---

---

# SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

---

# FORM 20-F

|o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
|- | ----------------------------------------------------------------------------------------------

# OR

|x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
               1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

# OR

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

# OR

|o | SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring this shell company report.............................

For the transition period from _______________ to _______________

Commission file number
000-28584

|CHECK POINT SOFTWARE TECHNOLOGIES LTD.                
|------------------------------------------------------
|                                                      
|(Exact name of Registrant as specified in its charter)

|ISRAEL                                         
|-----------------------------------------------
|                                               
|(Jurisdiction of incorporation or organization)

|5 Ha'Solelim Street, Tel Aviv 67897, Israel
|-------------------------------------------
|                                           
|(Address of principal executive offices)   

Securities registered or to be
registered pursuant to Section 12(b) of the Act.

|                                        |                                     
|--------------------------------------- | ------------------------------------
|
|
|
|
|Title of each class                     | Name of exchange on which registered
|Ordinary shares, NIS 0.01 nominal value | NASDAQ Global Select Market         

Securities registered or to be
registered pursuant to Section 12(g) of the Act. None

Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act.  None

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report. 218,553,498 ordinary shares, NIS 0.01 nominal
value

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

Yes x  No  o

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

Yes o  No   x

Indicate by check mark 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 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 90 days.

Yes
 x  No  o

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large Accelerated filer  x
     Accelerated filer  o      Non-accelerated filer  o

Indicate by check mark which
financial statement item the registrant has elected to follow:

Item 17  o     Item 18  x

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

Yes  o      No  x



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# TABLE OF CONTENTS

|          |  | 
|--------- |  | 
|
|
|
|
|          |  | 
|          |  | 
|Item 1.   |  | 
|          |  | 
|Item 2.   |  | 
|          |  | 
|Item 3.   |  | 
|          |  | 
|Item 4.   |  | 
|          |  | 
|Item 4A.  |  | 
|          |  | 
|Item 5.   |  | 
|          |  | 
|Item 6.   |  | 
|          |  | 
|Item 7.   |  | 
|          |  | 
|Item 8.   |  | 
|          |  | 
|Item 9.   |  | 
|          |  | 
|Item 10.  |  | 
|          |  | 
|Item 11.  |  | 
|          |  | 
|Item 12.  |  | 
|          |  | 
|          |  | 
|          |  | 
|Item 13.  |  | 
|          |  | 
|Item 14.  |  | 
|          |  | 
|Item 15.  |  | 
|          |  | 
|Item 16.  |  | 
|          |  | 
|Item 16A. |  | 
|          |  | 
|Item 16B. |  | 
|          |  | 
|Item 16C. |  | 
|          |  | 
|Item 16D. |  | 
|          |  | 
|Item 16E. |  | 
|          |  | 
|          |  | 
|          |  | 
|Item 17.  |  | 
|          |  | 
|Item 18.  |  | 
|          |  | 
|Item 19.  |  | 

2

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# Currency of
Presentation and Certain Defined Terms

In
this Annual Report on Form 20-F, references to U.S. or United
States are to the United States of America, its territories and possessions.
References to $", dollar or U.S. dollar are to the
legal currency of the United States; references to NIS or Israeli
Shekel are to the legal currency of Israel; references to Euro are to
the legal currency of the European Union; and references to SEK or
Swedish Krona are to the legal currency of Sweden.

All
references to we, us, our or Check Point
shall mean Check Point Software Technologies Ltd., and, unless specifically indicated
otherwise or the context indicates otherwise, our consolidated subsidiaries.

# Forward-Looking
Statements

Some
of the statements contained in this Annual Report on Form 20-F are forward-looking
statements that involve risks and uncertainties. The statements contained in this Annual
Report on Form 20-F that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including, without
limitation, statements regarding trends related to our business and our expectations,
beliefs, intentions or strategies regarding the future. These statements are subject to
known and unknown risks, uncertainties and other factors, which may cause our actual
results to differ materially from those implied by the forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as may,
will, could, should, expects,
plans, anticipates, believes, intends,
estimates, predicts, potential, or
continue or the negative of these terms or other comparable terminology.
Forward-looking statements also include, among others, statements in (i) Item 4
 Information on Check Point regarding our belief as to increased acceptance of
Internet technologies, expansion of connectivity services, acceleration of the use of
networks, increasing demands on enterprise security systems, the impact of our
relationship with our technology partners on our sales goals, the contribution of our
products to our future revenue, our development of future products, and our ability to
integrate, market and sell acquired products and technologies; and (ii) Item 5
 Operating and Financial Review and Prospects regarding, among other things,
future amounts and sources of our revenue, our ongoing relationships with our current and
future customers and channel partners, our future costs, expenses, and the adequacy of our
capital resources.

Forward-looking
statements involve risks, uncertainties and assumptions, and our actual results may differ
materially from those predicted. Many of these risks, uncertainties and assumptions are
described in the risk factors set forth below in this section and elsewhere in this Annual
Report on Form 20-F. All forward-looking statements included in this Annual Report on Form
20-F are based on information available to us on the date of the filing and reasonable
assumptions. We undertake no obligation to update any of the forward-looking statements
after the date of the filing to conform those statements to reflect the occurrence of
unanticipated events, except as required by applicable law.

3

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# PART I

|ITEM 1. |  | IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- |  | -----------------------------------------------------

Not
applicable.

|ITEM 2. |  | OFFER
STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not
applicable.

|ITEM 3. |  | KEY
INFORMATION
|------- |  | ---------------

# Selected Financial Data

We prepare
our historical consolidated financial statements in accordance with generally accepted
accounting principles in the United States (U.S. GAAP). The selected financial data, set
forth in the table below, have been derived from our audited historical financial
statements for each of the years from 2003 to 2007. The selected consolidated statement of
income data for the years 2005, 2006, and 2007, and the selected consolidated balance
sheet data at December 31, 2006 and 2007, have been derived from our audited consolidated
financial statements set forth in Item 18  Financial Statements. The
selected consolidated statement of income data for the years 2003 and 2004, and the
selected consolidated balance sheet data at December 31, 2003, 2004 and 2005, has been
derived from our previously published audited consolidated financial statements, which are
not included in this document. These selected financial data should be read in conjunction
with our consolidated financial statements, and are qualified entirely by reference to
such consolidated financial statements.

4

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|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|
|
|
|
|Consolidated Statement of Income Data:    |                        
|Revenues                                  |                        
|                                          |                        
|Operating expenses (*):                   |                        
|Cost of revenues                          |                        
|Research and development                  |                        
|Selling and marketing                     |                        
|General and administrative                |                        
|Acquired in-process R&D                   |                        
|                                          |                        
|Total operating expenses                  |                        
|                                          |                        
|Operating income                          |                        
|Financial income, net                     |                        
|                                          |                        
|Income before taxes on income             |                        
|Taxes on income                           |                        
|                                          |                        
|Net income                                |                        
|                                          |                        
|Basic earnings per share                  |                        
|Shares used in computing basic earnings   |                        
|per share                                 |                        
|Diluted earnings per share                |                        
|Shares used in computing diluted earnings |                        
|per share                                 |                        

|                                                                                                                                                    
|----------------------------------------------------------------------------------------------------------------------------------------------------
|* Including pre-tax charges for
amortization of intangible assets, acquisition related expenses and stock-based
compensation in the following items:

|                                                    |  |  |  |   | 
|--------------------------------------------------- |  |  |  | - | 
|
|
|
|
|Amortization  of intangible  assets and acquisition |  |  |  |   | 
|related expenses                                    |  | 
|Cost of revenues                                    |  |  |  |   | 
|Selling and marketing                               |  |  |  | - | 
|General and administrative                          |  |  |  | - | 
|                                                    |  |  |  |   | 
|Total                                               |  |  |  | - | 
|                                                    |  |  |  |   | 
|                                                    |  | 
|Stock-based compensation                            |  | 
|Cost of products and licenses                       |  |  |  | - | 
|Cost of software updates, maintenance and services  |  |  |  | - | 
|Research and development                            |  |  |  | - | 
|Selling and marketing                               |  |  |  | - | 
|General and administrative                          |  |  |  | - | 
|                                                    |  |  |  |   | 
|Total                                               |  |  |  | - | 
|                                                    |  |  |  |   | 

5

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|                                 | December 31,
|-------------------------------- | ------------
|
|
|
|
|Consolidated Balance Sheet Data: |             
|Working capital                  |             
|Total assets                     |             
|Shareholders' equity             |             
|Capital stock                    |             

# Risk Factors

If any of the following risks
actually occurs, our business, financial condition, results of operations, and future
prospects could be materially and adversely affected. In that event, the market price of
our ordinary shares could decline and you could lose part or all of your investment.

# Risks Related to Our
Business and Our Market

If the market for information and
network security solutions does not continue to grow, our business will be adversely
affected

The
market for our products has expanded rapidly, but the market for information and network
security solutions may not continue to grow. Continued growth of this market will depend,
in large part, upon:

| | n | The
continued expansion of Internet usage and the number of organizations adopting or
expanding intranets.
| | - | ----------------------------------------------------------------------------------------------------------

| | n | The
ability of their respective infrastructures to support an increasing number of users and
services.
| | - | ------------------------------------------------------------------------------------------------------

| | n | The
continued development of new and improved services for implementation across the Internet
and between the Internet and intranets.
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | n | The
adoption of data security measures as it pertains to data encryption technologies.
| | - | --------------------------------------------------------------------------------------

If
the necessary infrastructure or complementary products and services are not developed in a
timely manner and, consequently, the enterprise security, data security, Internet, or
intranet markets fail to grow or grow more slowly than we currently anticipate, our
business, operating results, and financial condition may be materially adversely affected.
Additional details are provided in Item 4  Information on Check Point.

We may not be able to
successfully compete

The
market for information and network security solutions is intensely competitive and we
expect that competition will continue to increase in the future. Our principal competitors
include Cisco Systems, Inc., Fortinet Inc., Juniper Networks, Inc., Secure Computing
Corporation, and SonicWALL Inc. We also compete with several other companies, including
McAfee, Inc., Microsoft Corporation, and Symantec Corporation, with respect to specific
products that we offer, including data security products.

Some
of our current and potential competitors have various advantages over us, including longer
operating histories; access to larger customer bases; significantly greater financial,
technical and marketing resources; a broader portfolio of products, applications and
services; and larger patent and intellectual property portfolios. As a result, they may be
able to adapt better than we can to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their products.
Furthermore, some of our competitors with more diversified product portfolios may be
better able to withstand a reduction in spending on information and network security
solutions. In addition, some of our competitors have greater financial resources than we
do, and they have offered, and in the future may offer, their products at lower prices
than we do, which may cause us to lose sales or to reduce our prices in response to
competition.

6

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In
addition, consolidation in the markets in which we compete may affect our competitive
position. We may not be able to continue competing successfully against our current and
future competitors. Increased competition may result in price reductions, reduced gross
margins, and loss of market share, any of which will materially adversely affect our
business, operating results, and financial condition.

The
markets in which we compete also include many niche competitors, generally smaller
companies at a relatively early stage of operations, which are focused on specific
Internet and data security needs. These companies specialized focus may enable them
to adapt better than we can to new or emerging technologies and changes in customer
requirements in their specific areas of focus. In addition, some of these companies can
invest relatively large resources on very specific technologies or customer segments. The
effect of these companies activities in the market may result in price reductions,
reduced gross margins and loss of market share, any of which will materially adversely
affect our business, operating results, and financial condition.

Further,
vendors of operating system software or networking hardware may enhance their products to
include functionality that is currently provided by our products. The widespread inclusion
of similar functionality to that which is offered by our software as standard features of
operating system software or networking hardware could significantly reduce the
marketability of our products, particularly if the quality of such functionality were
comparable to that of our products. Furthermore, even if the network or application
security functionality provided as standard features by operating systems software or
networking hardware is more limited than that of our solutions, a significant number of
customers may elect to accept more limited functionality in lieu of purchasing additional
solutions.

If
any of the events described above occur, our business, operating results and financial
condition could be materially adversely affected. Additional details are provided in
Item 4  Information on Check Point.

If we fail to enhance our existing
products, develop or acquire new and more technologically advanced products, or fail to
successfully commercialize these products, our business and results of operations will
suffer

The
information and network security industry is characterized by rapid technological
advances, changes in customer requirements, frequent new product introductions and
enhancements, and evolving industry standards in computer hardware and software
technology. In particular, the markets for data security, Internet, and intranet
applications are rapidly evolving. As a result, we must continually change and improve our
products in response to changes in operating systems, application software, computer and
communications hardware, networking software, programming tools, and computer language
technology. Further, we must continuously improve our products to protect our
customers data and networks from evolving security threats.

Our
future operating results will depend upon our ability to enhance our current products and
to develop and introduce new products on a timely basis; to address the increasingly
sophisticated needs of our customers; and to keep pace with technological developments,
new competitive product offerings, and emerging industry standards. Our competitors
introduction of products embodying new technologies and the emergence of new industry
standards may render our existing products obsolete or unmarketable. While we have been
successful in developing, acquiring, and marketing new products and product enhancements
that respond to technological change and evolving industry standards, we may not be able
to continue to do so. In addition, we may experience difficulties that could delay or
prevent the successful development, introduction, and marketing of these products, as well
as the integration of acquired products. Furthermore, our new products or product
enhancements may not adequately meet the requirements of the marketplace or achieve market
acceptance. In some cases, a new product or product enhancements may negatively affect
sales of our existing products. If we do not respond adequately to the need to develop and
introduce new products or enhancements of existing products in a timely manner in response
to changing market conditions or customer requirements, our business, operating results
and financial condition may be materially adversely affected. Additional details are
provided in Item 4  Information on Check Point and under the caption
We may not be able to successfully compete in this Item 3.

7

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Product defects may increase our
costs and impair the market acceptance of our products and technology

Our
products are complex and must meet stringent quality requirements. They may contain
undetected hardware or software errors or defects, especially when new or acquired
products are introduced or when new versions are released. In particular, the personal
computer hardware environment is characterized by a wide variety of non-standard
configurations that make pre-release testing for programming or compatibility errors very
difficult and time-consuming. We may need to divert the attention of our engineering
personnel from our research and development efforts to address instances of errors or
defects. In addition, we may in the future incur costs associated with warranty claims.

Our
products are used to employ and manage Internet security and protect information, which
may be critical to organizations. As a result, the sale and support of our products
entails the risk of product liability and related claims. We do not know whether, in the
future, we will be subject to liability claims or litigation for damages related to
product errors, or will experience delays as a result of these errors. Our sales
agreements and product licenses typically contain provisions designed to limit our
exposure to potential product liability or related claims. In selling our products, we
rely primarily on shrink wrap licenses that are not signed by the end user,
and for this and other reasons, these licenses may be unenforceable under the laws of some
jurisdictions. As a result, the limitation of liability provisions contained in these
licenses may not be effective. Although we maintain product liability insurance for most
of our products, the coverage limits of these policies may not provide sufficient
protection against an asserted claim. If litigation were to arise, it could, regardless of
its outcome, result in substantial expense to us, significantly divert the efforts of our
technical and management personnel, and disrupt or otherwise severely impact our
relationships with current and potential customers. In addition, if any of our products
fails to meet specifications or has reliability, quality or compatibility problems, our
reputation could be damaged significantly and customers might be reluctant to buy our
products, which could result in a decline in revenues, a loss of existing customers, and
difficulty attracting new customers.

