiary. In addition, the options are not exercisable prior to the
earliest of the following events: (1) the consummation of a public offering of the
subsidiarys securities, (2) a merger of the subsidiary and (3) seven years
from the date of grant. Any vested options not exercised within the later of 90 days
of (a) the end of the optionees status as our or the subsidiarys
employee, or (b) the first to occur of such exerciseability events, will expire. The
rights of ordinary shares obtained upon exercise of the options will be identical to those
of the other ordinary shares of the subsidiary. Any option not exercised within
10 years of the grant date thereof will expire. Some of the options under the
subsidiary plan are subject to the terms stipulated by Section 102 of the Israeli
Income Tax Ordinance. Among other things, the Ordinance provides that the subsidiary will
be allowed to claim as an expense for tax purposes the amounts credited to the employees
as a benefit, when the related tax is payable by the employee. As of February 28, 2005,
options to purchase 323,922 ordinary shares of the subsidiary were outstanding under the
subsidiary plan, at exercise prices ranging from NIS0.01 per share to $5.55 per share. The
rest of the above options were forfeited.

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.

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.

57

---

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On
December 14, 2004, StoreNext USA 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. 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.

# ITEM 7  MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTION

# A. Major Shareholders

The
following table sets forth, as of February 28, 2005, 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 February 28, 2005,
17,655,584 of our ordinary shares were outstanding.

|Name                                                | Number of ordinary
shares held | Percentage of
outstanding ordinary
shares (1)(2)
|--------------------------------------------------- | ------------------------------ | ------------------------------------------------
|
|
|
|
|Bank Leumi Funds (3)                                |                                |                                                 
|Bank Hapoalim Funds (4)                             |                                |                                                 
|Barry Shaked (5)                                    |                                |                                                 
|Brian Cooper                                        |                                |                                                 
|All directors and executive officers as a group (6) |                                |                                                 

---

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

|(2) | Amounts
include shares that are not currently outstanding but are deemed
               beneficially owned because of the right to purchase them pursuant to
options                exercisable on February 28, 2005 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 122,294 shares held by Mr. Shaked,                directly
or indirectly, that are exercisable on February 28, 2005 or within                60 days
thereafter.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes
options to purchase 626,710 shares that are exercisable currently or
               within 60 days after February 28, 2005 at exercise prices that range
from                $10.00 to $23.19.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of February 28, 2005, 6,246,235 of our ordinary shares were held in the United States, by
2 record holders with mailing addresses in the United States, owning an aggregate of
approximately 35.4% 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.

58

---

---



# 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 $660,000) against two former employees and directors of PRS who currently
own the minority interest in PRS. This claim alleges that the defendants caused us 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. On 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

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

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

In
March 2005, the Tel-Aviv District Court has ruled that the above claim will not 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, which
is pending.

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

We
believe that we have meritorious defenses against these claims.

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. The claim alleges that
RCS breached its contractual obligation to the claimant and fraudulently misrepresented
facts concerning the product sold to the claimant.

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, states that promised features and
enhancements were never delivered. The damages claimed in this suit are in excess of
$200,000.

These
claims are handled by 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 believeRCS has meritorious defenses against these claims.

59

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PalmPoint

In
December 2002, a legal claim for the total amount of approximately $240,000 was filed in
the Magistrate Court of Beer-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 that rejects the claim
in its entirety.

The
management of PalmPoint is of the opinion that PalmPoint has meritorious defenses against
the claims.

In
October 2003, Leumi Card Ltd. by letters addressed to StoreAlliance and its directors,
complained that StoreAlliance breached an understanding it allegedly had with Leumi Card
in regard to the execution of a transaction involving an investment by Leumi Card in
StoreAlliance and further business cooperation between the parties. To date, no legal
procedures have been instituted against StoreAlliance in connection with this claim. Based
on the advice of our legal counsel, we believe that we have meritorious defenses against
the claim.

Cell-Time

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

We
are parties to several other claims filed against us by former customers and service
providers. In the opinion of the management, these claims are of sums that are not
material to us either individually or in the aggregate.

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.

60

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# ITEM 9  THE OFFER
AND LISTING

# A. Offer and Listing
Details

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

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

|                        | High | Low
|----------------------- | ---- | ---
|
|
|
|
|2000                    |      |    
|2001                    |      |    
|2002                    |      |    
|2003                    |      |    
|2004                    |      |    
|2003:                   |      |    
|First Quarter           |      |    
|Second Quarter          |      |    
|Third Quarter           |      |    
|Fourth Quarter          |      |    
|2004:                   |      |    
|First Quarter           |      |    
|Second Quarter          |      |    
|Third Quarter           |      |    
|Fourth Quarter          |      |    
|Most recent six months: |      |    
|September 2004          |      |    
|October 2004            |      |    
|November 2004           |      |    
|December 2004           |      |    
|January 2005            |      |    
|February 2005           |      |    

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

|                        | High | Low
|----------------------- | ---- | ---
|
|
|
|
|2000                    |      |    
|2001                    |      |    
|2002                    |      |    
|2003                    |      |    
|2004                    |      |    
|2003:                   |      |    
|First Quarter           |      |    
|Second Quarter          |      |    
|Third Quarter           |      |    
|Fourth Quarter          |      |    
|2004:                   |      |    
|First Quarter           |      |    
|Second Quarter          |      |    
|Third Quarter           |      |    
|Fourth Quarter          |      |    
|Most recent six months: |      |    
|September 2004          |      |    
|October 2004            |      |    
|November 2004           |      |    
|December 2004           |      |    
|January 2005            |      |    
|February 2005           |      |    
|                        |      |    

61

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# B. Plan of Distribution

| | Not
applicable.
| | ---------------

# C. Markets

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

# D. Selling Shareholders

Not
applicable.

# E. Dilution

Not
applicable.

# F. Expenses of the Issue

Not
applicable.

# ITEM 10 
ADDITIONAL INFORMATION

# A. Share Capital

Not
applicable.

# B. Memorandum and
Articles of Association

Our
memorandum of association and articles of association were amended on May 10, 2001. The
following is a summary description of certain provisions of our amended memorandum of
association and articles of association, and certain relevant provisions of the Israel
Companies Law which apply to us:

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

# Objects and Purposes

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

We
are authorized to issue 25,000,000 ordinary shares par value NIS 1.0 per share, of which
17,655,584 ordinary shares were outstanding as of February 28, 2005.

# 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.

62

---

---



# Remuneration of Directors

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

# Powers of the Board of
Directors

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

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

# Dividend and Liquidation
Rights

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

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;
| | - | ---------------------------------------------------------------

63

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

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

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

# Conflict of Interest

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

Under
Israeli law, an extraordinary transaction is a transaction:

| |  | other
than in the ordinary course of business;
| | - | ----------------------------------------------

| |  | otherwise
than on market terms; or
| | - | ----------------------------------

| |  | that
is likely to have a material impact on the company's profitability, assets or liabilities.
| | - | -----------------------------------------------------------------------------------------------

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

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

Based
on the foregoing provisions of Israeli law, 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.

