RETALIX LTD.

Gain Arising from Issuance of Shares by a Subsidiary and an Associated Company
In March 2003 we established Cell-Time, through our subsidiary StoreNext Israel, together with Lipman Electronic Engineering Ltd. and Dai
Telecom Ltd. Cell-Time is a provider of on-line services that enables retailers and cellular communication providers in Israel to sell on-line pre-paid
cellular air-time at retail points of sale. Each of the three parties holds an equal share in Cell-Time. According to the agreement between the parties, Dai
has committed to invest $1.25 million in consideration for its share in Cell-Time and the other parties have committed to grant Cell-Time rights to use
certain of their technologies. As of December 31, 2005, Dai has fulfilled its above commitment. As a result of Dai’s investments, we recorded in 2005 and
2004, gains of $83,000 and $200,000, respectively, representing StoreNext Israel’s portion in Cell-Time, which is shown as a gain arising from issuance of
shares by a subsidiary and an associated company.
In the fourth quarter of 2003, Isracard, a subsidiary of Bank Hapoalim, invested approximately $2.5 million in StoreNext Israel. Gain arising from
issuance of shares by a subsidiary and an associated company in 2003 represents the capital gain realized as a result of that investment. After giving effect
to the investment, we owned indirectly approximately 51.5% of the issued share capital of StoreNext Israel.
Share in Losses of an Associated Company
Share in losses of an associated company represents our share in the losses of Cell-Time. Store Next Israel, our subsidiary, holds 33.3% of Cell-
Time’s shares.
Minority Interests in Losses of Subsidiaries
Minority interests in losses of subsidiaries reflect the pro rata minority share attributable to the minority shareholders in losses of our subsidiaries,
principally StoreNext USA and StoreNext Israel.
Operating Results
The following table sets forth the percentage relationship of certain statement of operations items to total revenues for the periods indicated:
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Year ended December 31,
2003 2004 2005
Revenues:
Product sales 63.5% 63.0% 48.9%
Services and projects 36.5 37.0 51.1
Total revenues 100.0% 100.0% 100.0%
Cost of revenues:
Cost of product sales 18.0% 18.9% 16.8%
Cost of services and projects 13.5 15.4 18.4
Total cost of revenues 31.5% 34.3% 35.2%
Gross profit 68.5% 65.7% 64.8%
Operating expenses:
Research and development expenses, net 19.9% 27.7% 23.1%
Selling and marketing expenses 23.4 20.1 17.8
General and administrative expenses 14.5 13.0 12.3
Other general expenses, net (0.1)
Total operating expenses 57.9% 60.8% 54.0%
Income from operations 10.6 4.9 10.8
Financial income (expenses), net (0.1) 0.1
Gain arising from issuance of shares by a subsidiary and an associated company 1.1 0.2
Income before taxes on income 11.6% 5.1% 10.9%
Taxes on income (2.9) (1.3) (3.2)
Share in losses of an associated company (0.1) (0.1)
Minority interests in losses of subsidiaries 0.3 0.2 0.1
Net income 8.9% 3.9% 7.8%