Risks relating to
acquisitions

We
have made acquisitions in the past and we may make additional acquisitions in the future.
The pursuit of potential acquisitions may divert the attention of management and cause us
to incur various expenses in identifying, investigating, and pursuing suitable
acquisitions, whether or not they are consummated.

In
addition, if we acquire additional businesses, we may not be able to integrate the
acquired personnel, operations, and technologies successfully or effectively manage the
combined business following the completion of the acquisition. We may also not achieve the
anticipated benefits from the acquired business due to a number of factors, including:

| | n | Unanticipated
costs or liabilities associated with the acquisition.
| | - | -------------------------------------------------------------------

| | n | Incurrence
of acquisition-related costs.
| | - | ----------------------------------------

| | n | Diversion
of managements attention from other business concerns.
| | - | -----------------------------------------------------------------

8

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| | n | Harm
to our existing business relationships with manufacturers, distributors and customers as
a result of the acquisition.
| | - | --------------------------------------------------------------------------------------------------------------------------

| | n | The
potential loss of key employees.
| | - | ------------------------------------

| | n | Use
of resources that are needed in other parts of our business.
| | - | ----------------------------------------------------------------

| | n | Use
of substantial portions of our available cash to consummate the acquisition.
| | - | --------------------------------------------------------------------------------

| | n | Unrealistic
goals or projections for the acquisition.
| | - | -----------------------------------------------------

In
December 2006, we completed the acquisition of NFR Security, Inc., a U.S. privately held
company. In January 2007, we completed a tender offer for the outstanding shares and
warrants of Protect Data AB (Protect Data), which was a public company listed
on the Stockholm Stock Exchange. As of December 31, 2007, we had acquired the rights to
all of the shares and warrants of Protect Data, on a fully diluted basis, and completed
the integration of Protect Data into Check Points business. Protect Data is the
owner of 100% of Pointsec Mobile Technologies AB (Pointsec), a leading
provider of data security products, and other subsidiaries, as listed below in Item
4  Information on Check Point under the caption Organizational
structure. Pointsec provides products that are different in nature than our core
technologies, including encryption software that helps companies secure data that may be
stored on employee laptops, personal computers, smartphones, and personal digital
assistants (PDAs). As such, through this acquisition, we entered into a line of business
in which we have very limited experience, and we cannot assure you that we will be able to
compete successfully in this business.

Our operating margins may
decline

We
may experience future fluctuations or declines in operating margins from historical levels
due to many factors, including:

| | n | Increased
competition that results in pressure on us to reduce prices.
| | - | ----------------------------------------------------------------------

| | n | Additional
investments in the continuing development and expansion of our sales and marketing
organization, including the expansion and further reinforcement of our worldwide field
organization.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Integration
of an acquired business that at the time of acquisition has operating margins lower than
ours.
| | - | ----------------------------------------------------------------------------------------------------------

| | n | Additional
expansion of our research and development organization.
| | - | ------------------------------------------------------------------

| | n | Expected
growth in the percentage of revenues that we derive from products incorporating hardware,
which have lower operating margins than software products.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
operating margins are likely to fluctuate based on the amount and timing of these and
other developments. In addition, if our revenue levels are below expectations, this will
likely have an adverse effect on our operating margins, since most of our expenses are not
variable in the short term.

Our quarterly operating results
are likely to fluctuate which could cause us to miss expectations about these results and
cause the trading price of our ordinary shares to decline

Our
revenues from our sales are not consistent from quarter to quarter and we experience some
degree of seasonality in our sales. Factors that could cause our revenues and operating
results to fluctuate from period to period include:

| | n | Changes
in customer capital spending budgets and allocations throughout the year.
| | - | ---------------------------------------------------------------------------------

9

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| | n | Seasonal
trends in customer purchasing.
| | - | ---------------------------------------

| | n | Competitive
market conditions, including the pricing actions of our customers.
| | - | ------------------------------------------------------------------------------

| | n | The
occurrence of an infrastructure failure resulting in delay of quarter-end purchases of
products.
| | - | ----------------------------------------------------------------------------------------------------

| | n | The
occurrence of Internet security breaches or threats.
| | - | --------------------------------------------------------

| | n | The
timing and success of new products and new technologies introduced by us or our
competitors.
| | - | ------------------------------------------------------------------------------------------------

| | n | Regional
or global economic and political conditions.
| | - | -----------------------------------------------------

| | n | Changes
in our operating expenses and extraordinary expenses.
| | - | -------------------------------------------------------------

| | n | Impairment
of goodwill and intangibles.
| | - | ---------------------------------------

| | n | Our
relationships with, and sales through, our channel partners.
| | - | ----------------------------------------------------------------

| | n | Our
ability to integrate the technology and operations of acquired businesses with our own
business.
| | - | ----------------------------------------------------------------------------------------------------

| | n | Fluctuations
in foreign currency exchange rates.
| | - | ------------------------------------------------

Unfavorable
changes in the factors listed above, many of which are outside of our control, could
materially adversely affect our business, operating results, and financial condition.

Historically,
our revenues have reflected seasonal fluctuations related to the slowdown in spending
activities for the third quarter, and the increased activity related to the year-end
purchasing cycles of many users of our products. We believe that we will continue to
encounter quarter-to-quarter seasonality.

We
operate with immaterial backlog. Therefore, the timing and volume of orders within a given
period and our ability to fulfill these orders, determine the amount of our revenues
within the period.

We
derive our sales primarily through indirect channels, making it difficult for us to
predict revenues because we depend partially on estimates of future sales provided by
third parties. In addition, changes in our arrangements with our network of channel
partners or in the products they offer, such as our recent introduction of new support
programs for our customers, which combines support from our channel partners with back-end
support from us, could affect the timing and volume of orders. Furthermore, our expense
levels are based, in part, on our expectations as to future revenues. If our revenue
levels are below expectations, our operating results are likely to be adversely affected,
since most of our expenses are not variable in the short term.

As
a result, we believe that period-to-period comparisons of our results of operations are
not necessarily meaningful and should not be relied upon as indications of future
performance. Due to the factors described above, it is possible that in some future
quarter, our operating results may be below the expectations of public market analysts and
investors. In this event, the price of our ordinary shares would likely decline.

We may fail to maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404, which started in connection
with our 2006 Annual Report on Form 20-F, have resulted in increased general and
administrative expense and a diversion of management time and attention, and we expect
these efforts to require the continued commitment of resources. Section 404 of the
Sarbanes-Oxley Act requires (i) managements annual review and evaluation of our
internal control over financial reporting and (ii) a statement by management that its
independent registered public accounting firm has issued an attestation report on our
internal control over financial reporting, in connection with the filing of the Annual
Report on Form 20-F for each fiscal year. We have documented and tested our internal
control systems and procedures and have made improvements in order for us to comply with
the requirements of Section 404. While our assessment of our internal control over
financial reporting resulted in our conclusion that as of December 31, 2007, our
internal control over financial reporting was effective, we cannot predict the outcome of
our testing in future periods. If we fail to maintain the adequacy of our internal
controls, we may not be able to ensure that we can conclude on an ongoing basis that we
have effective internal controls over financial reporting. Failure to maintain effective
internal controls over financial reporting could result in investigation or sanctions by
regulatory authorities, and could have a material adverse effect on our operating results,
investor confidence in our reported financial information, and the market price of our
ordinary shares.

10

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We depend on our key personnel,
including our executive officers, and the failure to attract and retain key personnel
could adversely affect our business

Our
future performance depends in large part on the continued service of our key technical,
sales and management personnel. None of our key personnel is bound by an employment
agreement requiring service for any defined period of time. If we are unable to retain
members of our management and key employees, we must successfully manage transition and
replacement issues that may result from such departures. For example, as of April 30,
2008, our Chief Financial Officer, Eyal Desheh, will cease to be a full time employee and
we are in the process of identifying a new Chief Financial Officer to replace Mr. Desheh.

Our
future performance also depends on our ability to attract such skilled personnel in the
future. Competition for personnel is intense. In order to retain our employees, we provide
many of them with cash and stock-based awards that can be realized over time to increase
longer-term commitments. We cannot be assured that we can retain our key personnel in the
future.

The
loss of services of any of our key personnel, the inability to retain and attract
qualified personnel in the future, or delays in hiring required personnel, could make it
difficult for us to meet key objectives, such as timely product introductions, and could
adversely affect our business, financial condition and results of operations.

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

Under
current U.S., Swedish, and Israeli law, we may not be able to enforce, in whole or in
part, agreements that prohibit some of our employees from competing with us or working for
our competitors after they cease working for us. It may be difficult for us to restrict
our competitors from gaining the expertise our former employees gained while working for
us. Competitors and others have in the past and may in the future attempt to recruit our
employees. While our employees are required to sign standard agreements concerning
confidentiality and ownership of inventions, we may not be able to prevent them from
working with our competitors and providing their expertise to such companies. If we are
unable to enforce covenants not to compete, our competitors may gain access to employees
who are knowledgeable about certain of our proprietary information, which could harm our
business.

We are dependent on a
small number of distributors

We
derive our sales primarily through indirect channels. During 2007, we derived
approximately 49% of our sales from our 10 largest distributors, with the largest
distributor accounting for approximately 16% of our sales, and the second largest
distributor accounting for 14% of our sales. During 2006, these two distributors accounted
for approximately 26% of our sales.

11

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We
expect that a small number of distributors will continue to generate a significant portion
of our sales. Furthermore, there has been an industry trend toward consolidation among our
distributors, and we expect this trend to continue in the near future, which could further
increase our reliance on a small number of distributors for a significant proportion of
our sales. If these distributors reduce the amount of their purchases from us, our
business, operating results and financial condition could be materially adversely
affected. In 2007, our second largest distributor, Westcon Group agreed to acquire NOXS,
the distribution unit of Unit 4 Agressos Internet and Security Division. Since NOXS
operates in the United Kingdom, Germany, Benelux, France, Ireland, Italy and Austria.
Westcons recent purchase of NOXS resulted in our sales in Europe being highly
dependent on the performance of larger distributors such as Westcon. There is no guarantee
that these larger distributors will have the necessary focus, commitment and ability to
sell our products.

Our
future success is highly dependent upon our ability to establish and maintain successful
relationships with our distributors. In addition, we rely on these entities to provide
many of the training and support services for our products. Accordingly, our success
depends in large part on the effective performance of these distributors. Recruiting and
retaining qualified distributors and training them in our technology and products requires
significant time and resources.

Further,
we have no long-term contracts or minimum purchase commitments with any of our
distributors, and our contracts with these distributors do not prohibit them from offering
products or services that compete with ours. Our competitors may be effective in providing
incentives to existing and potential distributors to favor their products or to prevent or
reduce sales of our products. Our distributors may choose not to offer our products
exclusively or at all. Our failure to establish and maintain successful relationships with
distributors would likely materially adversely affect our business, operating results and
financial condition.

We are dependent on a
limited number of product families

Currently,
we derive most of our revenues from sales of Internet security products primarily under
our VPN-1, UTM-1 and related brands, as well as related revenues from software updates,
maintenance and other services. We expect this to continue to be the case in the
foreseeable future. Following the acquisition of Protect Data, we also began to generate a
significant amount of revenue from data security products and associated software updates,
maintenance and support services. Such sales of data security products and associated
software updates, maintenance and support services accounted for $82.8 million of our
revenue in 2007, or 11.3% of our total revenues. Our future growth depends heavily on our
ability to effectively develop and sell new and acquired products as well as add new
features to existing products. For more details, see Item 4  Information on
Check Point and Item 5  Operating and Financial Review and
Prospects.

We incorporate third party
technology in our products, which may make us dependent on the providers of these
technologies and expose us to potential intellectual property claims.

Our
products contain certain technology that others license to us. Third party developers or
owners of technologies may not be willing to enter into, or renew, license agreements with
us regarding technologies that we may wish to incorporate in our products, either on
acceptable terms or at all. If we cannot obtain licenses to these technologies, we may be
at a disadvantage compared with our competitors who are able to license these
technologies. In addition, when we do obtain licenses to third party technologies that we
did not develop, we may have little or no ability to determine in advance whether the
technology infringes the intellectual property rights of others. Our suppliers and
licensors may not be required or may not be able to indemnify us in the event that a claim
of infringement is asserted against us, or they may be required to indemnify us only up to
a maximum amount, above which we would be responsible for any further costs or damages.

12

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We incorporate open source
technology in our products which may expose us to liability and have a material impact on
our product development and sales

Some
of our products utilize open source technologies. These technologies are licensed to us on
varying license structures, including the General Public License. This license and others
like it pose a potential risk to products in the event they are inappropriately
integrated. In the event that we have not, or do not in the future, properly integrate
software that is subject to such licenses into our products, we may be required to
disclose our own source code to the public, which could enable our competitors to
eliminate any technological advantage that our products may have over theirs. Any such
requirement to disclose our source code or other confidential information related to our
products could, therefore, materially adversely affect our competitive advantage and
impact our business results of operations and financial condition.

We are the defendants in various
lawsuits, and are also subject to certain governmental proceedings, and participation in
litigation and government proceedings can be expensive and disruptive

We
are the defendants in various lawsuits, including employment-related litigation claims,
lease termination claims and other legal proceedings in the normal course of our business.
In the past, we received class action complaints, which were then consolidated into one
action, alleging violations of the federal securities laws. In January, 2007, the United
States District Court for the Southern District of New York issued a Final Judgment and
Order settling this action for $13 million, which amount was paid by our insurance
carrier.

We
operate our business in various countries and accordingly attempt to utilize an efficient
operating model to optimize our tax payments based on the laws in the countries in which
we operate. This can cause disputes between us and various tax authorities in different
parts of the world.  In particular we have disputes with the ITA (Israeli Tax
Authorities) on matters such as: the usage of funds earned by our approved
enterprise for investments outside of Israel, deductibility of employees stock
options expenses, percentage of foreign ownership of our shares, taxation of interest
earned outside of Israel and deductibility of research and development expenses. There is
no assurance that the ITA will accept our positions on these matters or others and in such
an event we may record additional tax expenses if these matters are settled for amounts in
excess of our current provisions.

In
particular, on December 27, 2007, following an audit of our 2002 corporate tax return, the
Israeli Tax Authority (the ITA) disagreed with several of our positions as it
pertains to the treatment of taxes. Specifically, this includes our treatment of certain
issues relating to cash that is held and managed by our wholly owned Singapore subsidiary.
The ITA therefore issued an order classifying the transfer of funds from Check Point to
our subsidiary in Singapore as a dividend for purposes of the Law for the Encouragement of
Capital Investments, which would result in a tax payment on the funds transferred. The ITA
order also contests our position with respect to the deductibility of employee stock
options and benefits to which we are entitled to under applicable Israeli law regarding
approved enterprise status. The ITA therefore demanded the payment of additional taxes in
the aggregate amount of NIS 963 million, which represents approximately $162 million of
additional tax plus an additional $84 million for interest in equivalent USD as of the end
of 2007. See also Item 8  Financial Information under the caption
Legal proceedings.

Litigation
and governmental proceedings can be expensive, lengthy and disruptive to normal business
operations, and can require extensive management attention and resources, regardless of
their merit. While we intend to defend the aforementioned matters vigorously, we cannot
predict the results of complex legal proceedings, and an unfavorable resolution of a
lawsuit or proceeding could materially adversely affect our business, results of
operations and financial condition.

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Class action litigation due to
stock price volatility or other factors could cause us to incur substantial costs and
divert our managements attention and resources

In
the past, following periods of volatility in the market price of a public companys
securities, securities class action litigation has often been instituted against that
company. Companies such as ours in the software industry, and other technology industries,
are particularly vulnerable to this kind of litigation as a result of the volatility of
their stock prices. As noted above, we have been named as a defendant in this type of
litigation in the past. Any litigation of this sort could result in substantial costs and
a diversion of managements attention and resources.