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

64

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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). Nasdaq requires a quorum of at least
33-1/3% of our ordinary shares. If there is no quorum within half an hour of the time set,
the meeting is postponed until the following week, or any other time that the chairman of
the board of directors and the shareholders present agree to. At the postponed meeting,
any two shareholders present in person or by proxy will constitute a quorum. We have
received an exemption from Nasdaq permitting us to have this quorum under common Israeli
practice for postponed meetings.

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

# Duties of Shareholders

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

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

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

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

Exculpation, Insurance
and Indemnification of Office Holders

# Exculpation of Office
Holders

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

# Insurance of Office
Holders

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

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

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

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

# Indemnification of
Office Holders

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

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

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

| | Our
articles of association also include provisions:
| | ----------------------------------------------------

| |  | authorizing
us to grant in advance an undertaking to indemnify an office holder, provided that the
undertaking is limited to types of events which our board of directors deems to be
anticipated at the time of the undertaking and limited to an amount determined by our
board of directors to be reasonable under the circumstances and provided that the total
amount of indemnification for all persons we have agreed to indemnify in such
circumstances does not exceed, in the aggregate twenty-five percent (25%) of our
shareholders equity at the time of the actual indemnification; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | authorizing
us to retroactively indemnify an office holder.
| | - | -----------------------------------------------------------

Limitations on
Exculpation, Insurance and Indemnification

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

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

| |  | a
breach by the office holder of his duty of care if the breach was done intentionally or
         recklessly;
| | - | --------------------------------------------------------------------------------------------------------------

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

| |  | any
fine levied against the office holder.
| | - | ------------------------------------------

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

# Anti-Takeover
Provisions; Mergers and Acquisitions

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

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

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

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

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

# C. Material Contracts

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

# D. Exchange Controls

Exchange Controls and
Other Limitations Affecting Security Holders

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

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

# E. Taxation

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

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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 is required to be included
in the U.S. holders income to the extent that such distribution does not exceed our
current and accumulated earnings and profits, as determined for U.S. federal income tax
purposes. The amount of a distribution which exceeds our earnings and profits will be
treated first as a non-taxable return of capital, reducing the U.S. holders tax
basis for the ordinary shares to the extent thereof, and then as capital gain. Corporate
holders generally will not be allowed a deduction for dividends received. In general,
preferential tax rates not exceeding 15% for qualified dividend income and
long-term capital gains are applicable for U.S. holders that are individuals, estates or
trusts. For this purpose, qualified dividend income means, inter alia,
dividends received from a qualified foreign corporation. A qualified
foreign corporation is a corporation that is entitled to the benefits of a
comprehensive tax treaty with the United States which includes an exchange of information
program. The U.S. Internal Revenue Service, or IRS, has stated that the Israel/U.S. Tax
Treaty satisfies this requirement and we believe we are eligible for the benefits of that
treaty.

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

In
addition, our dividends will be qualified dividend income if our shares are readily
tradable on Nasdaq or another established securities market in the United States.
Dividends will not qualify for the preferential rate if we are treated, in the year the
dividend is paid or in the prior year, as a foreign investment company, or a passive
foreign investment company, or PFIC. Due to the nature of our operations, we do not
believe we are a foreign investment company; we also do not believe we are a PFIC; 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
120 day period beginning on the date which is 60 days before the ex-dividend
date, or (b) to the extent the U.S. holder is under an obligation to make related
payments on substantially similar property. Any days during which the U.S. holder has
diminished its risk of loss on our shares are not counted towards meeting the 61-day
holding period. Based on IRS News Release 2004-22, the IRS intends to give current effect
to proposed legislation changing the aforementioned 120 day period to a 121 day
period. Finally, U.S. holders who elect to treat the dividend income as investment
income pursuant to Section 163(d)(4) of the Internal Revenue Code will not be
eligible for the preferential rate of taxation.

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 holders itemize their deductions.

Disposition of Shares

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

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

Passive Foreign
Investment Companies

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

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

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

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

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

If we become a PFIC, each U.S. holder
who has not elected to treat us as a qualified electing fund, 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 2004 and do not anticipate being a PFIC in 2005. 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.

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.

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

# Israeli Taxation

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

Tax Reform

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

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

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

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

| |  | Imposition
of capital gain tax on capital gains, realized by individuals beginning January 1, 2003,
from the sale of shares of publicly traded companies in the Tel Aviv Stock Exchange (such
gain was previously exempt from capital gains tax in Israel) and from the sale of shares
of publicly traded Israeli Companies on other stock exchanges. For information with
respect to the applicability of Israeli capital gains taxes on the sale of ordinary
shares, see   Taxation of Shareholders Capital Gains Taxbelow;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Effectuation
of a new regime for the taxation of shares and options issued to employees, officers
                  and directors; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of tax at a rate of 25% on dividends paid by one Israeli company to another (which are
generally not subject to tax), if the source of such dividends is income that was derived
outside of Israel.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

General Corporate Tax
Structure in Israel

Generally,
Israeli companies are subject to corporate tax at the rate of 35% of their taxable income
for 2004, 34% for 2005, 32% for 2006 and 30% from 2007 onwards. In addition, Israeli
companies are 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,
as in our case, the rate may be effectively reduced for companies with income derived from
an Approved Enterprise, as further discussed below.

Law for the Encouragement
of Capital Investments, 1959

The
Law for Encouragement of Capital Investments, 1959 (the Investment Law) provides that
capital investments in a production facility (or other eligible assets) may, upon approval
by the Investment Center of the Israel Ministry of Industry and Trade (the Investment
Center), be designated as an Approved Enterprise. The Investment Law will expire on March
31, 2005. Accordingly, requests for new programs or expansions that are not approved on or
before March 31, 2005 will not confer any tax benefits, unless the term of the law is
extended beyond such date. On January 12, 2005, a bill was submitted to the Israeli
parliament providing for certain changes to the Investment Law. Among others, the bill
proposes certain changes to both the criteria and procedure for obtaining Approved
Enterprise status for an investment program, and changes to the grants and tax benefits
afforded in certain circumstances to Approved Enterprises under such law. The proposed
amendment is expected to apply to new investment programs following the enactment of the
bill into law. In order to enact the bill as legislation, the bill must be approved by the
Israeli parliament and published.  We cannot predict whether the bill will eventually
be enacted into law and what changes it might implement.

Each
certificate of approval for an Approved Enterprise relates to a specific
          investment program, delineated both by the financial scope of the investment
and           by the physical characteristics of the facility or the asset. The tax
benefits           from any such certificate of approval relate only to taxable profits
          attributable to the specific Approved Enterprise. An Approved Enterprise is
          entitled to benefits, including Israeli Government cash grants, which are made
          available if it is located in a government designated development area, and/or
          tax benefits. As discussed below, our production facilities have been granted
          Approved Enterprise status.

