RETALIX LTD.

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Following the implementation of SFAS No. 123R, we are required to record a compensation expense in connection with share-based compensation, and, as a result, our profitability may be reduced significantly. On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued Statement No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123R, which is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments to employees to be recognized based on their fair values while SFAS No. 123R requires, as of the first quarter of 2006, all share-based payments to employees to be recognized as a compensation expense based on their fair values. SFAS No. 123R also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. The impact of the adoption of SFAS No. 123R cannot be predicted at this time because it will depend also on levels of share-based compensation granted in the future. Had we adopted this standard in prior periods, however, we would have recorded a material amount as compensation expense, which would have had a material adverse effect on our results of operations. The adoption of this standard could have a significant adverse impact on our results of operations, although we do not expect it will have any impact on our overall financial position. In addition, if as a result of SFAS No. 123R we would stop or limit the use of stock options as an incentive and retention tool, it could have an adverse effect on our ability to recruit and retain employees. Risks Related To Our Location In Israel Potential political, economic and military instability in Israel may adversely affect our results of operations. Our principal offices and headquarters are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Since September 2000, there has been a marked increase in hostilities between Israel and the Palestinians, characterized by terrorist attacks on civilian targets, suicide bombings and military incursions by the Israeli army into areas under the control of the Palestinian Authority. The future of relations between the Palestinian Authority and Israel is uncertain. Israel’s disengagement from the Gaza Strip and some parts of the West Bank in 2005 may serve to further disrupt the balance within the Palestinian Authority and affect the overall stability of the region. The newly-formed Palestinian Authority government controlled by Hamas, a militant Islamic organization, is widely considered to be an obstacle to relations between Israel and the Palestinian Authority, as well as to stability in the Middle East as a whole. In recent weeks Israel has been involved in an armed conflict with the Hizb-alla movement in Lebanon. This conflict is the most extremely violent event in which Israel was involved in recent years. We cannot predict the effect on us of any increase in the degree of violence by the Palestinians or others against Israel or the effect of military action elsewhere in the Middle East. The future of peace efforts between Israel and its Arab neighbors remains uncertain. Any armed conflicts or political instability in the region would likely negatively affect business conditions and adversely affect our results of operations. Furthermore, several countries continue to restrict or ban business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to make sales in those countries. Our results of operations could be negatively affected by the obligations of our personnel to perform military service. Our operations could be disrupted by the absence for significant periods of one or more of our executive officers, key employees or a significant number of other employees because of military service. Some of our executive officers and the majority of our male employees in Israel are obligated to perform military reserve duty, which could accumulate annually from several days to up to two months in special cases and circumstances. The length of such reserve duty depends, among other factors, on an individual’s age and prior position in the army. In addition, if a military conflict or war occurs, these persons could be required to serve in the military for extended periods of time. Any disruption in our operations as the result of military service by key personnel could harm our business. Because some of our financial assets and liabilities are denominated in non-dollar currencies such as the New Israeli Shekel, the British Pound Sterling or the Euro, and because our financial results are measured in dollars, our results of operations could be harmed, as a result of a strengthening or weakening of the dollar compared to these other currencies. We generate a majority of our revenues in dollars or in dollar-linked currencies, but some of our revenues are generated in other currencies such as the New Israeli Shekel, or NIS, the British Pound Sterling and the Euro. As a result, some of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. A considerable amount of our expenses are generated in dollars or in dollarlinked currencies, but some of our expenses such as salaries or hardware costs are generated in other currencies such as the New Israeli Shekel, the British Pound Sterling or the Euro. In addition to our operations in Israel, we are expanding our international operations. Accordingly, we incur and expect to continue to incur additional expenses in non-dollar currencies. As a result, some of our financial liabilities are denominated in these non-dollar currencies. In addition, some of our bank credit is linked to these non-dollar currencies. Most of the time our non-dollar assets are not totally offset by non-dollar liabilities. Due to the fact that our financial results are measured in dollars, our results could be harmed as a result of a strengthening or weakening of the dollar compared to these other currencies. Our results could also be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS or other currencies. These measures, however, may not adequately protect us from future currency fluctuations. 13
The dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel are not offset by a devaluation of the NIS in relation to the dollar, which would harm our results of operations. Since a considerable portion of our expenses such as employees’ salaries are linked to an extent to the rate of inflation in Israel, the dollar cost of our operations is influenced by the extent to which any increase in the rate of inflation in Israel is or is not offset by the devaluation of the NIS in relation to the dollar. As a result, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the dollar. In that event, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. In 2001 and 2002, the inflation adjusted NIS devalued against the dollar, which lowered the dollar cost of our Israeli operations. During 2003, 2004 and 2005, however, the inflation adjusted NIS appreciated against the dollar, which raised the dollar cost of our Israeli operations. We cannot predict whether in the future the NIS will appreciate against the dollar or vice versa. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the dollar, will increase labor and other costs, which will increase the dollar cost of our operations in Israel and harm our results of operations. We currently participate in or receive tax benefits from government programs. These programs require us to meet certain conditions and these programs and benefits could be terminated or reduced in the future, which could harm our results of operations. We receive tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959, or the Investments Law, with respect to our production facilities that are designated as “Approved Enterprises”. We believe that we are currently in compliance with these requirements. However, if we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory rate. We could also be required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index. Our tax benefits resulting from our Approved Enterprises for the years 2003, 2004 and 2005, net of other tax effects, were approximately $365,000, $355,000 and $2,518,000 respectively. In addition, an increase in our manufacturing outside of Israel may be construed as a failure to comply with the Investments Law conditions. There can be no assurance that new benefits will be available, or that existing benefits will be continued in the future, at their current level or at any level. Our board of directors has determined that we will not distribute any amounts of our undistributed tax exempt income as a dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to our Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration. On April 1, 2005, an amendment to the Investments Law came into effect, which revised the criteria for investments qualified to receive tax benefits. . An eligible investment program under the amendment will qualify for benefits as a Privileged Enterprise (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. The amendment does not apply to investment programs approved prior to December 31, 2004. As a result of the amendment, tax-exempt income generated under the provisions of the new law will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income. We are currently evaluating the impact the amendment will have on us. This may materially increase our provision for income taxes in 2006 and subsequent years. Because we have received grants from the Office of the Chief Scientist, we are subject to ongoing restrictions that limit the transferability of our technology and of our right to manufacture outside of Israel, and certain of our large shareholders are required to undertake to observe such restrictions. We have received royalty-bearing grants from the Office of the Chief Scientist, or OCS, of the Ministry of Industry, Trade and Labor of the Government of Israel in an aggregate amount of approximately $4,300,000 through December 31, 2005. We must pay royalties to the OCS on the revenue derived from the sale of products and technologies, and related services, developed with the grants from the OCS. The OCS budget has been subject to reductions, which may affect the availability of funds for grants in the future. As a result, we cannot be certain that we will continue to receive grants at the same rate, or at all. In addition, the terms of any future grant may be less favorable than our past grant. According to Israeli law, any products developed with grants from the OCS are usually required to be manufactured in Israel, unless we obtain prior approval of a governmental committee. As a condition to obtaining this approval, we may be required to pay the OCS up to 300% of the grants we received and to repay such grants at a quicker rate. In addition, we are prohibited from transferring to third parties the technology developed with these grants without the prior approval of a governmental committee. Any non-Israeli who becomes a direct holder of 5% or more of our outstanding ordinary shares will be required to notify the OCS and to undertake to observe the law governing the grant programs of the OCS, the principal restrictions of which are the transferability limits described above in this paragraph. In order to meet specified conditions in connection with the grants and programs of the OCS, we have made representations to the Government of Israel about our Israeli operations. If we fail to meet the conditions related to the grants, including the maintenance of a material presence in Israel, or if there is any material deviation from the representations made by us to the Israeli government, we would be required to refund the grants previously received (together with an adjustment based on the Israeli consumer price index and an interest factor) and would likely be ineligible to receive OCS grants in the future. The inability to receive these grants would result in an increase in our research and development expenses. Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees. Israeli courts have required employers seeking to enforce non-compete undertakings against former employees to demonstrate that the former employee breached an obligation to the employer and thereby caused harm to one of a limited number of legitimate interests of the employer recognized by the courts, such as the confidentiality of certain commercial information or a company’s intellectual property. We currently have non-competition clauses in the employment agreements of most of our employees. The provisions of such clauses prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors. In the event that any of our employees chooses to work for one of our competitors, we may be unable to prevent that competitor from benefiting from the expertise such former employee obtained from us, if we cannot demonstrate to the court that such former