We may not be able to
successfully protect our intellectual property rights

We
seek to protect our proprietary technology by relying on a combination of statutory as
well as common law copyright and trademark laws, trade secrets, confidentiality
procedures, and contractual provisions as indicated below in the section entitled
Proprietary Rights in Item 4  Information on Check Point. We
have certain patents in the United States and in some other countries, as well as pending
patent applications. We cannot guarantee that pending patent applications will be issued,
either at all or within the scope of the patent claims that we have submitted. In
addition, someone else may challenge our patents and these patents may be found invalid.
Furthermore, others may develop technologies that are similar to or better than ours, or
may work around any patents issued to us. Despite our efforts to protect our proprietary
rights, others may copy aspects of our products or obtain and use information that we
consider proprietary. Although we do not know the extent to which there is piracy of our
software products, software piracy is a persistent problem. We try to police this type of
activity, but it is difficult to do so effectively. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws of the
United States, Israel, or Sweden. Our efforts to protect our proprietary rights may not be
adequate or our competitors may independently develop technology that is similar to our
technology. If we are unable to secure, protect, and enforce our intellectual property
rights, such failure could harm our brand and adversely impact our business, financial
condition, and results of operations.

If a third-party asserts that we
are infringing its intellectual property, whether successful or not, it could subject us
to costly and time-consuming litigation or expensive licenses, which could harm our
business

There
is considerable patent and other intellectual property development activity in our
industry. Our success depends, in part, upon our ability not to infringe upon the
intellectual property rights of others. Our competitors, as well as a number of other
entities and individuals, own or claim to own intellectual property relating to our
industry. From time to time, third parties may claim that we are infringing upon their
intellectual property rights, and we may be found to be infringing upon such rights.
Third-parties have in the past sent us correspondence regarding their intellectual
property and in the future we may receive claims that our products infringe or violate
their intellectual property rights. Furthermore, we may be unaware of the intellectual
property rights of others that may cover some or all of our technology or products. Any
claims or litigation could cause us to incur significant expenses and, if successfully
asserted against us, could require that we pay substantial damages or royalty payments,
prevent us from selling our products, or require that we comply with other unfavorable
terms. In addition, we may decide to pay substantial settlement costs and/or licensing
fees in connection with any claim or litigation, whether or not successfully asserted
against us. Even if we were to prevail, any litigation regarding our intellectual property
could be costly and time-consuming and divert the attention of our management and key
personnel from our business operations. As such, third-party claims with respect to
intellectual property may increase our cost of goods sold or reduce the sales of our
products, and may have a material and adverse effect on our business.

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We are exposed to various legal,
business, political and economic risks associated with international operations; these
risks could increase our costs, reduce future growth opportunities and affect our results
of operations

We
sell our products worldwide, and we book a significant portion of our revenue outside the
United States. We intend to continue to expand our international operations, which will
require significant management attention and financial resources. In order to continue to
expand worldwide, we will need to establish additional operations, hire additional
personnel and recruit additional channel partners, internationally. To the extent that we
are unable to do so effectively, our growth is likely to be limited and our business,
operating results and financial condition may be materially adversely affected.

Our
international revenues and operations subject us to many potential risks inherent in
international business activities, including, but not limited to:

| | n | Technology
import and export license requirements.
| | - | --------------------------------------------------

| | n | Costs
of localizing our products for foreign countries, and the lack of acceptance of localized
products in foreign countries.
| | - | ------------------------------------------------------------------------------------------------------------------------------

| | n | Trade
restrictions.
| | - | -------------------

| | n | Imposition
of or increases in tariffs or other payments on our revenues in these markets.
| | - | -----------------------------------------------------------------------------------------

| | n | Changes
in regulatory requirements.
| | - | -----------------------------------

| | n | Greater
difficulty in protecting intellectual property.
| | - | -------------------------------------------------------

| | n | Difficulties
in managing our overseas subsidiaries and our international operations.
| | - | ------------------------------------------------------------------------------------

| | n | Changes
in general economic conditions.
| | - | ---------------------------------------

| | n | Political
instability and civil unrest which could discourage investment and complicate our
dealings with governments.
| | - | ----------------------------------------------------------------------------------------------------------------------

| | n | Variety
of foreign laws and legal standards.
| | - | --------------------------------------------

| | n | Expropriation
and confiscation of assets and facilities.
| | - | --------------------------------------------------------

| | n | Difficulties
in collecting receivables from foreign entities or delayed revenue recognition.
| | - | --------------------------------------------------------------------------------------------

| | n | Differing
labor standards.
| | - | --------------------------

| | n | Potentially
adverse tax consequences, including taxation of a portion of our revenues at higher rates
than the tax rate that applies to us in Israel.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | n | The
introduction of exchange controls and other restrictions by foreign governments.
| | - | ------------------------------------------------------------------------------------

These
difficulties could cause our revenues to decline, increase our costs or both. This is also
specifically tied to currency exchange rates which has an impact on our financial
statements based on currency rate fluctuations.

Conditions and changes in the
national and global economic and political environments may adversely affect our business
and financial results

Adverse economic conditions in
markets in which we operate can harm our business. If economic growth in the United States
and other countries economies is slowed, many customers may delay or reduce
technology purchases. This could result in reductions in sales of our products, longer
sales cycles, slower adoption of new technologies and increased price competition. In
addition, weakness in the end-user market could negatively affect the cash flow of our
distributors and resellers who could, in turn, delay paying their obligations to us. This
would increase our credit risk exposure and cause delays in our recognition of revenues on
future sales to these customers. Specific economic trends, such as declines in the demand
for PCs, servers, and other computing devices, or weakness in corporate information
technology spending, could have a more direct impact on our business. Any of these events
would likely harm our business, operating results and financial condition. If global
economic and market conditions, or economic conditions in the United States or other key
markets deteriorate, we may experience material impacts on our business, operating
results, and financial condition.

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We are controlled by a small
number of existing shareholders who may make decisions with which you or others may
disagree

As
of December 31, 2007, our directors and executive officers owned approximately 19.9% of
the voting power of our outstanding ordinary shares, or 24.5% of our outstanding ordinary
shares if the percentage includes options currently exercisable or exercisable within 60
days of December 31, 2007 (the exercise price of some of these options is greater than our
current share market price). The interests of these shareholders may differ from your
interests and present a conflict. If these shareholders act together, they could exercise
significant influence over our operations and business strategy. For example, although
these shareholders hold considerably less than a majority of our outstanding ordinary
shares, they may have sufficient voting power to influence matters requiring approval by
our shareholders, including the election and removal of directors and the approval or
rejection of mergers or other business combination transactions. In addition, this
concentration of ownership may delay, prevent or deter a change in control, or deprive a
shareholder of a possible premium for its ordinary shares as part of a sale of our
company.

We may be required to indemnify
our directors and officers in certain circumstances

We
have entered into agreements with each of our directors and senior officers to insure,
indemnify and exculpate them against some types of claims, subject to dollar limits and
other limitations. Subject to Israeli law, these agreements provide that we will indemnify
each of these directors and senior officers for any of the following liabilities or
expenses that they may incur due to an act performed or failure to act in their capacity
as our director or senior officer:

| | n | Monetary
liability imposed on the director or senior officer in favor of a third party in a
judgment, including a settlement or an arbitral award confirmed by a court.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Reasonable
legal costs, including attorneys fees, expended by a director or senior officer as
a result of an investigation or proceeding instituted against the director or senior
officer by a competent authority; provided, however, that such investigation or
proceeding concludes without the filing of an indictment against the director or senior
officer and either:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | No
financial liability was imposed on the director or senior officer in lieu of criminal
proceedings, or
| | - | --------------------------------------------------------------------------------------------------------

| |  | Financial
liability was imposed on the director or senior officer in lieu of criminal proceedings,
but the alleged criminal offense does not require proof of criminal intent.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Reasonable
legal costs, including attorneys fees, expended by the director or senior officer
or for which the director or senior officer is charged by a court:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
an action brought against the director or senior officer by us, on our behalf or on
behalf of a third party,
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | In
a criminal action in which the director or senior officer is found innocent, or
| | - | ----------------------------------------------------------------------------------

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| |  | In
a criminal action in which the director or senior officer is convicted, but in which
proof of criminal intent is not required.
| | - | ---------------------------------------------------------------------------------------------------------------------------------

Our business and operations are
subject to the risks of earthquakes and other natural catastrophic events

Our
headquarters in the United States, as well as certain of our research and development
operations, are located in the Silicon Valley area of Northern California, a region known
for seismic activity. A significant natural disaster, such as an earthquake, could damage
our operations and properties, and adversely affect our business, operating results, and
financial condition.

# Risks Related to Our
Operations in Israel

Potential political, economic and
military instability in Israel, where our principal executive offices and our principal
research and development facilities are located, may adversely affect our results of
operations

We
are incorporated under the laws of the State of Israel, and our principal executive
offices and principal research and development facilities are located in Israel.
Accordingly, political, economic and military conditions in and surrounding Israel may
directly affect our business. Since the State of Israel was established in 1948, a number
of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities
involving Israel or the interruption or curtailment of trade between Israel and its
present trading partners, or a significant downturn in the economic or financial condition
of Israel, could materially adversely affect our operations. Since October 2000, terrorist
violence in Israel has increased significantly. Recently, there was an escalation in
violence among Israel, Hamas, the Palestinian Authority and other groups, as well as
extensive hostilities along Israels northern border with Lebanon, and significant
hostilities along Israels border with the Gaza Strip. Ongoing and revived
hostilities or other Israeli political or economic factors could materially adversely
affect our business, operating results and financial condition.

The tax benefits available to us
require us to meet several conditions, and may be terminated or reduced in the future,
which would increase our taxes.

There
can be no assurance that our effective tax rate of 15% for the year ended December 31,
2007 will not change over time as a result of changes in corporate income tax rates or
other changes in the tax laws of the various countries in which we operate. We have
benefited or currently benefit from a variety of government programs and tax benefits that
generally carry conditions that we must meet in order to be eligible to obtain any
benefit.

If
we fail to meet the conditions upon which certain favorable tax treatment is based, we
would not be able to claim future tax benefits and could be required to refund tax
benefits already received. Additionally, some of these programs and the related tax
benefits are available to us for a limited number of years, and these benefits expire from
time to time.

Any
of the following could have a material effect on our overall effective tax rate:

| | n | some
programs may be discontinued,
| | - | ----------------------------------

| | n | we
may be unable to meet the requirements for continuing to qualify for some programs,
| | - | --------------------------------------------------------------------------------------

| | n | these
programs and tax benefits may be unavailable at their current levels,
| | - | ---------------------------------------------------------------------------

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| | n | upon
expiration of a particular benefit, we may not be eligible to participate in a new
program or qualify for               a new tax benefit that would offset the loss of the
expiring tax benefit, or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | we
may be required to refund previously recognized tax benefits if we are found to be in
violation of the               stipulated conditions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

Additional
details are provided in Item 5  Operating and Financial Review and
Products under the caption Taxes on income, in Item 10 
Additional Information under the caption Israeli taxation, foreign exchange
regulation and investment programs, and in notes 9 and 10 to our consolidated
financial statements.

Our operations may be disrupted by
the obligations of our personnel to perform military service

Many
of our employees in Israel, including members of senior management, are obligated to
perform one month (in some cases, more or less) of annual military reserve duty until they
reach age 45 and, in the event of a military conflict, could be called to active duty. Our
operations could be disrupted by the absence of a significant number of our employees
related to military service or the absence for extended periods of military service of one
or more of our key employees. Military service requirements for our employees could
materially adversely affect our business, operating results and financial condition.

Provisions of Israeli law and our
articles of association may delay, prevent or make difficult an acquisition of us, prevent
a change of control, and negatively impact our share price

Israeli
corporate law regulates acquisitions of shares through tender offers and mergers, requires
special approvals for transactions involving directors, officers or significant
shareholders, and regulates other matters that may be relevant to these types of
transactions. Furthermore, Israeli tax considerations may make potential acquisition
transactions unappealing to us or to some of our shareholders. For example, Israeli tax
law may subject a shareholder who exchanges his or her ordinary shares for shares in a
foreign corporation to taxation before disposition of the investment in the foreign
corporation. These provisions of Israeli law may delay, prevent or make difficult an
acquisition of our company, which could prevent a change of control and therefore, depress
the price of our shares.

In
addition, our articles of association contain certain provisions that may make it more
difficult to acquire us, such as the provision which provides that our board of directors
may issue preferred shares. These provisions may have the effect of delaying or deterring
a change in control of us, thereby limiting the opportunity for shareholders to receive a
premium for their shares and possibly affecting the price that some investors are willing
to pay for our securities.

Additional
details are provided in Item 10  Additional Information under the
caption Articles of association and Israeli Companies Law  Anti-takeover
measures.

Our operations expose us to risks
associated with fluctuations in foreign currency exchange rates that could adversely
affect our business.

Although
we have operations throughout the world, the majority of our revenue and approximately 65%
of our operating costs in 2007 were denominated in, or linked to, the U.S. dollar.
Accordingly, we consider the U.S. dollar to be our functional currency. However,
approximately 35% of our operating costs in fiscal 2007 were incurred outside the United
States in other currencies, particularly in Israeli Shekels and Swedish Kronas. Therefore,
fluctuations in exchange rates between the currencies in which such costs are incurred and
the dollar may have a material adverse effect on our results of operations and financial
condition. For example, during 2007, the Israel Shekel appreciated against the U.S.
dollar, which resulted in a significant increase in the U.S. dollar cost of our operations
in Israel, and this trend has continued in early 2008. As a result of this differential,
from time to time we may experience increases in the costs of our operations outside the
United States, as expressed in dollars, which could have a material adverse effect on our
results of operations and financial condition.

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The
majority of our revenue and approximately 56% of our operating costs were in dollars or
linked to the dollar in 2007. We do not hedge all of our exposure in currencies other than
the U.S. dollar, but rather our policy is to hedge significant net exposures in the major
foreign currencies in which we operate. However, we cannot assure you that we will be able
to effectively limit all of our exposure to currency exchange rate fluctuations.

The
imposition of exchange or price controls or other restrictions on the conversion of
foreign currencies could also have a material adverse effect on our business, results of
operations and financial condition.

Market performance and
other changes may decrease the value of assets

The performance of the capital markets affects the values of funds that are held in
marketable securities. These assets are subject to market fluctuations and will yield
uncertain returns, which may fall below our projected return rates. Due to recent market
developments, including a series of rating agency downgrades the fair value of these
investments may decline. Check Point expects that market conditions will continue to
fluctuate and that the fair value of our investments may be impacted accordingly.

One
of our primary market risk exposures is to changes in interest rates. A decline in market
interest rates could have an adverse effect on our investment income. In a declining
interest rate environment, borrowers may seek to refinance their borrowings at lower rates
and, accordingly, prepay or redeem securities we hold more quickly than we initially
expected. This action may cause us to reinvest the redeemed proceeds in lower yielding
investments. An increase in market interest rates could also have an adverse effect on the
value of our investment portfolio, for example, by decreasing the fair values of the fixed
income securities that comprise a substantial majority of our investment portfolio.

|ITEM 4. |  | INFORMATION
ON CHECK POINT
|------- |  | --------------------------

We
develop market and support a wide range of software and combined hardware and software
products and services for information technology (IT) security and offer our customers an
extensive portfolio of network and gateway security solutions, data and endpoint security
solutions and management solutions. Our solutions operate under a unified security
architecture that enables total end-to-end security with a single line of unified security
gateways and allow a single agent for all endpoint security, which can be managed by a
single unified management console. This unified management allows for ease of deployment
and centralized control and is supported and enforced with real-time security updates. Our
products and services are sold to enterprises, service providers, small- and medium-sized
businesses and consumers. Our Open Platform for Security (OPSEC) framework allows
customers to extend the capabilities of our products and services with third-party
hardware and security software applications. Our products are sold, integrated and
serviced by a network of partners around the world.