Taxable
income derived from an Approved Enterprise within the benefit period, and subject to
compliance with the conditions for approval as described below, is subject to a reduced
corporate tax rate of 25% rather than the usual corporate tax rate. The benefit period is
ordinarily seven years, or ten years for a company whose foreign investment level, as
defined below, exceeds 25%, commencing with the year in which the Approved Enterprise first
generates taxable income, and is limited to twelve years from the commencement of
production or fourteen years from the date of approval, whichever is earlier.

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That
income is eligible for further reductions in tax rates if the company qualifies as a
foreign investors company. A foreign investors company is a company in which
more than 25% of its combined share capital including loans from shareholders (in terms of
shares, rights to profits, voting and appointment of directors) is owned by non-Israeli
residents. The tax rate is reduced to 20% if the foreign ownership of the foreign
investors company is 49% or more but less than 74%; 15% if the foreign ownership of
the foreign investors company is 74% or more but less than 90%; and 10% if the
foreign ownership of the foreign investors company is 90% or more. The determination
of foreign ownership is made on the basis of the lowest level of foreign ownership during
the tax year. Such tax rates, are applicable only to a foreign investors company that
submitted an application for the grant of Approved Enterprise status prior to March 31,
2005.

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

Dividends
paid by a company that owns an Approved Enterprise and that are attributable to income
derived from that Approved Enterprise during the applicable benefits period, are taxed at
a reduced rate of 15% which is withheld at source, if the dividends are paid during
the benefit period or no more than twelve years thereafter; or, if the Company qualifies
as a foreign investors company without any time limitations. This tax must be
withheld at source by the company paying the dividend.

A
dividend paid from income derived from an enterprise owned by a company that has elected
the Alternative Benefits Program during the period in which it is exempt from tax causes
the company to be liable for corporate tax on the amount distributed which for this
purpose includes the amount of the corporate tax at the rate that would have been
applicable had the company not elected the Alternative Benefits Program, of up to 25%. In
addition, the company would be required to withhold at source, for the account of the
dividend recipient, 15% of the amount actually distributed as a dividend, as described
above.

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

Our
production facilities have been granted Approved Enterprise status under the Investment
Law. In respect of income derived from each of our Approved Enterprises, we are entitled
to reduced tax rates during a period of seven years from the year in which such
enterprises first earn taxable income (limited to 12 years from commencement of production
or 14 years from the date of approval, whichever is earlier). We have seven Approved
Enterprises. One of our Israeli subsidiaries has two Approved Enterprises. Income derived
from our Approved Enterprise is tax exempt during the first two years of the seven year
tax benefit period mentioned above, and is subject to a reduced tax rate of 25% (depending
on our foreign investment level, as defined above) during the remaining years of benefits.
The periods of benefits relating to five of our Approved Enterprises have already expired.
The periods of benefits relating to one of our Approved Enterprises will expire in 2005
and it is anticipated that the last Approved Enterprise will expire in 2009. The period of
benefits for our Israeli subsidiary with Approved Enterprises has not yet commenced and,
once commenced, may not continue beyond 2013.

Since
we participate in the Alternative Benefits Program, in the event we distribute a dividend
from income that is tax exempt, as described above, we would have to pay a tax of up to
25% (depending on our foreign investment level, as defined above) in respect of the amount
distributed. The benefits available to an Approved Enterprise are conditioned upon terms
stipulated in the Investment Law and the regulations thereunder and the criteria set forth
in the applicable certificate of approval. In the event that we do not fulfill these
conditions in whole or in part, the benefits can be canceled and we may be required to
refund the amount of the benefits, with the addition of the Israeli consumer price index
linkage differences and interest. We believe that our Approved Enterprises currently
operate in compliance with all applicable conditions and criteria, but there can be no
assurance that they will continue to do so.

The
investment law and regulations prescribing the benefits under it, provide for an
expiration date for the grant of new benefits. The expiration date has been extended
several times in the past. The expiration date currently in effect is March 31, 2005
(which may be extended by ministerial decision until June 30, 2005), and no new benefits
will be granted after that expiration date. There can be no assurance that new benefits
will be available after March 31, 2005 or that existing benefits will be continued in the
future at their current level or at any level. A proposal has been put forth for new
legislation to replace or amend the Investment Law. We are not able to predict when or if
this new legislation will be enacted, nor can we predict the nature and scope of benefits
that may be available under any new law.

Law for the Encouragement
of Industry (Taxes), 1969

We
believe that we currently qualify as an Industrial Company within the meaning
of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement
Law. According to the Industry Encouragement Law, an Industrial Company is a
company resident in Israel, 90% or more of the income of which in any tax year, other than
of income from defense loans, capital gains, interest and dividends, is derived from an
Industrial Enterprise owned by it. An Industrial Enterprise is
defined as an enterprise whose major activity in a given tax year is industrial
production.

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The
following corporate tax benefits are available to Industrial Companies, among others:

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

| |  | deductions
over a three-year period of expenses involved with the issuance and listing of shares on
the Tel Aviv Stock Exchange or, on or after January 1, 2003, on a recognized stock market
outside of Israel;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | accelerated
depreciation rates on equipment and buildings; and
| | - | --------------------------------------------------------------

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

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

# Taxation of Shareholders

Capital Gains Tax in
Israel

Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents
of Israel, as defined for Israeli tax purposes, and on the sale of assets located in
Israel, including shares in Israeli companies, by both residents and non-residents of
Israel, unless a specific exemption is available or unless a tax treaty between Israel and
the shareholders country of residence provides otherwise. The law distinguishes
between the inflationary surplus and the real gain. The inflationary surplus is a portion
of the total capital gain, which is equivalent to the increase of the relevant
assets purchase price attributable to the increase in the Israeli consumer price
index between the date of purchase and the date of sale. The real gain is the excess of
the total capital gain over the inflationary surplus. A nonresident that invests in
taxable assets with foreign currency may elect to calculate the inflationary amount in
that foreign currency.

Prior
to the tax reform, sales of our ordinary shares by individuals were generally exempt from
Israeli capital gains tax so long as (1) our ordinary shares were quoted on Nasdaq or
listed on a stock exchange in a country appearing on a list approved by the Controller of
Foreign Currency and (2) we qualified as an Industrial Company within the definition of
the Law for the Encouragement of Industry (Taxes), 5729-1969. We believe that we currently
qualify as an Industrial Company, but no assurance can be given that we will continue to
qualify as an Industrial Company.

Pursuant
to the Tax Reform, generally, capital gains tax is imposed on Israeli residents at a rate
of 15% on real gains derived on or after January 1, 2003 from the sale of shares in:
(1) companies publicly listed on the Tel Aviv Stock Exchange; or (2) Israeli
companies publicly listed on Nasdaq or a recognized stock exchange or a regulated market
outside of Israel as defined in the Income Tax Order (Definition of Stock Exchange), 2004;
or (3) companies dually listed on both the Tel Aviv Stock Exchange and Nasdaq or a
recognized stock exchange or a regulated market outside of Israel (such as our company).
This tax rate is contingent upon the shareholder not claiming a deduction for financing
expenses (in which case the gain will generally be taxed at a rate of 25%), and does not
apply to: (1) dealers in securities; or (2) shareholders that report in accordance
with the Income Tax Law (Inflationary Adjustments), 1985 Law (that will be taxed at
corporate tax rates for corporations and at marginal tax rates for individuals); or (3)
shareholders who acquired their shares prior to an initial public offering (that may be
subject to a different tax arrangement); or (4) a sale to a relative (as defined in the
Israeli Income Tax Ordinance).