Page 1 and 2: UNITED STATES SECURITIES AND EXCHAN
Page 3 and 4: PART I TABLE OF CONTENTS Item 1. ID
Page 5 and 6: PART II PART III G. Statement by Ex
Page 7 and 8: ITEM 3 - KEY INFORMATION A. Selecte
Page 9 and 10: the uncertainty regarding the adopt
Page 11 and 12: changing customer needs; and frequ
Page 13 and 14: If we are unsuccessful in establish
Page 15: Antitrust scrutiny of e-marketplace
Page 19 and 20: It could be difficult to enforce a
Page 21 and 22: ITEM 4 - INFORMATION ON THE COMPANY
Page 23 and 24: Our Market Opportunity The customer
Page 25 and 26: Our solutions provide for both reta
Page 27 and 28: Leverage our integrated suite of pr
Page 29 and 30: Enterprise Headquarters Solutions:
Page 31 and 32: Retalix HQC - Retalix HQ for C-Stor
Page 33 and 34: • Ordering, receiving • Load ba
Page 35 and 36: StoreLine.net StoreLine.net is a th
Page 37 and 38: create and sustain customer interes
Page 39 and 40: The Retalix InSync Solution Portfol
Page 41 and 42: Customers Our software has been dep
Page 43 and 44: Direct Sales Our direct sales force
Page 46 and 47: ITEM 5 - OPERATING AND FINANCIAL RE
Page 48: The following table shows the impac
Page 51 and 52: Revenues from on-line application,
Page 54 and 55: Product Sales Product sales primari
Page 56 and 57: Gain Arising from Issuance of Share
Page 58 and 59: The increase in cost of product sal
Page 60 and 61: SFAS No. 154. In May 2005, the FASB
Page 62 and 63: The following table presents inform
Page 64 and 65: D. Trend Information Trends we iden
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Yoni Stutzen has served as our Exec
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The Companies Law and Nasdaq listin
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D. Employees Set forth are tables p
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Options granted under our Second 19
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ITEM 7 - MAJOR SHAREHOLDERS AND REL
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PalmPoint In December 2002, a legal
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The following table sets forth, for
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The oversight of the management of
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A quorum in a general meeting consi
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In addition, provisions of the Comp
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The amount of a distribution with r
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Backup Withholding A U.S. holder ma
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The benefits available to an approv
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Generally, up until the 2006 tax ye
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The table below presents principal
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ITEM 15 - CONTROLS AND PROCEDURES P
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Our audit committee has adopted a p
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SIGNATURES The registrant hereby ce
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REPORT OF INDEPENDENT REGISTERED PU
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RETALIX LTD. CONSOLIDATED BALANCE S
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RETALIX LTD. STATEMENTS OF CHANGES
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RETALIX LTD. CONSOLIDATED STATEMENT
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RETALIX LTD. CONSOLIDATED STATEMENT
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NOTE 1 - SIGNIFICANT ACCOUNTING POL
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RETALIX LTD NOTES TO CONSOLIDATED F
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RETALIX LTD. NOTES TO CONSOLIDATED
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NOTE 2 - ACQUISITIONS (continued):
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NOTE 2 - ACQUISITIONS (continued):
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NOTE 4 - GOODWILL AND OTHER INTANGI
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NOTE 6 - OTHER LIABILITIES: RETALIX
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NOTE 9 - SHAREHOLDERS’ EQUITY (co
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NOTE 9 - SHAREHOLDERS’ EQUITY (co
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NOTE 10 - TAXES ON INCOME (continue
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NOTE 15 - SELECTED INCOME STATEMENT
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RETALIX LTD. REPORT OF INDEPENDENT
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Report of Independent Registered Pu
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I, Barry Shaked, certify that: File
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I, Danny Moshaioff, certify that: F
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Certification Pursuant to Section 9
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Consent of Independent Registered P
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Retalix Holdings, Inc. Plano, Texas
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RETALIX LTD.

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