In
January 2007, we completed a tender offer for the outstanding shares and warrants of
Protect Data AB (Protect Data), which was a public company listed on the
Stockholm Stock Exchange. As of December 31, 2007, we had acquired the rights to all of
the shares and warrants of Protect Data, on a fully diluted basis, and completed the
integration of Protect Data into Check Points business. Protect Data operates its
business through its wholly owned subsidiary, Pointsec Mobile Technologies AB, a worldwide
provider of mobile data protection. Pointsec delivers solutions for automatic data
encryption that keeps sensitive information stored on mobile computing devices, such as
laptops, PDAs, smartphones and removable media (e.g., USB devices), confidential and
secure. With the acquisition of Protect Data, Check Point entered into the data security
market.

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Additional
details regarding the important events in the development of our business since the
beginning Additional details regarding the important events in the development of our
business since the beginning of 2007 are provided in Item 5  Operating and
Financial Review and Prospects under the caption Overview.

We
were incorporated in Israel in 1993. Our registered office and principal place of business
is located at 5 HaSolelim Street, Tel Aviv 67897 Israel. The telephone number of our
registered office is 972-3-753-4555. Our companys Web site is
www.checkpoint.com. The contents of our Web site are not incorporated by reference
into this Annual Report on Form 20-F.

This
Annual Report on Form 20-F is available on our Web site. If youd like to receive a
printed copy via mail, please contact our Investor Relations department at 800 Bridge
Parkway, Redwood City, CA 94065, U.S.A., tel: 650-628-2050, email:
ir@us.checkpoint.com.

Our
agent for service of process in the United States is CT Corporation System, 818 West
Seventh Street, Los Angeles, CA 90017 U.S.A., tel: 213-627-8252.

# Industry Background

The
ability to access and distribute information is a key strategic asset in todays
competitive business environment. The resulting need to effectively use and communicate
information as well as work more collaboratively has led to the extensive deployment of
network-based communication systems delivering connectivity. Increased connectivity has in
turn expanded the need for technology to safeguard and manage the access to information
available over these networks and data security solutions.

Increase
in connectivity

Over
the past decade, global connectivity has continued to increase. The network computing
market has undergone three major transitions. The first of these transitions was the
migration of corporate computing environments from networks centralized in one location to
networks dispersed over multiple remote locations. The ability to access and share
information over multiple remote locations has expanded the need for connectivity beyond
workgroup-based Local Area Networks (LANs) to enterprise-wide networks spanning multiple
LANs and Wide Area Networks (WANs). The second major transition has been the widespread
adoption of the Internet as a platform for conducting business. Internet-based business
applications have rapidly expanded beyond email to a broad range of business applications
and services, such as electronic publishing, direct-to-customer transactions, supply chain
automation, product marketing, advertising and customer support. The emergence of
increased reliance on the Internet for business communications and transactions increases
the need for secured access to information and applications and raises challenges
associated with providing it. Finally, companies of all sizes in most industries are
embracing and supporting increased connectivity for mobile and remote employees. This
includes connectivity to corporate data and application resources, as well as general
Internet access. Remote users are increasingly able to access private corporate networks
and information from a growing spectrum of devices, including laptops, PDAs and
smartphones. The expansion of network access to mobile workers is driving demand to secure
all devices with Internet access, as well as those that connect to the corporate network.

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These
developments and the need for secure and managed communications have led to nearly
universal adoption of Virtual Private Networks (VPNs). VPNs enable a secured exchange of
private information over networks, including the Internet. Sharing information and
utilizing services are now widely available, both within the enterprise, and with business
partners and customers. As a result, businesses are able to share internal information and
to run enterprise applications across geographically dispersed facilities, as well as
enable customers, suppliers and other business partners to link into their enterprise
information systems. As Internet protocols and infrastructure gain increasingly widespread
acceptance as a means of global communication, new wide-area connectivity services
continue to emerge at a rapid rate. These connectivity services include access to Web
information, messaging applications, such as email, database access,
transaction-processing services, voice-over-IP services and video teleconferencing
services. This expansion of services and applications is further accelerating the use of
networks as global communication systems.

The
need for network and gateway security

The
use of networks within organizations and the use of the Internet by organizations of all
sizes have increased the risk that information technology resources can be attacked.
Organizations have recognized this risk and are deploying security solutions in an effort
to protect their information and infrastructure from damage and unauthorized access.

The
primary means of controlling access to organizational networks and protecting against
attacks is the deployment of Internet firewalls. Firewalls are typically deployed at the
demarcation of an organizations LAN and the Internet or within an organization
between different segments and are used to strictly control traffic into and out of the
organizational network or between segments. Firewall technology is constantly evolving to
detect and defeat highly sophisticated network- and application-level attacks that are
increasingly prevalent on the Internet today. In addition to protecting their IT assets
from attack, organizations have taken steps to guard their sensitive information
traversing untrusted networks, such as the Internet. Securing organizational information
on the Internet is critical as organizations utilize the Internet as their corporate
network backbone to link company offices and employees. Transmitting information over the
Internet without adequate security exposes this information to unauthorized interception,
manipulation or replication. To mitigate this risk, organizations have deployed VPNs to
encrypt and authenticate their Internet traffic.

Firewalls
and VPNs are usually integrated as a single product. Unified Threat Management (UTM)
solutions integrate firewalls and VPNs with additional security features in a single,
centrally managed security solution. Integrating multiple security functionalities
delivers greater security for all network traffic and facilitates the management and
enforcement of an organizations security policies.

IT
security administrators within organizations have primarily focused on securing the
network perimeter. However, organizations are realizing the importance of also securing
their internal networks and Web-based business applications. Many of todays security
threats and attacks emerge within organizations. Internal security breaches can be in the
form of worm outbreaks and other attacks that are introduced through mobile and wireless
devices, internal hacking and misuse of business applications by users within an
organization. In addition, due to the rapid development of Web-based technologies and the
increased reliance on the Web to connect remote users, Web-based applications and
protocols are highly vulnerable to attacks. This presents many security challenges for
businesses because internal networks and Web-based communications contain unique
complexities, such as programming code embedded in the network traffic and communications
protocols that are used in these environments. Security solutions, for both internal and
Web security, need to incorporate an understanding of the applications and protocols that
are common in these environments.

The
need for data and endpoint security

While
network security offers effective solutions for data in motion, sensitive data can still
be lost or accessed improperly. Organizations are deploying an additional layer of
security by applying security software to endpoint devices, such as personal computers.
Endpoint security includes personal-firewall, Network Access Control (NAC), program
control, antivirus, anti-spyware, data security, URL filtering, anti-spam and remote
access features that have been specifically designed for remote personal computing
devices.

21

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Lost
or stolen computers can end up in the wrong hands, intentionally or unintentionally.
Companies of all sizes and government agencies face the consequences of losing sensitive
data from lost laptop computers, removable media or plug-and-play storage devices. This
drives the need for a complete data protection solution that secures data on all common
platforms, deploys easily, scales to any size organization and meets strict compliance
requirements related to privacy laws and regulations. For example, a number of publicized
cases involving large corporations losing unencrypted laptops and exposing millions of
customers and employees to potential identity theft have prompted a surge in data
protection legislation and regulatory compliance laws worldwide. The relative ease with
which data may be lost makes data security a major concern for organizations. To mitigate
this risk, organizations are looking to extend security beyond the network infrastructure,
to the data itself.

The
primary means of protecting data that resides on endpoints are: full-disk encryption of
the hard drive with access control (rendering the data useless to unauthorized parties),
media encryption and port protection (to prevent unauthorized copying of sensitive data to
USB flash drives, writable CDs and DVDs, etc.) and mobile device and memory card data
encryption (to prevent sensitive data from being accessed on lost or stolen PDAs and
smartphones).

# Products and Services

Our
products, services and technologies provide the following protection:

|1. | Network
and gateway security:
|-- | -----------------------------

Our
wide range of network security gateways allows our customers to implement their security
policies on network traffic between internal networks and the Internet as well as between
internal networks and private networks used with partners. These gateways are available as
either software solutions or integrated into complete solutions including hardware and can
scale to meet the requirements of organizations of many sizes. Versions of our software
include the following technologies to secure traffic:

|n | Firewall
 Inspects traffic as it passes through security gateways, classifying it based on
various criteria such as source and destination of connection, protocol, services and
application used. This provides a means to allow, block and log each connection based on
the organizations security policy. Our firewall technology is based on several key
differentiated technologies, including:
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Patented
Stateful Inspection technology that allows flexible and programmable classification of
network traffic.
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | Application
Intelligence technology that contains various means to detect the correct use of
application protocols and can block attacks that attempt to utilize such exploits in
specific applications.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Network
Address Translation  Allows hiding of internal addresses so internal users are not
exposed to external threats, as well as connecting private networks that use generic addresses
using publicly defined external addresses.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Specific
technologies to prevent denial-of-service (DoS) attacks on networks. These attacks
include various ways of overloading applications and networks in multiple requests that
try to slow and stop their response.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|n | Intrusion
Prevention Technologies  Our SmartDefense online security update services and our
IPS-1 products provide the means to detect specific attacks based on their usage patterns
as well as unknown attacks based on out of bounds usage of
certain services and protocols.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | Virtual
Private Networks (VPNs)  Provide the means to enable private communication over a
network by encrypting traffic between various sub-networks (site-to-site) or individual
computers (such as mobile computers) and the corporate network. This prevents exposing
sensitive traffic and attempts to modify such communication and replicate certain
transactions.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | Content
Screening  Enables screening of specific application protocols such as Web traffic
to allow/block access to specific Web addresses based on their content. Screening for
viruses (antivirus) to detect downloads of malicious applications.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | Messaging
Security  Prevents the use of the messaging infrastructure (such as email) to
attack the organization. Six dimensions of messaging security technologies are available
in our products including prevention of emailed spam and the use of messaging protocols
for various attacks as well as enabling the scanning of email traffic for malware and
viruses embedded in email.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | Web-Based
Communications  Allow remote and mobile employees to securely connect to their
organizations networks via a Web browser and defend against attacks that target our
customers Web-based business applications.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Data
and endpoint security:
|-- | ---------------------------

Our
data and endpoint security technologies provide multiple technologies that run on
individual computers (endpoints) connecting to the network such as desktop computers and
mobile computers and communications devices. These technologies include:

|n | Personal
Firewall  Prevents network attacks on individual computers by blocking internal
attacks and the proliferation of network worms within the corporate network
as well as attacks on home and mobile computers that are connected to public networks.
Our personal firewall technologies include proprietary technologies such as:
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Inbound
and Outbound Firewalls  Prevent malware and Trojan horses not only from attacking
individual computers but also from sending data out through unauthorized applications.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Program
Advisor and Operating System Firewall  Using a real-time network service, we can
detect malicious and/or unauthorized applications running on individual computers and
block their activities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Network
Access Control  Provides the network with information on the compliance of
individual computers to the organizations security policy and allows selective
connectivity of devices to the network based on their compliance.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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|n | Data
Protection  Data stored on individual endpoint devices can be exposed to
unauthorized parties by copying it to external devices, or even more commonly, if devices
fall into the wrong hands. Lost and stolen computers provide unauthorized parties the
chance to access all the information stored on these computer hard drives. We protect
against these risks to data through:
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Full-Disk
Encryption  All the data stored on an individual PC can be fully encrypted, so that
unauthorized parties cannot read this data even if they get physical access to the disk
drive.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Port
Control  Allows an organization to prevent or control the transfer of information
from individual computers to external devices such as USB memory devices and external
hard drives.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Media
Encryption  Enables encryption of data stored on mobile devices such as CDs and
DVDs and other external removable media.
| | - | -------------------------------------------------------------------------------------------------------------------------------

|n | Remote
Access VPNs  Enable mobile devices to securely access an organizations
network by encrypting all traffic between mobile devices and the corporate network and
ensure mobile devices and users are properly authenticated.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n | Anti-Malware
 Antivirus, anti-spyware and other technologies detect viruses and other malware
that try to run on any device and/or circumvent its operation. Our anti-malware
technology uses some of the industrys best engines and operates on-demand when
a new application is stored or retrieved from the device or the network and by scanning
computers against this type of attack.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
2008, we introduced a new strategy that combines the above four technologies into a single
endpoint security agent. This is the industrys first and only such software. It
provides total security at the endpoint and eliminates the need to deploy and manage
multiple agents, reducing complexity, conflicts between various security components,
procurement and management costs and the total cost of ownership.

24

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|3. | Security
management:
|-- | --------------------

A
key element in implementing the above security technologies is the ability to effectively
manage their deployment and operations, ensuring consistent operations according to
organization policy. Our strategy is to provide a single console for security management.
This single console reduces the need for multiple, sometimes conflicting, management
systems that require a high degree of specialization and training, which make it hard to
achieve the high and consistent level of security and compliance that is required.

| | n | Centralized
Policy Management  Tools that allow the definition of various aspects of the
security policy, such as network access rights, application controls, etc.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Provisioning
Tools  Allow the daily deployment and removal of individual entities such as new
gateways, users and devices.
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | n | Monitoring
Tools  Show the status of each controlled device and allow the immediate detection
and remediation of various situations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | n | Auditing
Tools  Consistent tools to log and monitor every change made to the security
infrastructure and to ensure that all changes are accounted for and can be traced and
tracked by company policies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Security
Information and Event Management  Todays complex, multi-layered security
architecture consists of many devices to ensure servers, hosts and network applications
are protected from harmful activity. These devices all generate voluminous logs that are
difficult and time consuming to interpret. Our solutions automatically prioritize
security events for decisive, intelligent action. Clear, graphical reports help inform
decisions related to resource allocation, security optimization and regulatory
compliance.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
security solutions are based on NGX, our advanced security software platform. The NGX
platform delivers a unified security architecture for an entire Check Point network
security infrastructure. This unified security architecture enables all Check Point
products to be managed and monitored from a single administrative console and provides a
consistent level of security, leveraging a common set of adaptive security technologies
across an entire enterprise network. This unified security architecture enables
enterprises of all sizes to reduce the cost and complexity of security management and
ensures that their security systems can be easily extended to adapt to new and evolving
threats.

We
package and market our products and services under different names and at a variety of
prices. Each package addresses security tasks for different network environments and has
corresponding support offerings.

Our
management and gateway software products run in a variety of deployment environments and
on platforms that include standard workstations, servers and dedicated appliances, such as
those produced by Nokia Corporation, Crossbeam Systems Inc and International Business
Machines Corporation (IBM). Different client products run on different client Operating
Systems (OS), such as Microsoft Windows, Macintosh OS, Microsoft Windows Mobile, Symbian,
linux and PalmOS.