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

Beginning January 1, 2005, 15% tax
rate applies to real capital gains derived from a sale of non  Israeli tradable
shares subject to the limitations described above. A non  Israeli tradable shares are:
shares traded in a recognized stock exchange outside of Israel, except for (a) Israeli
companies shares; (b) non Israeli companies shares dually traded on both the Tel Aviv
Stock Exchange and a foreign stock exchange or a regulated market outside of Israel.
Concerning non  Israeli tradable shares that were purchased before January 1, 2005,
a 35% tax rate applies to real capital gain derived from the sale of the shares, which
attributed to the holding period up to December 31, 2004 and 15% to reminder of the
capital gain. The total real capital gain is divided to the aforementioned periods on a
linear basis.

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Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares publicly traded on the Tel Aviv Stock Exchange, unless such gains are attributable
to permanent establishment of the foreign resident 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 Nasdaq or a recognized stock exchange or a regulated market outside of
Israel as defined in Income Tax Order (Definition Stock Exchange), 2004, provided that
such capital gains are not derived by a permanent establishment of the foreign resident in
Israel and that such shareholders did not acquire their shares prior to the issuers
initial public offering. However, non-Israeli corporations will not be entitled to such
exemption if an Israeli resident (1) has a controlling interest of 25% or more in such
non-Israeli corporation, or (2) is the beneficiary of or is entitled to 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or indirectly.

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

Application of the
Israel/U.S. Tax Treaty to Capital Gains Tax

Subject
to the Israel/U.S. Tax Treaty, the sale, exchange or disposition of our ordinary shares by
a person who qualifies as a resident of the United States and is entitled to claim the
benefits afforded to a resident referred to as a Treaty U.S. Resident, will not be subject
to Israeli capital gains tax unless (1) that Treaty U.S. Resident held, directly or
indirectly, shares representing 10% or more of our voting power during any part of the
12-month period preceding the sale, exchange or disposition; or (2) the capital gains from
such sale can be allocated to a permanent establishment in Israel. A sale, exchange or
disposition of our ordinary shares by a Treaty U.S. Resident who held, directly or
indirectly, shares representing 10% or more of our voting power at any time during the
12-month period preceding the sale, exchange or disposition will be subject to Israeli
capital gains tax, to the extent applicable. However, under the Israel/U.S. Tax Treaty,
this Treaty U.S. Resident would be permitted to claim credit for these taxes if required
to be paid against U.S. income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations set in U.S. laws applicable to foreign tax
credits.

Taxation of Non-Residents
on Receipt of Dividends

Nonresidents
of Israel will be subject to Israeli income tax on the receipt of dividends paid on our
ordinary shares at the rate of 25%, which tax will be withheld at source, unless the
dividends are paid from income derived from an Approved Enterprise during the applicable
benefit period, in which case the rate will be 15%, or a different rate is provided in a
treaty between Israel and the shareholders country of residence. Under the
Israel/U.S. Tax Treaty, the maximum tax on dividends paid to a holder of our ordinary
shares who is a Treaty U.S. Resident will be 25%. However, when dividends are paid from
income derived during any period for which we are not entitled to the reduced tax rate
applicable to an Approved Enterprise under the Investment Law, the maximum tax will be
12.5% if the holder is a U.S. company holding shares representing 10% or more of our
issued voting power during the part of the tax year preceding the date of payment of
dividends and during the whole of its prior tax year, if any, and provided that not more
than 25% of our gross income consists of interest or dividends. When dividends are paid
from income derived during any period for which we are entitled to the reduced tax rate
applicable to an Approved Enterprise, then the tax will be 15% if the conditions in the
preceding sentence are met.

# F. Dividends and Paying
Agents

Not
applicable.

# G. Statements by Experts

Not
applicable.

# H. Documents on Display

We
are subject to the informational requirements of the Exchange Act applicable to foreign
private issuers and fulfill the obligations with respect to such requirements by filing
reports with the SEC. You may read and copy any document we file with the SEC without
charge at the SECs public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material may be obtained by mail from the Public Reference Branch of
the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Certain of our SEC filings are also
available to the public at the SECs website at http://www.sec.gov.

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

# I. Subsidiary Information

Not applicable.

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# ITEM 11 
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market
risks relating to our operations may result primarily from weak economic conditions in the
markets in which we sell our products and from changes in exchange rates or in interest
rates. We have only limited involvement with derivative financial instruments. From time
to time we carry out transactions involving foreign exchange derivative financial
instruments (forward exchange contracts). These transactions do not qualify for hedge
accounting under FAS 133. During 2003, we entered into one foreign currency forward
contract for conversion of British Pounds Sterling into a notional amount of U.S. dollars
of approximately $2.9 million. We renewed this contract three times during 2003 and
four times during 2004. This contract was still outstanding as of December 31, 2004.
During 2004, we entered into two foreign currency forward contracts for conversion of
Euros into a notional amount of U.S. dollars of approximately $ 500,000 each. One of the
said contracts was renewed and was still outstanding as of December 31, 2004. In addition,
during 2004, we entered into a foreign currency forward contract for conversion of New
Israeli Shekels into a notional amount of U.S. dollars of approximately $2.5 million,
which was still outstanding as of December 31, 2004. The fair value of these outstanding
contracts as of December 31, 2004 reflects a liability in the amount of $130,000,
which was charged to financial expenses. Other than foreign exchange derivative financial
instruments as described above, we do not use derivative financial instruments in our
investment portfolio.

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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,
2004.

(In thousands, except percentages)

|                                                               |            | Maturity |        |       
|-------------------------------------------------------------- | ---------- | -------- | ------ | ------
|                                                               |            | 2004-5   | 2006-7 | 2008-9
|Corporate securitiesheld to maturitybearing fixedinterest rate | Book value | $12,089  | $4,239 | $853  
|WAYM *                                                         | 3.11%      | 3.27%    | 4.99%  | 3.24% 
|Marketable Securities                                          | Book value | $3,275   | -      | -     
|WAY**                                                          | 5.00%      | -        | -      | 5.00% 
|Dollar linkedmoney marketfunds anddeposits                     | Book value | $80,065  | -      | -     
|WAIR***                                                        | 2.15%      | -        | -      | 2.15% 
|New IsraeliShekels linkeddeposits                              | Book value | $4,173   | -      | -     
|WAIR***                                                        | 3.00%      | -        | -      | 3.00% 
|British PoundsSterling linkeddeposits                          | Book value | $5,146   | -      | -     
|WAIR***                                                        | 4.40%      | -        | -      | 4.40% 
|Euros                                                          | Book value | $1,819   | -      | -     
|WAIR***                                                        | 0.50%      | -        | -      | 0.50% 
|Australian Dollars                                             | Book value | $210     | -      | -     
|WAIR***                                                        | 4.00%      | -        | -      | 4.00% 
|Total                                                          | Book value | $106,777 | $4,239 | $853  
|WAY****                                                        | 2.46%      | 3.27%    | 4.99%  | 2.51% 

