RETALIX LTD.

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