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The
following chart summarizes the capabilities of our security gateway products:

|Overview of Security Gateways                                                                  
|-----------------------------------------------------------------------------------------------
|
|
|VPN-1 Software for
Enterprises:
Solutions to 
protect the 
network 
infrastructure             
|VPN-1 Power                                                                                    
|VPN-1 Power VSX                                                                                
|UTM-1 Appliances
for Enterprises: 
Proven security,
easily deployable 
and manageable          
|UTM-1 Edge                                                                                     
|Dedicated Security 
Solutions: For Web
security and
intrusion
prevention                       
|IPS-1                                                                                          
|Small Business and
Consumer
Appliances: UTM
and remote access
for small business 
and consumers
|ZoneAlarm Secure Wireless Router                                                               

|The
above products are offered in multiple configurations. Different configurations may
include different options from the above table. Some capabilities are optional and
some require an additional subscription payment.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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These
charts summarize our primary product offerings based on target customers:

|                                                                                                                                                                                                                                         | Consumer | Small Business1-100 Users | Mid-size
Companies
100-1000
Users | Enterprise 
1000-10,000
Users | High End
10,000-plus
Users | Telco/MSP
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | ------------------------- | --------------------------------- | ----------------------------- | -------------------------- | ---------
|
|VPN-1 UTM- Security functions
including firewall, intrusion
prevention, antivirus, anti-spyware,
Web application firewall, and IPSec
and SSL VPN in a single software
solution on third-party hardware.                                  |          | P                         | P                                 | P                             | P                          | P        
|VPN-1 Power- Integrated firewall,
VPN and intrusion prevention
gateways for enterprises with
demanding performance requirements.                                                                                                         |          |                           | P                                 | P                             | P                          | P        
|VPN-1 Power VSX- Virtualized
security gateway allows managed
service providers and enterprises
with virtualized networks up to 250
virtual security systems, including
firewall, VPN and intrusion
prevention, on one hardware platform. |          |                           |                                   |                               | P                          | P        
|UTM-1- All-inclusive Check Point
security gateway technologies
integrated on dedicated hardware
appliances. Available with optional
Total Security turnkey
messaging-security and comprehensive
services.                                |          | P                         | P                                 | P                             | P                          | P        
|UTM-1 Edge- Integrated security
appliances for remote sites and
branch offices.                                                                                                                                                          |          | P                         | P                                 | P                             | P                          | P        
|Connectra- Secure remote access
from any Web browser via SSL VPN.                                                                                                                                                                        |          | P                         | P                                 | P                             | P                          |          
|IPS-1- Dedicated intrusion
prevention appliances that provide
situational visibility and real-time
attack mitigation, including
protection from internal threats.                                                                        |          |                           | P                                 | P                             | P                          | P        
|Safe@Office- Industry-proven
firewall, with protection against
worms and viruses, remote access VPN
and Web filtering.                                                                                                                   | P        | P                         |                                   |                               |                            | P        
|ZoneAlarm Wireless Router- A
dedicated home-network,
integrated-security appliance
specifically for consumers.                                                                                                                           | P        |                           |                                   |                               |                            |          

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|                                                                                                                                                                                                                                         | Consumer | Small Business1-100 Users | Mid-size
Companies
100-1000
Users | Enterprise
1000-10,000
Users | High End
10,000-plus
Users | Telco/MSP
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | ------------------------- | --------------------------------- | ---------------------------- | -------------------------- | ---------
|
|Check Point Endpoint Security Total
Security- Includes all endpoint
security technologies, including
firewall, program control, NAC,
antivirus, anti-spyware, full-disk
encryption, port protection, media
encryption and remote access. |          | P                         | P                                 | P                            | P                          | P        
|Check Point Endpoint Security Secure
Access - Includes firewall, program
control, anti-malware engine, NAC
and VPN.                                                                                                                      |          | P                         | P                                 | P                            | P                          | P        
|Check Point Endpoint Security Full
Disk Encryption -
Full-disk encryption with preboot
authentication for laptops and PCs.                                                                                                               |          | P                         | P                                 | P                            | P                          | P        
|Check Point Endpoint Security Media
Encryption - Encryption of removable
media such as USB drives and
writable CDs and DVDs combined with
port control and device management.                                                            |          | P                         | P                                 | P                            | P                          |          
|Pointsec Mobile -Encryption of
device and memory card data on PDAs
and smartphones.                                                                                                                                                      |          | P                         | P                                 | P                            | P                          | P        
|ZoneAlarm -Line of PC security
products including ZoneAlarm
Internet Security Suite, ZoneAlarm
Pro, ZoneAlarm AntiVirus and the
ZoneAlarm free firewall.                                                                                 | P        | P                         |                                   |                              |                            | P        
|ZoneAlarm ForceField -Browser
security delivers virtualization and
other defenses to secure all Web-
based activity, complementing
existing PC security.                                                                                 | P        |                           |                                   |                              |                            |          

28

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|                                                                                                                                 | Consumer | Small Business1-100 Users | Mid-size
Companies
100-1000
Users | Enterprise
1000-10,000
Users | High End
10,000-plus
Users | Telco/MSP
|-------------------------------------------------------------------------------------------------------------------------------- | -------- | ------------------------- | --------------------------------- | ---------------------------- | -------------------------- | ---------
|
|SmartCenter -Centrally managed
security through a single console.                                                                |          | P                         | P                                 | P                            | P                          |          
|Eventia Suite -Security event
and information management
and reporting.                                                          |          | P                         | P                                 | P                            | P                          | P        
|Provider-1 -Security management for
service providers and large-scale
enterprises.                                               |          |                           |                                   | P                            | P                          | P        
|SMP -Large scale security management
for service providers for small
appliances. Also offered as "Software
as a service" (SaaS). |          |                           |                                   |                              |                            | P        

# Technologies

We
have developed and acquired a variety of technologies that secure networks and
information. Our products and services implement these technologies to protect our
customers networks and private information, enabling their IT administrators to
define and enforce their security policies across the network. These technologies also
collect and bring together related information, monitor security and traffic flow and
analyze and update configurations, to reflect changes in the security policy.

Stateful
Inspection technology

Our patented
Stateful Inspection technology is a de facto standard in network security technology. In
order to provide accurate and highly efficient traffic inspection, Stateful Inspection
extracts and maintains extensive state information, i.e., data that provides
context for future screening decisions, from all relevant communication layers.

Stateful
Inspection runs on a network gateway or an endpoint, such as a personal computer, and
enables the screening of all data attempting to pass from one network to another. By
tracking each connection, the system ensures that data passing through the gateway
complies with a defined security and traffic policy; traffic is managed according to
priority; and security decisions are made in an intelligent and timely manner.

Stateful
Inspection enables our products to inspect network traffic at high speed. This means that
as network traffic increases, our products respond efficiently to the larger volumes of
data. Our Stateful Inspection technology can be adapted to new protocols, software
applications, and security threats. It can be upgraded and can be run on a wide range of
operating systems.

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Application
Intelligence

Our
Application Intelligence technology provides a set of advanced capabilities that prevents
the exploitation of vulnerabilities in business applications, including vulnerabilities in
the application code, communication protocols, and the underlying operating system.
Application Intelligence provides security for these applications by running multiple
security checks, including validation of compliance to standards, validation of expected
use of protocols, inspection for known malicious content and control of application layer
operations. The result is the ability to proactively shield applications from attack
without relying on specific attack signatures. We have integrated our Application
Intelligence technology into our VPN-1 Power, VPN-1 Power Multi-core, UTM-1, UTM-1 Edge,
VPN-1 UTM, VPN-1 UTM Power Multi-core, Safe@Office, IPS-1, Connectra, and VPN-1 Power VSX
products, which are listed above.

Security
Management Architecture (SMART)

Security
Management Architecture (SMART), a core component of our unified security architecture,
enables our customers to configure and manage security policies from a central
administrative point. SMART enables the definition and ongoing management of security
policies for businesses of all sizes. This object-oriented architecture maps real-world
entities, such as networks and users, to graphical representations that can be manipulated
in a database. Integrated monitoring and reporting tools improve the manageability of the
system by providing administrators with real-time information on the state of network and
security systems. These tools also provide longer term trending information that is useful
for periodic security management tasks, such as security audits.

Security
and network traffic enforcement technologies (based on Stateful Inspection)

Based
on our Stateful Inspection technology, the INSPECT engine scans all incoming and outgoing
traffic at security enforcement points. These are typically located at the network
perimeter as security gateways, on critical servers or inside the network dividing the
network into separate segments.

The
INSPECT engine can perform a variety of functions on inspected network traffic as listed
below:

| | n | Drop
it when the security policy has been violated.
| | - | ---------------------------------------------------

| | n | Encrypt
it to create a secured VPN that enables the transfer of private data over public
networks, such as the Internet.
| | - | ------------------------------------------------------------------------------------------------------------------------

| | n | Prioritize
it for Quality of Service (QoS), which is the ability of a network to provide better
service for selected traffic.
| | - | -----------------------------------------------------------------------------------------------------------------------------

| | n | Send
it for further processing, such as authentication, content inspection or the filtering of
malicious or unwanted traffic.
| | - | -----------------------------------------------------------------------------------------------------------------------------

We
have developed a broad range of technologies that can be implemented by our INSPECT
engine. In addition, third party technologies can be implemented through our Open Platform
for Security (OPSEC) framework, which is described below.

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SecurePlatform

SecurePlatform
bundles the Check Point security solutions together with a prehardened OS, in a single
package that is easy to deploy. It optimizes the performance of security and OSes and
includes a set of tools that ease setup and network configuration, thus reducing the total
cost of ownership for security gateways and security management servers. SecurePlatform
runs on a variety of open systems, i.e., systems whose key interfaces are based on widely
supported standards.

ClusterXL

Our
ClusterXL technology provides high availability and load sharing to keep businesses
running. It distributes traffic between clusters of redundant gateways so that the
computing capacity of multiple machines may be combined to increase total throughput. If
an individual gateway becomes unreachable, all connections are redirected to a designated
backup without interruption. Integration with our management and enforcement points
enables simple deployment.

CoreXL

CoreXL
is a technology for intelligently balancing security traffic loads between multiple cores
on multi-core processors. It results in a higher level of performance for integrated
intrusion prevention. With CoreXL, a VPN-1 gateway running on a multi-core platform can be
configured to have a large number of active intrusion prevention settings, such as would
be found protecting sensitive information or networks, while maintaining high performance
levels.

SecureXL

SecureXL
is a framework of software and hardware technologies, including third-party technologies,
designed to increase performance. By using SecureXL, hardware vendors can accelerate the
performance of appliances on which our software is installed. With SecureXL, our products
can be integrated into high-performance networks typically found in large enterprises and
service providers.

TrueVector
technology

Our
TrueVector technology is a patented, flexible and efficient software technology for
enabling high-performance, scalable and robust Internet security for personal computers.

TrueVector
stops attempts to send confidential data to unauthorized parties by malicious software,
such as keystroke loggers and Trojan horses. It monitors all applications running on
protected computers, allowing trusted applications to engage in network communications,
while blocking network connections by untrusted applications. TrueVector enforces security
policies that are centrally created and managed, stand alone or any combination of these.
In addition, TrueVector may be configured to make protected computers invisible to
external attackers. The technology is used in the Check Point Endpoint Security and
ZoneAlarm lines of endpoint security products, as described above under
Products.

Pointsec
Secure Pre-Boot Environment

Pointsec
Secure Pre-Boot Environment (PPBE) is a secure, proprietary operating program. PPBE, along
with Pointsecs access control and authentication architecture, the Multi-Factor
Authentication Engine (MFAE), encrypts all information stored on a PCs hard disk,
i.e., full-disk encryption. It provides a user-friendly graphical user interface for the
Pre-Boot Authentication process and allows for the use of all common second factor
authentication methods, such as smartcards or tokens. The full-disk encryption technology
protects every sector of the computers hard drive, including the operating system
files. This prevents successful attacks on the OS and attacks to gain access to sensitive
data on the drive. The graphical user interface is designed like a common login screen to
ensure straightforward operation by the end user.

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Hybrid
Detection Engine (HDE)

At
the heart of the IPS-1 Sensor (described above under Products), HDE utilizes
multiple detection and analysis techniques to detect hostile or suspicious traffic. These
techniques include the following: signature-based methods to detect known patterns of
attacks targeted at the network and at vulnerabilities within the network; protocol
analysis to validate that the traffic construct meets the expected standards; anomaly
detection to identify instances where network traffic exhibits abnormal characteristics;
OS fingerprinting to determine the OS type of the traffic destination, which ensures
proper receipt and processing; multi-element correlation to detect widespread illicit
activity launched from the same source address; dynamic worm mitigation whereby rapidly
proliferating worms are detected and automatically blocked from spreading within the
network; as well as other techniques to deliver comprehensive network protection.

Intrusion
Prevention with Confidence Indexing

Based
on several analysis data points for every network traffic flow, the IPS-1 Sensor
determines a level of confidence that a certain traffic flow is an attack. An exact match
to an exploit signature would derive a confidence level at or near 100 percent, whereas
purely anomalous traffic would derive a confidence level possibly in the range of 70
percent. This function reduces the occurrence of false positives by enabling a more
granular prevention policy, such as block everything with a confidence greater than
90 percent, which allows exploits to be blocked, without the concern of blocking
critical business traffic.

Open
Platform for Security (OPSEC)

Our
OPSEC framework provides a single platform that enables the integration and
interoperability of multi-vendor information security products and technologies. The OPSEC
framework allows certified third-party security applications to plug into our solutions
through our published application programming interfaces. Products that carry the OPSEC
Certified seal have been tested and certified for integration and interoperability within
the OPSEC framework.

Precision
Virtualization technology

Virtualizing
or emulating a limited set of processes creates a secure sandbox without the overhead of a
full OS virtual machine. This allows powerful but lightweight security just for a targeted
area that might otherwise be vulnerable to attacks. ZoneAlarm ForceField utilizes this to
provide powerful security for Web-browsing activities.

32

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# Revenues by category of
activity

The
following table presents our revenues for the last three fiscal years by category of
activity:

|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|
|
|
|
|Products and licenses                      |                        
|Software updates, maintenance and services |                        
|                                           |                        
|Total revenues                             |                        
|                                           |                        

Our
revenues for the last three fiscal years by geographic area are set out in Item 5
 Operating and Financial Review and Prospects under the caption
Overview.

# Sales and Marketing

We
sell through a wide network of channel partners, including distributors, resellers,
value-added resellers, system integrators, and managed services providers. Our agreements
with these channel partners are usually non-exclusive. Almost all of our enterprise sales
are to our channel partners and not directly to our end users. However, in the data
security market, we engage in some direct sales to end users, mostly to larger accounts,
though we plan to transition these sales to channel partners. Most of our sales to the
consumer market are either direct, via our Web sites, or through retail stores.

We
use various marketing tools to increase awareness and knowledge of our products and to
promote sales. These include our corporate Web sites, seminars and tradeshows that we
organize and participate in, print media and online advertising, online search
optimization, and telemarketing campaigns. In addition, in order to try our products, we
provide current and prospective customers with 30 day software evaluation licenses. We
have strategic relationships with various hardware partners, including vendors providing
server, workstation, appliance and networking products. These include Crossbeam Systems
Inc., Dell Inc., Hewlett-Packard Co., IBM, Nokia Corporation, Microsoft Corporation,
Nortel Networks Corp., Siemens AG and Sun Microsystems Inc. The purpose of these
relationships is to improve the integration of our security software with hardware
platforms, support our marketing and sales efforts, and help increase customer
satisfaction. In addition, these hardware partners provide primary support and training to
their customers. We also initiated and continue to maintain our Open Platform for Security
(OPSEC) framework, enabling integration with leading hardware appliances and third-party
security software applications. OPSEC promotes interfaces that allow integration and
interoperability between our products and best of breed complementary
technologies. This enables users to create a complete Internet security architecture.
Products that carry the OPSEC certified and Secured by Check Point
seals have been tested to ensure integration and interoperability. OPSEC partners include
both appliance manufacturers (such as those listed above) and application developers, such
as RSA Security, Inc., Trend Micro, Inc. and VeriSign, Inc. As of December 31, 2007, we
had 717 employees dedicated to sales and marketing.