* Weighted average yield to maturity** Weighted average yield as per the performance of 2004*** Weighted average interest rate**** Weighted average yield

# Foreign Currency Risk

The
majority of our revenues is denominated in U.S. dollars and or linked to the U.S. dollar,
and our financing is mostly in U.S. dollars, and thus the U.S. dollar is our functional
currency. In addition, part of our revenues is denominated in British Pounds Sterling or
the Euro, and some of our expenses are denominated in New Israeli Shekels. This situation
exposes us from time to time, to fluctuations between the exchange rates of the dollar and
the NIS, the British Pound Sterling and the Euro. We hold most of our financial assets in
dollar or dollar linked investment channels. In addition, we tend from time to time, to
take NIS or British Pounds Sterling loans from banks attempting to maintain a similar
level of assets and liabilities in any given currency and thus trying to offset exposures
to inter-currency fluctuations.

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The
following table sets forth our non-dollar assets and liabilities as of December 31, 2004:
(in thousands)

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

# Interest Rate Risk

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

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

# ITEM 12 
DESCRIPTION OF SECURITIES OTHER THEN EQUITY SECURITIES

Not
applicable.

# PART II

# ITEM 13  DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES

Not
applicable.

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

The
net proceeds of our public offering of ordinary shares under the Securities Act of 1933 in
1998 were $12.9 million. These proceeds were invested in cash, cash equivalents and in
short term bank deposits and marketable securities. Only a small portion of these proceeds
was used to finance current business operations of the company.

# PART III

# ITEM 15  CONTROLS
AND PROCEDURES

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

There
were no significant changes in our internal control over financial reporting or in other
factors that materially affected, or are reasonably likely to materially affect our
internal control over financial reporting during the period covered by this annual report.

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# ITEM 16A. Audit
Committee Financial Expert

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

# ITEM 16B. Code of Ethics

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

# ITEM 16C. Principal
Accountant Fees and Services

Kesselman
& Kesselman, a member of PricewaterhouseCoopers International Limited, has served as
our principal independent public accountants since 1997. The following table presents the
aggregate fees for professional audit services and other services rendered by Kesselman
& Kesselman in 2003 and 2004:

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

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.

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.

# ITEM 16D. Exemptions
from Listing Standards for Audit Committees

None.

# ITEM 16E. Purchases of
Equity Securities by the Issuer and Affiliated Purchasers

Not
Applicable.

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# 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.

79

---

---



# ITEM 19  EXHIBITS

| | (a) | Financial
Statements
| | --- | --------------------

| | 1. | Report
of Independent Auditors
| | -- | ------------------------------

| | 2. | Consolidated
Balance Sheets
| | -- | ---------------------------

| | 3. | Consolidated
Statements of Income
| | -- | ---------------------------------

| | 4. | Statements
of Changes in Shareholders Equity
| | -- | ---------------------------------------------

| | 5. | Consolidated
Statements of Cash Flows
| | -- | -------------------------------------

| | 6. | Notes
to Consolidated Financial Statements
| | -- | ------------------------------------------

| | 7. | Exhibit
 Details of subsidiaries and associated company
| | -- | --------------------------------------------------------

| | 8. | Reports
of Independent Auditors of Certain Associated Companies
| | -- | ---------------------------------------------------------------

| | (b) | Exhibits
| | --- | --------

|Exhibit No. |  | Exhibit
|----------- |  | -------

|*1.1 |  | Memorandum
of Association of Registrant, as amended.
|---- |  | ----------------------------------------------------

|*1.2 |  | Articles
of Association of Registrant, as amended.
|---- |  | --------------------------------------------------

|**4.1 |  | Employment
Agreement dated December 1, 1999, between Point of Sale
                            Limited and Danny       Moshaioff.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------

|**4.2 |  | Agreement
dated December 30, 1999, between Point of Sale Limited and the
                            Corex Development Company (C. D. C.) Limited.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|***4.3 |  | Second
1998 Share Option Plan.
|------ |  | ------------------------------

|****4.4 |  | 2004
Israeli Share Option Plan.
|------- |  | -------------------------------

|8.1 |  | Principal
Subsidiaries of Retalix Ltd.
|--- |  | --------------------------------------

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

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

|13.1 |  | Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
                            Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
                            the                Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|15.2 |  | Consents
of Nation Smith Hermes Diamond.
|---- |  | ----------------------------------------

|15.3 |  | Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
|---- |  | --------------------------------------------------------------------------

---

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

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

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

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

80

---

---



SIGNATURES

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

|Date: March 21, 2005 |  | RETALIX LTD.BY: /S/ Barry Shaked
Barry Shaked, President, Chief Executive Officerand Chairman of the Board of Directors
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------

|Date: March 21, 2005 |  | BY: /S/ Danny Moshaioff
Danny Moshaioff, Chief Financial Officer
|-------------------- |  | ------------------------------------------------------------------------------

81

---

---



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

TABLE OF CONTENTS

|                                                         | Page     
|-------------------------------------------------------- | ---------
|
|
|
|
|REPORT OF INDEPENDENT REGISTERED PUBLIC                  |          
|ACCOUNTING FIRM                                          | F-2      
|CONSOLIDATED FINANCIAL STATEMENTS:                      
|Balance sheets                                           | F-3-F-4  
|Statements of income                                     | F-5      
|Statements of changes in shareholders' equity            | F-6      
|Statements of cash flows                                 | F-7-F-9  
|Notes to financial statements                            | F-10-F-46
|EXHIBIT - DETAILS OF SUBSIDIARIES AND ASSOCIATED COMPANY | F-47     

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



---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

# RETALIX LTD.

We have audited the consolidated
balance sheets of Retalix Ltd. (the Company) and its subsidiaries as of
December 31, 2004 and 2003 and the related consolidated statements of income, changes
in shareholders equity and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of the
Companys Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We did not audit the financial
statements of certain consolidated subsidiaries whose assets constitute approximately
25.6% and 24.1% of total consolidated assets as of December 31, 2004 and 2003,
respectively, and whose revenues constitute approximately 42.8%, 31.7% 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 auditing 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.

|Tel-Aviv, Israel | /s/ Kesselman & Kesslman           
|---------------- | -----------------------------------
|March 21, 2005   | Certified Public Accountants (Isr.)