# Customer Service and
Support

We
operate a worldwide technical services organization which provides a wide range of
services, including technical customer support programs and plans, such as Enterprise
Based Support (EBS) and Collaborative Enterprise Support (CES)
which provides support for a customers entire Check Point product install base;
certification and educational training on Check Point products; and professional services
in implementing, upgrading, and optimizing Check Point products, such as design planning,
security implementation, and project management.

33

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Our
technical assistance centers in the United States, Israel, and Japan offer worldwide
24-hour service, seven days per week. There are employees in additional locations
supporting our call centers, as well as call centers operated by third parties (for
consumers support only). As of December 31, 2007, we had 225 employees dedicated to
customer service and support.

Our
channel partners generally provide their customers with installation, training,
maintenance and support, while we provide our high-level technical support to our channel
partners. Alternatively, our customers may elect to receive support directly from us. As
part of our pre-sale support to our channel partners, we employ technical consultants and
systems engineers who work closely with our channel partners to assist them with pre-sale
configuration, use and application support.

We
offer comprehensive programs that cover all of our products in a customers installed
base. In 2006, we introduced a new support program for our customers, combining first-line
support from our partners, with full back-end support from Check Point. This program
provides added value to customers and partners by improving the support our customers
receive. The majority of our software updates, maintenance and support contracts are based
on these new programs.

# Research and Product
Development

We
believe that our future success will depend upon our ability to enhance our existing
products, develop, acquire and introduce new products to address the increasingly
sophisticated needs of our customers. We work closely with existing and potential
customers, distribution channels, and major resellers, who provide significant feedback
for product development and innovation. Our product development efforts are focused on
providing a unified security architecture that functions throughout all layers of the
network and devices that carry data. This includes enhancements to our current family of
products and the continued development of new products to address network and data
security, covering perimeter, internal, Web and endpoint security needs, as well as the
integrated management of these solutions. We expect to develop most of our new products
internally, and also expect to leverage the products and technologies recently acquired in
our acquisitions of Protect Data AB and NFR Security, Inc. We may decide, based upon
timing and cost considerations that it would be more efficient to acquire or license
certain technologies or products from third parties, or to make acquisitions of other
businesses. Research and development expenses were $50.5 million in 2005, $62.2 million in
2006, and $81.0 million in 2007. These amounts include stock-based compensation in the
amount of $1.3 million in 2005, $9.4 million in 2006 and $4.3 million in 2007. As of
December 31, 2007, we had 673 employees dedicated to research and development activities
and quality assurance.

# Competition

Information
concerning competition is provided in Item 3  Key Information under the
caption Risk Factors  Risks Relating to Our Business and Our Market  We
may not be able to successfully compete.

# Proprietary Rights

We
use a combination of copyright and trademark laws, trade secrets, confidentiality
procedures, and contractual provisions to protect our proprietary rights. We rely on trade
secret and copyright laws to protect our software, documentation, and other written
materials. These laws provide only limited protection. Further, we generally enter into
confidentiality agreements with employees, consultants, customers and potential customers,
and limit access and distribution of materials and information that we consider
proprietary.

34

---

---



We
have six U.S. patents, over 25 U.S. patents pending, and additional patents issued and
patent applications pending worldwide. Our efforts to protect our proprietary rights may
not be adequate or our competitors may independently develop technology that is similar
but is based on our technology. Additional details are provided in Item 3  Key
Information under the caption Risk Factors  Risks Relating to Our
Business and Our Market  We may not be able to successfully protect our intellectual
property rights.

# Effect of Government
Regulation on our Business

Information
concerning regulation is provided in Item 5  Operating and Financial Review
and Products under the caption Taxes on income and in Item 10
 Additional Information under the caption Israeli taxation, foreign
exchange regulation and investment programs.

# Organizational Structure

We
are organized under the laws of the State of Israel. We wholly own the subsidiaries listed
below, directly or through other subsidiaries, unless otherwise specified in the footnotes
below:

|NAME OF SUBSIDIARY                                       | COUNTRY OF INCORPORATION             
|-------------------------------------------------------- | -------------------------------------
|
|
|
|
|Check Point Software Technologies, Inc.                  | United States of America (Delaware)  
|                                                        
|Check Point Software Technologies (Canada) Inc.          | Canada                               
|                                                        
|Check Point Software Technologies (Japan) Ltd.           | Japan                                
|                                                        
|Check Point Software Technologies (Singapore) PTE Ltd.   | Singapore                            
|                                                        
|Check Point Software Technologies (Netherlands) B.V.     | Netherlands                          
|                                                        
|Check Point Holding (Singapore) PTE Ltd.                 | Singapore                            
|                                                        
|Check Point Holding (Singapore) PTE Ltd. - US Branch (1) | United States of America (New York)  
|                                                        
|Check Point Software Technologies Cayman Islands         | Cayman Islands                       
|                                                        
|Israel Check Point Software Technologies Ltd. China (2)  | China                                
|                                                        
|C.P.S.T. Sweden Holdings AB                              | Sweden                               
|                                                        
|Protect Data AB                                          | Sweden                               
|                                                        
|SofaWare Technologies Ltd. (3)                           | Israel                               
|                                                        
|NFR Technologies, Inc.                                   | United States of America (Delaware)  
|                                                        
|NFR Security, Inc                                        | United States of America (Delaware)  
|                                                        
|Zone Labs, L.L.C.                                        | United States of America (California)
|                                                         |                                      

---

(1)
          Branch of Check Point Holding (Singapore) PTE Ltd.

(2)
          Branch of Check Point Software Technologies Ltd.

(3)
          We own 64% of the outstanding equity of SofaWare (57% on a fully diluted basis)
          as of December 31, 2007.

35

---

---



Check
Point Software Technologies (Netherlands) B.V. acts as a holding company. It wholly owns
the principal operating subsidiaries listed below, unless otherwise indicated in the
footnotes below:

|NAME OF SUBSIDIARY                                                        | COUNTRY OF INCORPORATION
|------------------------------------------------------------------------- | ------------------------
|
|
|
|
|Check Point Software Technologies S.A.                                    | Argentina               
|                                                                         
|Check Point Software Technologies (Australia) PTY Ltd.                    | Australia               
|                                                                         
|Check Point Software Technologies (Austria) GmbH                          | Austria                 
|                                                                         
|Check Point Software Technologies (Belarus) LLC                           | Belarus                 
|                                                                         
|Check Point Software Technologies (Belgium) S.A.                          | Belgium                 
|                                                                         
|Check Point Software Technologies (Brazil) LTDA                           | Brazil                  
|                                                                         
|Check Point Software Technologies (Hong Kong) Ltd. (Guangzhou office) (1) | China                   
|                                                                         
|Check Point Software Technologies (Hong Kong) Ltd. (Shanghai office)      | China                   
|                                                                         
|Check Point Software Technologies (Czech Republic) s.r.o.                 | Czech Republic          
|                                                                         
|Check Point Software Technologies (Denmark) ApS                           | Denmark                 
|                                                                         
|Check Point Software Technologies (Finland) Oy                            | Finland                 
|                                                                         
|Check Point Software Technologies SARL                                    | France                  
|                                                                         
|Check Point Software Technologies GmbH                                    | Germany                 
|                                                                         
|Check Point Software Technologies (Hong Kong) Ltd.                        | Hong Kong               
|                                                                         
|Check Point Software Technologies (India) Private Limited                 | India                   
|                                                                         
|Check Point Software Technologies (Italia) Srl (2)                        | Italy                   
|                                                                         
|Check Point Software Technologies Mexico S.A. de C.V.                     | Mexico                  
|                                                                         
|Check Point Software Technologies B.V.                                    | Netherlands             
|                                                                         
|Check Point Software Technologies Norway A.S.                             | Norway                  
|                                                                         
|Check Point Software Technologies (Poland) Sp.z.o.o.                      | Poland                  
|                                                                         
|Check Point Software Technologies (RMN) SRL.                              | Romania                 
|                                                                         
|Check Point Software Technologies (Russia) OOO                            | Russia                  
|                                                                         
|Check Point Software Technologies (Korea) Ltd.                            | S. Korea                
|                                                                         
|Check Point Software Technologies (Spain) S.A.                            | Spain                   
|                                                                         
|C.P.S.T. Sweden A.B.                                                      | Sweden                  
|                                                                         
|Check Point Software Technologies (Switzerland) A.G.                      | Switzerland             
|                                                                         
|Check Point Software Technologies (Taiwan) Ltd.                           | Taiwan                  
|                                                                         
|Check Point Yazilim Teknolojileri Pazarlama A.S. (3)                      | Turkey                  
|                                                                         
|Check Point Software Technologies (UK) Ltd.                               | United Kingdom          

---

(1)
          Representative Office of Check Point Software Technologies (Hong Kong) Ltd.

(2)
          97% owned by Check Point Software Technologies (Netherlands) B.V. and 3% owned
          by Check Point Software Technologies Ltd.

(3)
          96% owned by Check Point Software Technologies (Netherlands) B.V., 1% owned by
          Check Point Software Technologies Ltd., and 3% owned in trust by the directors
          of Check Point Yazilim Teknolojileri Pazarlama A.S. on behalf of Check Point
          Software Technologies (Netherlands) B.V.

36

---

---



Protect Data AB wholly owns the
subsidiaries listed below, directly or through other subsidiaries:

|NAME OF SUBSIDIARY                    | COUNTRY OF INCORPORATION             
|------------------------------------- | -------------------------------------
|
|
|
|
|Protect Data Internet Solutions AB    | Sweden                               
|                                     
|Pointsec Sweden AB                    | Sweden                               
|                                     
|Pointsec Mobile Technologies AB       | Sweden                               
|                                     
|Pointsec Norway AS                    | Norway                               
|                                     
|Pointsec Denmark A/S                  | Denmark                              
|                                     
|Oy Pointsec Finland AB                | Finland                              
|                                     
|Pointsec Wireless Solutions AB        | Sweden                               
|                                     
|Pointsec Mobile Technologies, Inc.    | United States of America (California)
|                                     
|Pointsec Mobile Technologies Ltd.     | United Kingdom                       
|                                     
|Pointsec Mobile Technologies GmbH     | Germany                              
|                                     
|Pointsec Mobile Technologies SAS      | France                               
|                                     
|Pointsec Mobile Technologies Pty Ltd. | Australia                            
|                                     
|Pointsec Mobile Technologies Limited  | Hong Kong                            
|                                     
|Pointsec Mobile Technologies B.V.     | Holland                              
|                                     
|Pointsec Mobile Technologies Pte Ltd. | Singapore                            
|                                     
|Pointsec K.K.                         | Japan                                
|                                     
|Reflex Software Ltd. (Jersey)         | United Kingdom                       
|                                     
|Reflex Magnetics Ltd.                 | United Kingdom                       
|                                     
|Reflex Software Luxembourg SARL       | Luxembourg                           

37

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# Property, Plants and
Equipment

In
May 2007, we relocated to our new international headquarters in Tel Aviv, Israel that we
purchased. The new international headquarters building contains approximately 170,000
square feet of office space and approximately 280,000 square feet of below-ground space
for parking and other purposes. We also acquired rights for an additional building with
approximately 130,000 square feet. We paid approximately $45.9 million in the aggregate
for the new international headquarters building and the rights to the additional building,
and this amount included the costs for renovating and modifying the buildings to our
specifications.

We
lease offices in various locations around the world. Our principal offices are as follows:

| | Location                  | Primary Usage | Space (square
feet)
| | ------------------------- | ------------- | -------------------
|
|
|
|
| | Redwood City, California  |               |                    
| | San Francisco, California |               |                    
| | Irving, Texas             |               |                    
| | Rockville, Maryland       |               |                    
| | Stockholm, Sweden         |               |                    
| |                           |               |                    

In addition
to the above, we lease the following office spaces:

| | Location               | Primary Usage | Space (square
feet)
| | ---------------------- | ------------- | -------------------
|
|
|
|
| | Europe                 |               |                    
| | Americas               |               |                    
| | Asia Pacific and Japan |               |                    
| |                        |               |                    

# Principal Capital
Expenditures and Divestitures

For
more information regarding our principal capital expenditures currently in progress, see
Item 5  Operating and Financial Review and Prospects under the caption
Liquidity and capital resources.

|ITEM 4A. |  | UNRESOLVED STAFF COMMENTS
|-------- |  | -------------------------

Not
applicable.

|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

The
following discussion and analysis is based on our consolidated financial statements,
including the related notes, and should be read in conjunction with them. Our financial
statements are provided in Item 18  Financial Statements.

38

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---



# Overview

We
develop, market, and support a wide range of software and combined hardware and software
products and services for information technology (IT) security, and offer our customers an
extensive range of network security, data security and management solutions. A broad range
of our network security solutions operate under a unified security architecture, with
central management and enforcement of security policy, and with centralized, real-time
security updates. Our Open Platform for Security (OPSEC) framework, allows customers to
extend the capabilities of our products and services, enabling integration with leading
hardware appliances and third-party security software applications. Our products and
services are sold to enterprises, service providers, small and medium-sized businesses and
consumers. Our products are sold, integrated and serviced by a network of partners around
the world.

In
January 2007, we completed a tender offer for the outstanding shares and warrants of
Protect Data AB (Protect Data), which at the time was a public company listed
on the Stockholm Stock Exchange. As of December 31, 2007, we had acquired the rights to
all of the shares and warrants of Protect Data, on a fully diluted basis, and completed
the integration of Protect Data into Check Points business. Protect Data operates
its business through its wholly owned subsidiary, Pointsec Mobile Technologies AB, a
worldwide provider of mobile data protection. Pointsec delivers solutions for automatic
data encryption that keeps the sensitive information stored on mobile computing devices,
such as laptops, PDAs, smartphones, and removable media (e.g., USB devices), confidential
and secure. With the acquisition of Protect Data, Check Point entered the data security
market.

Our
business is subject to the effects of general global economic conditions and, in
particular, market conditions in the IT, Internet security, and data security industries.
If general economic and industry conditions fail to improve, or if they deteriorate,
demand for our products could be adversely affected.

We
derive most of our revenues from sales of Internet security products primarily under our
VPN-1 and related brands, as well as related revenues from software updates, maintenance
and other services. We expect this to continue to be the case in the foreseeable future.
Following the acquisition of Protect Data in 2007, we expect to derive revenues also from
data security products and associated software updates, maintenance and support services.

We
derive our sales primarily through indirect channels. During 2007, we derived
approximately 49% of our sales from our ten largest distributors (compared to 48% in
2006), with the largest distributor accounting for approximately 16% of our sales, and the
second largest distributor accounting for approximately 14% of our sales. During 2006,
these two distributors accounted for approximately 26% of our sales with the largest
distributor accounting for approximately 15% of our sales, and the second largest
distributor accounting for approximately 11% of our sales.

39

---

---



The
following table presents the percentage of total consolidated revenues that we derive from
sales in each of the regions shown:

| |                                | Year Ended December 31,
| | ------------------------------ | -----------------------
|
|
|
|
| | Americas, principally U.S.     |                        
| | Europe, Middle East and Africa |                        
| | Asia Pacific and Japan         |                        
| |                                |                        

For
information on the impact of foreign currency fluctuations, you can see Item 11
 Quantitative and Qualitative Disclosures about Market Risk  Foreign Currency
Risk.

# Critical Accounting
Policies and Estimates

Our
consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles (GAAP). These accounting principles require us to make certain
estimates, judgments and assumptions. We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information available to us at
the time that these estimates, judgments and assumptions are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities as of
the date of the financial statements as well as the reported amounts of revenues and
expenses during the periods presented. To the extent there are material differences
between these estimates, judgments or assumptions and actual results, our financial
statements will be affected. The accounting policies that reflect our more significant
estimates, judgments and assumptions and which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results, include the following:

| | n | Revenue
recognition
| | - | -------------------

| | n | Business
combinations
| | - | ---------------------

| | n | Goodwill
and other intangible assets
| | - | ------------------------------------

| | n | Realizability
of long-lived assets
| | - | ----------------------------------

| | n | Accounting
for income taxes
| | - | ---------------------------

| | n | Equity-based
compensation expense
| | - | ---------------------------------

| | n | Allowances
for doubtful accounts
| | - | --------------------------------

| | n | Valuation
of investments
| | - | ------------------------

In
many cases, the accounting treatment of a particular transaction is specifically dictated
by GAAP and does not require managements judgment in its application. There are also
areas in which managements judgment in selecting among available alternatives would
not produce a materially different result. Our senior management has reviewed these
critical accounting policies and related disclosures with the Audit Committee of our Board
of Directors. You can see a summary of all of our significant accounting policies in Note
2 to our consolidated financial statements.

Revenue
recognition

We
generally derive our revenues from two primary sources:

| | n | New
software products and licenses.
| | - | -----------------------------------

| | n | Software
updates, maintenance and services.
| | - | -------------------------------------------

40

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---



We
recognize software revenue in accordance with Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, as amended by SOP No. 98-9,
Modification of SOP No. 97-2, Software Revenue Recognition, With Respect
to Certain Transactions (collectively, SOP 97-2). We recognize software
license revenue when persuasive evidence of an arrangement exists, the software license
has been delivered, there are no uncertainties surrounding product acceptance, there are
no significant future performance obligations, the license fees are fixed or determinable,
and collection of the license fee is considered probable. Amounts received in advance of
meeting these criteria are deferred. Fees for arrangements with payment terms extending
beyond customary payment terms are considered not to be fixed or determinable, in which
case revenue is deferred and recognized when payments become due from the customer or are
actually collected, providing that all other revenue recognition criteria have been
met.As required by SOP 97-2, we determine the value of the
software component of our multiple-element arrangements using the residual method when
vendor specific objective evidence (VSOE) of fair value exists for the undelivered
elements of the support and maintenance agreements. VSOE is based on the price charged
when an element is sold separately or renewed. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the arrangement fee
is allocated to the delivered elements and is recognized as revenue.

Our
software updates and maintenance provides customers with rights to unspecified software
product upgrades released during the term of the agreement. Our support services grant our
customers telephone access to technical support personnel during the term of the service.
We recognize revenues from software updates, maintenance and services ratably over the
term of the agreement.

We
follow very specific and detailed guidelines in measuring revenue, several of which are
discussed above. We determine the fair value of each type of undelivered element as
follows:

For
enterprise products, we determine the fair value based on the renewal prices charged for
our software updates, maintenance and support services. We offer several levels of
services, classified by services offered, response time and availability. We have defined
classes of customers, based on the total gross value of licensed software products the
customer purchased from us. We price renewals for each service level and each class of
customer as a fixed percentage of the total gross value of licensed software products the
customer purchased from us.

For
our consumer products, we determine the fair value based on the renewal prices of our
software updates, maintenance and support services for the different products offered. The
renewal prices are based on our price list.

Business
combinations

In
accordance with business combination accounting, we allocate the purchase price of
acquired companies to the tangible and intangible assets acquired and liabilities assumed
as well as to in-process research and development based on their estimated fair values. We
engage third-party appraisal firms to assist management in determining the fair values of
certain assets acquired and liabilities assumed. Such valuations require management to
make significant estimates and assumptions, especially with respect to intangible assets.

Management
makes estimates of fair value based upon assumptions it believes to be reasonable. These
estimates are based on historical experience and information obtained from the management
of the acquired companies and are inherently uncertain. Critical estimates in valuing
certain of the intangible assets include, but are not limited to, the following: future
expected cash flows from license sales, maintenance agreements, customer contracts and
acquired developed technologies and patents; expected costs to develop the in-process
research and development into commercially viable products and estimated cash flows from
the projects when completed; the acquired companys brand and market position as well
as assumptions about the period of time the acquired brand will continue to be used in the
combined companys product portfolio; and discount rates. Unanticipated events and
circumstances may occur which may affect the accuracy or validity of such assumptions,
estimates or actual results. Changes to these estimates, relating to circumstances that
existed at the acquisition date, are recorded as an adjustment to goodwill during the
purchase price allocation period (generally within one year of the acquisition date) and
as operating expenses, if otherwise.

41

---

---



In
connection with purchase price allocations, we estimate the fair value of the support
obligations assumed in connection with acquisitions. The estimated fair value of the
support obligations is determined utilizing a cost build-up approach. The cost build-up
approach determines fair value by estimating the costs related to fulfilling the
obligations plus a normal profit margin. The sum of the costs and operating profit
approximates, in theory, the amount that we would be required to pay a third party to
assume the support obligation.

Goodwill
and other intangible assets

We
review goodwill for impairment annually during the fourth quarter of each fiscal year, and
whenever events or changes in circumstances indicate its carrying value may not be
recoverable in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill impairment is deemed to exist if the carrying value of a reporting
unit exceeds its implied fair value. If the carrying value of a reporting units
goodwill exceeds its implied fair value, then we would record an impairment loss equal to
the difference.

We
operate in one operating segment, and this segment comprises our only reporting unit. In
calculating the implied fair value of the reporting unit, we use a discounted cash flow
methodology, market multiples and market capitalization. Significant estimates that we use
in these fair value methodologies include estimates of future cash flows, future
short-term and long-term growth rates, weighted average cost of capital and estimates of
market multiples of the reportable unit. Other factors we consider are the brand awareness
and the market position of the reporting unit and assumptions about the period of time we
will continue to use the brand in our product portfolio. If these estimates or their
related assumptions change in the future, we may be required to record impairment charges
for our goodwill. Our most recent annual goodwill impairment analysis, which was performed
during the fourth quarter of fiscal 2007, did not result in an impairment charge.

Realizability
of long-lived assets

We
are required to assess the impairment of long-lived assets, tangible and intangible
assets, other than goodwill, under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, on a periodic basis, when events or changes in
circumstances indicate that the carrying value may not be recoverable. Impairment
indicators include any significant changes in the manner of our use of the assets or the
strategy of our overall business, significant negative industry or economic trends and
significant decline in our share price for a sustained period.

42

---

---



Upon
determination that the carrying value of the asset may not be recoverable based upon a
comparison of aggregate undiscounted projected future cash flows to the carrying amount of
the asset, an impairment charge is recorded for the excess of fair value over the carrying
amount. We measure fair value using discounted projected future cash flows. We base our
fair value estimates on assumptions we believe to be reasonable but that are unpredictable
and inherently uncertain. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for our long-lived assets,
tangible and intangible assets.

Accounting
for income tax

On
January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income
Taxes, which contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with Statement 109, Accounting for Income
Taxes. The first step is to evaluate the tax position taken or expected to be taken
in a tax return by determining if the weight of available evidence indicates that it is
more likely than not that, on an evaluation of the technical merits, the tax position will
be sustained on audit, including resolution of any related appeals or litigation
processes. The second step is to measure the tax benefit as the largest amount that is
more than 50% likely to be realized upon ultimate settlement. Prior to January 1,
2007, we estimated our uncertain income tax obligations in accordance with SFAS
No. 109, Accounting for Income Taxes (SFAS No. 109) and SFAS
No. 5 Accounting for Contingencies (SFAS No. 5).

We
recognize accrued interest related to unrecognized tax benefits in tax expense. We also
have non-income tax obligations related to sales and use and employment-related taxes and
ongoing appeals related to these tax matters that are outside the scope of FIN 48 and
accounted for under SFAS No. 5.

Accounting
for tax positions requires judgments, including estimating reserves for potential
uncertainties. We also assess our ability to utilize tax attributes, including those in
the form of carry forwards, for which the benefits have already been reflected in the
financial statements. We do not record valuation allowances for deferred tax assets that
we believe are more likely than not to be realized in future periods. While we believe the
resulting tax balances as of December 31, 2007 and 2006 are appropriately accounted
for in accordance with FIN 48, SFAS No. 5 and SFAS No. 109 as applicable, the
ultimate outcome of such matters could result in favorable or unfavorable adjustments to
our consolidated financial statements and such adjustments could be material. See Note 10
to Consolidated Financial Statements for further information regarding income taxes. We
have filed or are in the process of filing local and foreign tax returns that are subject
to audit by the respective tax authorities. The amount of income tax we pay is subject to
ongoing audits by the tax authorities, which often result in proposed assessments. Our
estimate of the potential outcome for any uncertain tax issue is highly judgmental. We
believe that we adequately provided for any reasonably foreseeable outcomes related to tax
audits and settlement. However, our future results may include favorable or unfavorable
adjustments to our estimated tax liabilities in the period the assessments are made or
resolved, audits are closed or when statutes of limitation on potential assessments
expire.

Equity-based
compensation expense

We
account for equity-based compensation in accordance with SFAS No. 123(R),
Share-Based Payment. Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as an expense over the requisite service periods.
Determining the fair value of stock-based awards at the grant date requires the exercise
of judgment, including the amount of stock-based awards that are expected to be forfeited.
If actual results differ from these estimates, equity-based compensation expense and our
results of operations could be impacted.

43

---

---



We
estimate the fair value of employee stock options using a Black-Scholes Merton valuation
model. The fair value of an award is affected by our stock price on the date of grant as
well as other assumptions including the estimated volatility of our stock price over the
term of the awards and the estimated period of time that we expect employees to hold their
stock options. The risk-free interest rate assumption is based upon United States treasury
interest rates appropriate for the expected life of the awards. We use the historical
volatility of our publicly traded stock options in order to estimate future stock price
trends. In order to determine the estimated period of time that we expect employees to
hold their stock options, we have used historical behavioral patterns rates of employee
groups by job classification. Our expected dividend rate is zero since we do not currently
pay cash dividends on our common stock and do not anticipate doing so in the foreseeable
future.

Allowance
for doubtful accounts

We
maintain an allowance for doubtful accounts for losses that may result from the failure of
our channel partners to make required payments. We estimate this allowance based on our
judgment as to our ability to collect outstanding receivables. We form this judgment based
on an analysis of significant outstanding invoices, the age of the receivables, our
historical collection experience and current economic trends. If the financial condition
of our channel partners were to deteriorate, resulting in their inability to make
payments, we would need to increase the allowance for doubtful accounts. Bad debt expense
amounted to $648,000, $490,000 and $2,316,000 in 2005, 2006 and 2007, respectively.

Valuation
of investments

Fair
values of marketable securities are estimated using quoted market prices where available.
For securities not actively traded, fair values are estimated using values obtained from
our asset managers. To estimate the value of these investments, the asset managers employ
various models that take into consideration such factors, among others, as the credit
rating of the issuer, effective maturity of the security, yields on comparably rated
publicly traded securities, availability of insurance and risk-free yield curves. The
actual value at which such securities could actually be sold or settled with a willing
buyer or seller may differ from such estimated fair values depending on a number of
factors including, but not limited to, current and future economic conditions, the
quantity sold or settled, the presence of an active market and the availability of a
willing buyer or seller.

Based
on the Companys intent with respect to a particular investment at the time of
investment, the Company is generally required to classify its investments into one of
three investment categories under GAAP:

Trading;

Held
to maturity; or

Available
for sale.

44

---

---



The
classification of the investment may affect our reported results. For investments
classified as trading, we are required to recognize changes in the fair values into income
for the period reported. For investments classified as held to maturity, we are required
to carry the investment at amortized cost, with only the amortization occurring during the
period recognized into income. Changes in the fair value of investments classified as
available for sale are not recognized to income during the period, but rather are
recognized as a separate component of equity until realized. We classify our investments
as available-for-sale. Had we reported all the changes in the fair values of our
investments into income, our reported net income for the year ended December 31,
2007, would have increased by $8.5 million.

We
regularly review our investments for factors that may indicate that a decline in the fair
value of an investment below its cost or amortized cost is other than temporary. Some
factors considered in evaluating whether or not a decline in fair value is other than
temporary include:

| | Our
ability and intent to retain the investment for a period of time sufficient to allow for
a recovery in value;
| | -----------------------------------------------------------------------------------------------------------------

| | The
duration and extent to which the fair value has been less than cost; and
| | ----------------------------------------------------------------------------

| | The
financial condition and prospects of the issuer.
| | ----------------------------------------------------

Such
reviews are inherently uncertain in that the value of the investment may not fully recover
or may decline further in future periods resulting in realized losses.

45

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# Results of operations

The
following table presents information concerning our results of operations in 2005, 2006
and 2007:

|                                                   | Year Ended December 31,
|-------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                          |                        
|Products and licenses                              |                        
|Software updates, maintenance and services         |                        
|                                                   |                        
|Total revenues                                     |                        
|                                                   |                        
|                                                   |                        
|Operating expenses*:                               |                        
|Cost of products and licenses                      |                        
|Cost of software updates, maintenance and services |                        
|Amortization of technology                         |                        
|                                                   |                        
|Total cost of revenues                             |                        
|                                                   |                        
|Research and development                           |                        
|Selling and marketing                              |                        
|General and administrative                         |                        
|Acquired in-process R&D                            |                        
|                                                   |                        
|Total operating expenses                           |                        
|                                                   |                        
|                                                   |                        
|Operating income                                   |                        
|Financial income, net                              |                        
|                                                   |                        
|                                                   |                        
|Income before taxes on income                      |                        
|Taxes on income                                    |                        
|                                                   |                        
|Net income                                         |                        
|                                                   |                        
|                                                   |                        

---

|*
Including pre-tax charges for amortization of intangible assets, acquisition related
expenses and stock-based compensation in the following items:
|----------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       |  |  |  
|------------------------------------------------------ |  |  | -
|
|
|
|
|Amortization  of  intangible  assets  and  acquisition |  |  |  
|related expenses                                       |  | 
|Selling and marketing                                  |  |  | $
|General and administrative                             |  |  |  
|                                                       |  |  |  
|Total                                                  |  |  | $
|                                                       |  |  |  
|                                                       |  | 
|Stock-based compensation                               |  | 
|Cost of products and licenses                          |  |  | $
|Cost of software updates, maintenance and services     |  |  |  
|Research and development                               |  |  |  
|Selling and marketing                                  |  |  |  
|General and administrative                             |  |  |  
|                                                       |  |  |  
|Total                                                  |  |  | $
|                                                       |  |  |  
|                                                       |  |  |  

46

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The
following table presents information concerning our results of operations as a percentage
of revenues for the periods indicated:

|                                                   | Year Ended December 31,
|-------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                          |                        
|Products and licenses                              |                        
|Software updates, maintenance and services         |                        
|                                                   |                        
|Total revenues                                     |                        
|                                                   |                        
|                                                   |                        
|Operating expenses:                                |                        
|Cost of products and licenses                      |                        
|Cost of software updates, maintenance and services |                        
|Amortization of technology                         |                        
|                                                   |                        
|Cost of revenues                                   |                        
|                                                   |                        
|Research and development                           |                        
|Selling and marketing                              |                        
|General and administrative                         |                        
|Acquired in-process R&D                            |                        
|                                                   |                        
|Total operating expenses                           |                        
|                                                   |                        
|                                                   |                        
|Operating income                                   |                        
|Financial income, net                              |                        
|                                                   |                        
|                                                   |                        
|Income before taxes on income                      |                        
|Taxes on income                                    |                        
|                                                   |                        
|Net income                                         |                        
|                                                   |                        
|                                                   |                        

Revenues

We
derive our revenues mainly from the sale of products and licenses, and related software
updates, maintenance and other services. Our revenues were $579.4 million in 2005, $575.1
million in 2006 and $730.9 million in 2007.