F - 2

---

---



RETALIX LTD. 
CONSOLIDATED BALANCE
SHEETS

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

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

F - 3

---

---



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

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

F - 4

---

---



RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF INCOME

|                                                  | Year ended
December 31
|------------------------------------------------- | ----------------------
|
|
|
|
|REVENUES(note 14a):                               |                       
|Product sales                                     |                       
|Services and projects                             |                       
|                                                  |                       
|T o t a l    revenues                             |                       
|                                                  |                       
|COST OF REVENUES:                                 |                       
|Cost of product sales                             |                       
|Cost of services and projects                     |                       
|                                                  |                       
|T o t a l    cost of revenues                     |                       
|                                                  |                       
|GROSS PROFIT                                      |                       
|                                                  |                       
|OPERATING INCOME (EXPENSES):                      |                       
|Research and development expenses - net           |                       
|Selling and marketing expenses                    |                       
|General and administrative expenses  (note 15a)   |                       
|Other general income (expenses) - net  (note 15c) |                       
|                                                  |                       
|T o t a l    operating expenses                   |                       
|                                                  |                       
|INCOME FROM OPERATIONS                            |                       
|FINANCIAL INCOME (EXPENSES),net (note 15b):       |                       
|GAIN ARISING FROM ISSUANCE OF SHARES BY           |                       
|A SUBSIDIARY AND AN ASSOCIATED                    |                       
|COMPANY(note 2f and 2g)                           |                       
|                                                  |                       
|INCOME BEFORE TAXES ON INCOME                     |                       
|TAXES ON INCOME(note 10)                          |                       
|                                                  |                       
|INCOME AFTER TAXES ON INCOME                      |                       
|SHARE IN LOSSES OF AN ASSOCIATED COMPANY          |                       
|MINORITY INTERESTS IN LOSSES OF                   |                       
|SUBSIDIARIES                                      |                       
|                                                  |                       
|NET INCOME                                        |                       
|                                                  |                       
|EARNINGS PER SHARE(note 15d):                     |                       
|Basic                                             |                       
|                                                  |                       
|Diluted                                           |                       
|                                                  |                       
|WEIGHTED AVERAGE NUMBER OF SHARES USED            |                       
|IN COMPUTATION OF EARNINGS PER                    |                       
|SHARE - in thousands (note 15d):                  |                       
|Basic                                             |                       
|                                                  |                       
|Diluted                                           |                       
|                                                  |                       

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

F - 5

---

---



RETALIX LTD. 
STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

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

* Net of share issuance expenses.

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

F - 6

---

---



(Continued) 
1

RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF CASH FLOWS

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

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

F - 7

---

---



(Continued)  2

RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF CASH FLOWS

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

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

F - 8

---

---



(Concluded)  3

RETALIX LTD. 
CONSOLIDATED STATEMENTS
OF CASH FLOWS

# SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:

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

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

| | 1) | During
2004, the Company acquired 100% of the shares of OMI International, Inc.           in
consideration for the issuance of share capital of the Company in the total
          amount of $5,410,000.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In
February 2004, the Companys subsidiary in the U.K. acquired the supply
               chain management distribution activities of OMI International Ltd. These
               activities were acquired in consideration for cash, as well as the
issuance of                share capital of the Company in the total amount of
approximately                $ 590,000.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

F - 9

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES:

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

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

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

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

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

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

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

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

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

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

| | The
currency of the primary economic environment in which the operations of the Group and
almost each member of the Group (except for one subsidiary and the associated company)
are conducted is the U.S. dollar (dollar; $). Most of the Groups
revenues are in dollars or in Israeli currency linked to the dollar (see note 14a). The
Groups financing is mostly in dollars. Thus, the functional currency of the Group
is the dollar.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
and balances originally denominated in dollars are presented at their original amounts.
Balances in non-dollar currencies are translated into dollars using historical and
current exchange rates for non-monetary and monetary balances, respectively. For
non-dollar transactions and other items (stated below) reflected in the statements of
income, the following exchange rates are used: (i) for transactions  exchange rates
at transaction dates or average rates; and (ii) for other items (derived from
non-monetary balance sheet items such as depreciation and amortization, changes in
inventories, etc.)  historical exchange rates. Currency transaction gains or losses
are carried to financial income or expenses, as appropriate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | The
functional currency of one subsidiary and of the associated company is their local
currency (Euro and New Israeli Shekel) (NIS). The financial
statements of the said subsidiary are included in the consolidation based on translation
into dollars in accordance with Statement of Financial Accounting Standards (FAS)
52  Foreign Currency Translation of the Financial Accounting Standards Board
of the United States (FASB): assets and liabilities are translated at year
end exchange rates, while operating results items are translated at average exchange
rates during the year. Differences resulting from translation are presented in
shareholders equity under accumulated other comprehensive income. The financial
statements of the associated company are included in the financial statements of the
Company by the equity method, based on translation into dollars in accordance with FAS
52: the resulting translation adjustments are presented under shareholders equity-
accumulated other comprehensive income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

| | Investment
in marketable bonds  which are to be held to maturity - are stated at
amortized cost with the addition of computed interest accrued to balance sheet date (such
interest represents the computed yield on cost from acquisition to maturity). Interest
and amortization of premium discount for debt securities are carried to financial income
or expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

F - 11

---

---



RETAX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(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 |  
|Vehicles                           |  
|Office furniture and equipment     |  
|Building                           |  

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

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

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

| | i. | Impairment
of assets:
| | -- | ---------------------

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

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

F - 12

---

---



RETAX LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

| | 1) | Deferred
income taxes are determined by the asset and liability method based on                the
estimated future tax effects of differences between the financial accounting
               and the tax bases of assets and liabilities under the applicable tax law.
               Deferred tax balances are computed using the tax rates expected to be in
effect                at time when these differences reverse. Valuation allowances in
respect of the                deferred tax assets are provided when it is more likely
than not that all or a                portion of the deferred income tax assets will not
be realized. As to the main                factors in respect of which deferred income
taxes have been included  see                note 10g.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

F - 13

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

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

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

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

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

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

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

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

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

F - 14

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

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

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

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

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

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

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

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

F - 15

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

| | Basic
EPS is computed by dividing net income by the weighted average number of shares
outstanding during the year. Diluted EPS reflects the increase in the weighted average
number of shares outstanding that would result from the assumed exercise of options,
calculated using the treasury-stock method. The options of a subsidiary have no effect on
the Companys diluted EPS since their effect on the 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, in addition to net income,
currency translation adjustments of non-dollar currency financial statements of a
subsidiary and of an associated company (accumulated balance at December 31, 2004 of
$267,000).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 16

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

|                                    | Year ended December 31
|----------------------------------- | ----------------------
|
|
|
|
|Net income, as reported             |                       
|Add (deduct) - stock based employee |                       
|compensation expense (income),      |                       
|included in reported net income     |                       
|Deduct - stock based employee       |                       
|compensation expenses determined    |                       
|under the fair value method for     |                       
|all awards                          |                       
|                                    |                       
|Pro forma net income                |                       
|                                    |                       
|                                    |                       
|                                    |                       
|Earnings per share:                 |                       
|Basic - as reported                 |                       
|                                    |                       
|Basic - pro forma                   |                       
|                                    |                       
|Diluted - as reported               |                       
|                                    |                       
|Diluted - pro forma                 |                       
|                                    |                       

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

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

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

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

| | 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 was recorded by the Company
as a sales transaction under the provisions of FAS No.140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The resulting costs
are charged to financial expenses  net, as incurred. The expenses resulting from
these sales in the year ended December 31, 2004 and 2003 amounted to $658,000 and
$887,000 respectively and were charged as financial expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

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

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

F - 18

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

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

# NOTE 2 
ACQUISITIONS:

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

| | a. | In
January 2004, the Company through its subsidiary Retalix Holdings Inc.,
               acquired 100% of the shares of OMI International, Inc. (OMI),
a                company that provides supply chain management solutions and services
from an                unrelated party in consideration of $19.1million, comprised
of                $13,700,000 in cash, including estimated direct costs and 226,040 of
the                Companys Ordinary shares valued at approximately $ 5,410,000.
The value of                the Ordinary shares issued was determined based on the
average market price of                the Companys shares over few days before and
after the acquisition was                agreed and announced. During October 2004, the
Company paid the sellers of OMI                additional $449,000 as part of an election
made with the U.S. Internal Revenue                Service the result of which for tax
purposes, is the step-up of OMIs                assets value to fair value as of
the acquisition date. The identified intangible                assets acquired amounted
to approximately $ 1.7 million and included mainly acquired                technology of
approximately $ 1.2 million and customer base of approximately $                0.4
million to be amortized over their estimated useful lives (3 to 7 years) 
               see also note 4b. Goodwill arising on the acquisition amounted to
approximately                $ 16.8 million. The goodwill can be amortized for tax
purposes over a period of                fifteen years.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 19

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2  ACQUISITIONS(continued):

| | c. | In February 2004, the Companys subsidiary in the U.K. acquired the
               supply chain management distribution activities of OMI International Ltd
               (OEL). These activities were acquired in consideration of
               approximately $ 1.5 million out of which approximately $ 947,000 in cash and in
               addition 28,188 Ordinary shares of the Company valued at approximately
               $ 590,000. The value of the Ordinary shares issued was determined based on
               the average market price of the Companys shares over few days before and
               after the acquisition was agreed and announced. The identified intangible assets
               acquired included mainly customer base of approximately $ 0.7 million to be
               amortized over their estimated useful lives (3 years)  see also note 4b.
               Goodwill arising on the acquisition amounted to approximately $ 0.8 million. The
               goodwill can be amortized for tax purposes over a period of five years.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | According
to the agreement between the parties, StoreAlliance has committed to invest $140,000 in
consideration for 67% of the companys share capital (including capital notes) and
against a counter proportional investment of $70,000 by the minority interest. Such
Investments are to be executed according to terms specified in the formation agreement.
As of December 31, 2004, an amount of $105,000 was invested in the company by the
parties, $70,000 by Store Alliance and $35,000 by other party.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 20

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2  ACQUISITIONS
(continued):

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

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

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

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

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

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

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

F - 21

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2  ACQUISITIONS
(continued):

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

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

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

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

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

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

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

F - 22

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 3  PROPERTY,
PLANT AND EQUIPMENT:

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

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

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

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

# NOTE 4  GOODWILL
AND OTHER INTANGIBLE ASSETS:

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

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

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

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

F - 23

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

# NOTE 5  LONG-TERM
BANK LOANS:

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

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

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

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

F - 24

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

# NOTE 6  OTHER
LIABILITIES

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

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

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

# NOTE 7  EMPLOYEE
RIGHTS UPON RETIREMENT:

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

| | The
Israeli companies in the Group may only make withdrawals from the amounts funded for the
purpose of paying severance pay.
| | -----------------------------------------------------------------------------------------------------------------------------

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

F - 25

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  EMPLOYEE RIGHTS UPON
RETIREMENT(continued):

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

| | d. | The
profits (losses) on the amounts funded totaled $ 166,000, $ 311,000 and $
          (121,000) in 2004, 2003 and 2002, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

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

| | 1) | The
Group expects to contribute in the year ending December 31, 2005, $
               1,187,000 to the insurance companies in respect of its severance pay
obligation.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
Company expects to pay $932,000 future benefits to its employees during the
          year 2005 to 2014 upon their normal retirement age  see breakdown below. The
          amount was determined based on the employees current salary rates and the
          number of service years that will be accumulated upon the retirement date.
These           amounts do not include amounts that might be paid to employees that will
cease           working for the Company before their normal retirement age.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 26

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 8 
COMMITMENTS, PLEDGES AND CONTINGENT LIABILITIES:

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

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

| | The
Group has entered into operating lease agreements for the premises it uses; the last
lease expires in July 2010.
| | --------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

F - 27

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

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

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

F - 28

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

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

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

F - 29

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

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

F - 30

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 9 
SHAREHOLDERS EQUITY:

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

| | 1) | Under a prospectus dated April 28,
2004, an amount of 3,450,000 Ordinary Shares of NIS 1.00 par value of the Company were
issued on May 4 and May 7 in a public offering (the offering), in the United
States for $18 per share. The net proceeds to the Company of $58,857,000 are net of 5.5%
underwriting discount, and net of offering expenses.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 1) | Company's
Option plans
| | -- | ----------------------

| | On
March 5, 1998, the Companys Board of Directors approved the Second 1998 Share
Option Plan (the Second 1998 Plan). Under the Second 1998 Plan (as was
amended from time to time) up to 5,000,000 options were to be granted to employees,
directors and consultants of the Company, to purchase ordinary shares of the Company.
Each option is exercisable into one ordinary share of the Company. The exercise price of
each option under this plan is to be at least equal to the fair value of one ordinary
share at grant date. Unless terminated earlier, the options will expire starting from
2005 through June 2008. These options vest over the period of 0  3.5 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | On
May 10, 2004, the Companys Board of Directors approved the 2004 Israeli Share
Option Plan (the Israeli Plan). Under the Israeli Plan up to 2,000,000
options can be granted to Israeli employees, directors and consultants of the Company to
purchase ordinary shares of the Company. Each option is exercisable into one ordinary
share of the Company. Unless terminated earlier, the options granted to date under the
Israeli Plan will expire under the terms of the option agreements beginning in May 2004
through May 2014. These options vest over the period of 0  3.5 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 31

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SHAREHOLDERS
EQUITY(continued):

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

|                                | 2004 | 2003 | 2002
|------------------------------- | ---- | ---- | ----
|
|
|
|
|Options outstanding at          |      |      |     
|beginning of year               |      |      |     
|Changes during the year:        |      |     
|Granted - at market value       |      |      |     
|Exercised                       |      |      |     
|Forfeited or expired            |      |      |     
|                                |      |      |     
|Options outstanding at end of   |      |     
|year                            |      |      |     
|                                |      |      |     
|Options exercisable at year-end |      |      |     
|                                |      |      |     
|Weighted average fair value of  |      |     
|options granted during the      |      |     
|year                            |      |      |     
|                                |      |      |     

| | * | The
fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 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, 2004:
| | ------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

F - 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# NOTE 10  TAXES ON
INCOME:

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

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

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

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

F - 35

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

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

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

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

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

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

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

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

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

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

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

| | As
of December 31, 2004, the periods of benefits relating to five of the approved
enterprises of the Company have already expired, The periods of benefits relating to its
other approved enterprises will expire in 2005 and 2009. The period of benefits relating
to the approved enterprises of the Company Israeli subsidiary has not yet commenced
(it is restricted to the year 2013).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

F - 36

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

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

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

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

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

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

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

| | Income
of the Company and its Israeli subsidiaries, not eligible for approved enterprise
benefits for each of the years ended December 31, 2004, 2003 and 2002, is taxed at the
regular rate of 35%, 36% and 36%, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Carryforward
tax losses of certain subsidiaries as of December 31, 2004 and 2003 aggregate
approximately $9,383,000 and $ 5,005,000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 37

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

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

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

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

|                                                                      | December 31
|--------------------------------------------------------------------- | -----------
|
|
|
|
|1) Provided in respect of the following:                              |            
|Provisions for employee rights                                        |            
|Share issuance expenses                                               |            
|Carryforward tax losses                                               |            
|Doubtful accounts                                                     |            
|Research and development                                              |            
|Other                                                                 |            
|                                                                      |            
|                                                                      |            
|L e s s- valuation allowance                                          |            
|Depreciable fixed assets                                              |            
|Tax deductible goodwill                                               |            
|                                                                      |            
|                                                                      |            
|                                                                      |            
|                                                                      |            
|2) The deferred taxes are presented in the balance sheets as follows: |            
|                                                                      |            
|
|
|
|
|
|As a current asset                                                    |            
|As a non-current asset                                                |            
|                                                                      |            
|                                                                      |            
|                                                                      |            

F - 38

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

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

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

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

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

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

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

F - 39

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10  TAXES ON INCOME(continued):

| | 3) | Following
is a reconciliation of the theoretical tax expense, assuming all           income is
taxed at the regular tax rate applicable to companies in Israel           (2004-35% and
2003, 2002-36%) and the actual tax expense:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                          | Year ended December 31
|--------------------------------------------------------- | ----------------------
|
|
|
|
|Income before taxes on income, as reported                |                       
|in the income statements                                  |                       
|                                                          |                       
|Theoretical tax expense                                   |                       
|L e s s - tax benefits arising from                       |                       
|approved enterprise status                                |                       
|                                                          |                       
|                                                          |                       
|Increase (decrease) in taxes resulting from permanent     |                       
|differences:                                              |                       
|Disallowable deductions                                   |                       
|Tax exempt income                                         |                       
|Increase (decrease) in taxes resulting from different tax |                       
|rates for non - Israeli subsidiaries                      |                       
|Changes in valuation allowance                            |                       
|Taxes on income adjustments from previous years           |                       
|Other, mainly differences between the basis of            |                       
|measurement of income reported for tax purposes and       |                       
|the basis of measurement of income for financial          |                       
|reporting purposes - net, see b. above                    |                       
|                                                          |                       
|Taxes on income for the reported years                    |                       
|                                                          |                       

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

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

F - 40

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

# NOTE 12 
SUPPLEMENTARY BALANCE SHEET INFORMATION:

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

F - 41

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY BALANCE SHEET INFORMATION(continued):

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

| | 1) | The
amortized cost basis, aggregate fair value and the gross unrealized holding
          gains and losses are as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------

|                | Amortized
cost | Unrealized
gains | Unrealized
losses | Aggregate
fair value
|--------------- | -------------- | ---------------- | ----------------- | --------------------
|
|
|
|
|At December 31: |                |                  |                   |                     
|2004            |                |                  |                   | 17,181              
|                |                |                  |                   |                     
|2003            |                |                  |                   | 7,570               
|                |                |                  |                   |                     

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

|                                   | U.S. $ in
thousands
|---------------------------------- | -------------------
|
|
|
|
|2005                               |                    
|2006                               |                    
|2007                               |                    
|2008 and thereafter (through 2010) |                    
|                                   |                    
|                                   |                    
|                                   |                    

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

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

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

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

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

F - 42

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY BALANCE SHEET INFORMATION(continued):

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

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

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

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

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

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

# NOTE 13 
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS:

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

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

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

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

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

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

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

F - 43

---

---



RETALIX LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)

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

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

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

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

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

# NOTE 14  SEGMENT
INFORMATION:

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

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

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

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

F - 44

---

---



RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14  SEGMENT
INFORMATION (continued):

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

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

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

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

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

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

# NOTE 15  SELECTED
INCOME STATEMENT DATA:

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

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

F - 45

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RETALIX LTD. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15  SELECTED INCOME
STATEMENT DATA(continued):

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

F - 46

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Exhibit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

F - 47

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# Independent
Auditors Report

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

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

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

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

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



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# Independent
Auditors Report

To the StockholderRetalix Holdings, Inc. and Subsidiaries Plano, Texas

We have audited the accompanying
consolidated balance sheet of Retalix Holdings, Inc. and Subsidiaries(the Company) (see Note 1 to the consolidated financial statements)
as of December 31, 2003, and the related consolidated statements of income,
stockholders equity, and cash flows for the year then ended. The consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated financial statements based on
our audit. We did not audit the financial statements of StoreNext Retail Solutions, LLC, a
majority-owned subsidiary, which statements reflect total assets of approximately
$5,606,000 as of December 31, 2003, and total revenues of approximately $22,688,000
for the year then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts included for
StoreNext Retail Solutions, LLC, is based solely on the report of the other auditors.

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

In our opinion, based on our audit
and the report of the other auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial position of
Retalix Holdings, Inc. and Subsidiaries as of December 31, 2003, and the
consolidated results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of America.

|/s/ Nation Smith Hermes Diamond
San Diego, CaliforniaMarch 31, 2004
|-------------------------------------------------------------------



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Report of Independent Registered Public Accounting Firm

To the StockholderRetalix 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, 2004, and the
related consolidated statements of income, stockholder's equity, and cash flows for the
year then ended. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. We did not audit the financial statements of
StoreNext Retail Solutions, LLC, a majority-owned subsidiary, whose statements reflect
total assets of approximately $6,973,000 as of December 31, 2004, and total revenues of
approximately $26,831,000 for the year then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for StoreNext Retail Solutions, LLC, is based solely on the report
of the other auditors.

We conducted our audit in accordance
with 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. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, based on our audit
and the report of the other auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial position of
Retalix Holdings, Inc. and Subsidiaries as of December 31, 2004, and the consolidated
results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.

|/s/ Nation Smith Hermes Diamond
March 7, 2005San Diego, California
|------------------------------------------------------------------



---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders ofCELL-TIME LTD.

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

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

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

|Tel-Aviv, Israel | /s/ Kost Forer Gabbay & Kasierer
|---------------- | --------------------------------
|January 23, 2005 | A Member of Ernst & Young Global



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