Total
revenues in 2006 remained flat compared to 2005. In 2006, a decrease of $39.4 million in
product revenues was offset by an increase of $35.2 million in sales of software updates,
maintenance and other service revenues. In 2006, we experienced strength in sales of our
software updates, maintenance and other services revenues, attributed primarily to greater
account coverage of our new software updates, maintenance and support programs, mainly in
Europe, where we experienced growth of approximately 22% in sales of our software updates,
maintenance and other services revenue. In addition, sales of our SmartDefense service
grew by 43% in 2006 compared to 2005, and we also experienced growth of software update
and maintenance sales in the consumer business.

Total
revenues in 2007 grew by 27% compared to 2006. Of that increase, 13% was attributed to
Check Points traditional business and the remainder was due to the inclusion of
Protect Data in our results for 2007. Protect Data contributed $82.8 million to our
revenues in 2007. The increase of 28% in product and licenses revenues is mainly
attributed to the inclusion of Protect Data in our results of operations for 2007.
Software updates, maintenance and other services revenues grew by 26% compared to 2006.

Over
the last three years, product and license revenues as a percentage of revenues decreased
from 49% in 2005 to 42% in both 2006 and in 2007. The reason for the decline as a
percentage of revenue is because of the broad coverage of our installed base with our
software updates, maintenance and support programs, and the maturity of our enterprise
perimeter security business.

47

---

---



Cost
of revenues

Total
cost of revenues was $30.5 million in 2005, $36.4 million in 2006 and $82.3 million in
2007. Cost of revenues includes cost of product and licenses, cost of software updates,
maintenance and services and amortization of technology.

Our
cost of products and licenses is comprised of the cost of software and hardware
production, manuals, packaging, and license fees paid to third parties. Cost of products
and licenses was $11.0 million in 2005, $13.4 million in 2006, and $30.3 in 2007, and
represented 2% of revenues in 2005, 2% of revenues in 2006, and 4% in 2007. In 2006 and
2007, these amounts include stock-based compensation of $39 thousand and $65 thousand
respectively, resulting from the adoption of SFAS No. 123(R). The increase in 2006 was
mainly due to increased sales of hardware-based products and to an increase in licensing
expenses, which accounted for approximately $3 million. In 2007 the increase was mainly
due to increased sales of hardware based products and increase in licensing expenses,
which accounted for approximately $13.3 million and the inclusion of Protect Data in our
financial results which accounted for approximately $2.8 million. We anticipate that cost
of products and licenses will increase in 2008, in order to support an expected growth in
revenues and increased volume of appliance sales.

Our
cost of software updates, maintenance and services includes the cost of post-sale customer
support, training and consulting. The cost of software updates, maintenance and services
was $14.1 million in 2005, $17.6 million in 2006 and $24.3 in 2007, and represented 2% of
revenues in 2005, and 3% of revenues in both 2006 and 2007. These amounts include
stock-based compensation related to the acquisition of Zone Labs in the amount of $0.4
million in 2005. In 2006 and 2007, these amounts include stock-based compensation of $0.5
million and $0.7 million, respectively, resulting from the adoption of SFAS No. 123(R). In
2006, we experienced an increase in cost of software updates, maintenance and services,
primarily related to an increase in our support organization headcount, from 122 employees
at the end of 2005 to 163 employees at the end of 2006, resulting in an additional
compensation expense of approximately $1.8 million, in order to support the growth in
software updates, maintenance and services revenues. We have continued to grow our support
organization in parallel with the introduction of new support programs at the
international level, and as a result of the inclusion of Protect Data and at the end of
2007, we had 225 employees, of which 18 originated from Protect Data. The continued
increase in number of employees resulted in an additional compensation expense of
approximately $4.8 million in 2007. The inclusion of Protect Data in our results for 2007
increased the cost of software updates, maintenance and services by approximately $2.4
million. We anticipate that cost of software updates, maintenance and services expenses in
2008 will increase due to an expected increase in support personnel as a result of hiring
new employees, and due to an expected increase in payroll and related expenses.

Amortization
of technology related to the acquisition of Zone Labs was $5.4 million in 2005 and 2006.
In 2007, amortization of technology increased to $27.7 with the inclusion of Protect Data
and NFR. The intangible assets added in connection with the acquisitions are amortized
over their useful lives on a straight-line basis, which represents the expected pattern of
usage.

48

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Research
and Development

Research
and development expenses consist primarily of salaries and other related expenses for
research and development personnel, as well as the cost of facilities and depreciation of
capital equipment. Research and development expenses were $50.5 million in 2005, $62.2
million in 2006, and $81.0 million in 2007. These amounts include stock-based compensation
related to the acquisition of Zone Labs in the amount of $1.3 million in 2005. In 2006 and
2007, these amounts include stock-based compensation of $9.4 million and $4.3 million,
respectively, resulting from the adoption of SFAS No. 123(R). Research and development
expenses represented 9% of revenues in 2005 and 11% of revenues in 2006 and in 2007. In
addition to the above-mentioned expenses in 2006, the increase in research and development
expenses was mainly due to an increase in our research and development headcount, from 520
at the end of 2005 to 573 at the end of 2006, resulting in an additional expense of
approximately $3.3 million. In 2007, the research and development expenses was mainly due
to growth in headcount, from 573 at the end of 2006 to 673 at the end of 2007, of which 68
came from Protect Data acquisition, resulting in an additional expense of approximately
$15.5 million. The inclusion of Protect Data in our financial results in 2007 contributed
approximately $9.7 million to expenses. In addition, in 2006, strengthening of the Israeli
Shekel compared to the U.S. dollar contributed approximately $0.5 million to expenses, and
in 2007, the strengthening of the Israeli Shekel, Euro, British Pound and the Swedish
Krona compared to U.S dollar contributed approximately $1.8 million to expenses. The
majority of our developers are located in Israel, where compensation related expenses are
paid in Israeli Shekels; additional development expenses occur in Swedish Krona for our
development center in Sweden, while our expenses are reported in U.S. dollars. Therefore,
changes to the exchange rate between the Israeli Shekel, the Swedish Krona and the U.S.
dollar, have affected and may in the future affect our expense level. We anticipate that
research and development expenses in 2008 will increase due to an expected increase in
research and development personnel as a result of hiring new employees, and due to an
expected increase in payroll and related expenses.

Selling
and Marketing

Selling
and marketing expenses consist primarily of salaries, commissions, advertising, trade
shows, seminars, public relations, travel and other related expenses. Selling and
marketing expenses were $142.3 million in 2005, $157.1 million in 2006, and $217.5 million
in 2007. These amounts include amortization of intangible assets and stock-based
compensation relating to the acquisition of Zone Labs in the amount of $2.1 million in
2005. In 2006, the amount includes amortization of intangible assets of $0.6 million,
relating to the acquisition of Zone Labs, and stock-based compensation of $8.0 million,
resulting from SFAS No. 123(R). In 2007, the amount included amortization of intangible
assets of $12.3 million, relating to the acquisition of Zone Labs, NFR, and Protect Data,
and stock based compensation of $8.8 million, resulting from the adoption of SFAS No.
123(R). Selling and marketing expenses represented 25% of revenues in 2005, 27% of
revenues in 2006, and 30% of revenues in 2007. In 2006, the increase in selling and
marketing expenses was primarily due to an increase in our sales and marketing headcount,
from 536 at the end of 2005 to 580 at the end of 2006, resulting in an additional expense
of approximately $5.6 million. In 2007, the increase in selling and marketing expenses was
primarily due to an increase in our sales and marketing headcount, from 580 at the end of
2006 to 717 at the end of 2007, and the associated increase in travel, entertainment and
facilities expenses. Of those, 134 came from Protect Data, resulting in an increase in
expenses of approximately $27.9 million. In addition, strengthening of the Euro compared
to the U.S. dollar contributed approximately $0.6 million to the 2006 compensation
expenses, and approximately $2.2 million to the 2007 compensation expenses. Our expenses
in Europe, which primarily relate to compensation, travel, facilities and marketing, are
paid in local currencies, while being reported in U.S. dollars. Therefore, changes to the
exchange rates between the Euro and the U.S. dollar have affected, and may in the future
affect, our expense level. We anticipate that selling and marketing expenses will increase
in 2008 due to an expected increase in marketing activities, headcount, payroll and
related expenses.

49

---

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General
and Administrative

General
and administrative expenses consist primarily of salaries and headcount related expenses,
professional fees, insurance costs and other expenses. General and administrative expenses
were $24.2 million in 2005, $43.5 million in 2006, and $53.5 million in 2007. In 2006,
these amounts included acquisition related expenses and stock-based compensation, as a
result of SFAS No. 123(R), in the amount of $19.4 million. In 2007, these amounts included
stock-based compensation as a result of the adoption of SFAS No. 123(R), in the amount of
$20.2 million. General and administrative expenses represented 4% of revenues in 2005 and
8% of revenues in 2006 and in 2007. The increase in general and administrative expenses in
2006, as compared to 2005, as a percentage of revenues, is mainly attributable to the
inclusion of stock-based compensation as a result of the adoption of SFAS No. 123(R), in
the amount of $18.5 million. The increase in general and administrative expense in 2007,
as compared to 2006, is mainly due to Protect Data acquisition, resulting in an increase
in expenses of approximately $5 million and an increase of doubtful account expenses. We
anticipate that general and administrative expenses will increase in 2008 due to an
expected increase in headcount and related expenses.

In-Process
Research and Development

Upon
the acquisition of Protect Data in January 2007, we recorded a $17 million charge for
acquired in-process research and development (IPR&D). This expense was attributable to
projects which have as not yet reached technological feasibility and with no alternative
future use. The value of IPR&D was determined using discounted cash flow approach. The
expected future cash flow attributable to IPR&D was discounted at 17.5%. At the time
of the acquisition of Protect Data, we estimated that these IPR&D projects were 17%
complete and would be completed in 2008.

Upon
the acquisition of NFR in December 2006, we recorded a $1.1 million charge for acquired
IPR&D. This expense was attributable to projects which qualified as not yet having
reached technological feasibility and with no alternative future use. The value of
IPR&D was determined using the discounted cash flow approach. The expected future cash
flow attributable to IPR&D was discounted at 22%. At the time of the acquisition of
NFR, we estimated that these IPR&D projects were 40% complete and would be completed
in 2007.

Stock-Based
Compensation

In
2006, we adopted SFAS No. 123(R), which had a material adverse effect on our results of
operations, although it did not have an impact on our overall financial position or cash
flow. In 2006, we incurred $36.4 million and in 2007, we incurred $34.1 million of
stock-based compensation expense as a result of SFAS No. 123(R). We anticipate that 2008
stock-based compensation expense will be at the same level or higher then in 2007 as a
result of stock-based compensation to employees.

Operating Margin

We
had operating margins of 57% in 2005, 48% in 2006, and 38% in 2007. The decrease in
operating margin between 2005 and 2006 is attributable primarily to the adoption of SFAS
No. 123(R), which contributed 6% to the decline in margin, and to an increase in
operational expenses due to growth in our sales and support headcount, which contributed
3% to the decline in margin. The decrease of 10% in operating margin between 2006 and 2007
is attributable primarily to the acquisition of Protect Data and the inclusion of its
operations in our financial results. Of that decrease, 5% of the decline in margin is
attributable to acquisition-related expenses and the amortization of technology and 5% of
the decline in margin is attributable to the increased level of operating expenses as a
result of the acquisition.

50

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---



We
may experience future fluctuations or declines in operating margins from historical levels
due to several factors, as described above in Item 3  Key Information
under the caption Risk Factors  Risks Relating to Our Business and Our Market
 Our operating margins may decline.

Financial
Income, Net

Net
financial income consists primarily of interest earned on cash equivalents and marketable
securities. Net Financial income was $54.2 million in 2005, $63.6 million in 2006, and
$49.7 million in 2007. As we usually hold debentures until maturity, our current
portfolios yield stems mainly from market interest rates and the yield of securities
at the day of the investment. As most of our investments are in U.S. dollars, our
financial income is heavily dependent on prevailing U.S. interest rates. The increase in
net financial income in 2006 is mainly attributable to a rise in interest rate, while our
portfolio size was $1,650 million at the end of the year. The decrease in net financial
income in 2007 was primarily due to the decrease in our portfolio size resulting from the
approximately $614 million in cash we used to acquire Protect Data and from declining
interest rates.

As
interest rates in the U.S have decreased in the beginning of 2008 and are expected to
further decrease during 2008, we believe that this trend will result in a lower portfolio
yield. See also Item 3, Risk Factors  Risks Related to Our Business and Our
Market  Market performance and other changes may decrease the value of assets.

Taxes
on Income

Our
effective tax rate was 17% in 2005, 18% in 2006, and 15% in 2007. These relatively low tax
rates were mainly achieved as a result of the Approved Enterprise and Privileged
Enterprise status granted to our production facilities in Israel (as described in Item 10
 Additional Information under the caption Israeli taxation, foreign
exchange regulation and investment programs). Our effective tax rate further
decreased in 2007, as a result of the acquisition of Protect Data and an increase in the
tax-exempt income deriving from our Privileged Enterprise. Our effective tax rate may
increase in 2008, as a result of changing in tax regulation.

Additional
details are provided in Item 10  Additional Information under the
caption Israeli taxation, foreign exchange regulation and investment programs
and Item 3  Key Information under the caption The tax benefits
available to us under Israeli law require us to meet several conditions, and may be
terminated or reduced in the future, which would increase our taxes.

# Quarterly Results of
Operations

The
following tables set forth certain unaudited consolidated statements of income data from
Reports of Foreign Private Issuer on Form 6-K we filed during 2006 and 2007, as well as
the percentage of our revenues represented by each item. We prepare our unaudited
consolidated financial statements on the same basis as our audited consolidated financial
statements and include all adjustments (consisting only of normal recurring adjustments)
that we consider necessary for a fair presentation of such information. You should read
this information in conjunction with our consolidated financial statements, including the
related notes, appearing in Item 18  Financial Statements.

51

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---



|                                 | Year Ended December 31, 2006 | Year Ended December 31, 2007
|-------------------------------- | ---------------------------- | ----------------------------
|
|
|
|
|Revenues:                        |                              |                             
|Products and licenses            |                              |                             
|Software updates, maintenance    |                              |                             
|and services                     |                              |                             
|                                 |                              |                             
|Total revenues                   |                              |                             
|                                 |                              |                             
|Operating expenses:              |                              |                             
|Cost of products and licenses    |                              |                             
|Cost of software updates,        |                              |                             
|maintenance and services         |                              |                             
|Amortization of technology       |                              |                             
|                                 |                              |                             
|Total cost of revenues           |                              |                             
|Research and development         |                              |                             
|Selling and marketing            |                              |                             
|General and administrative       |                              |                             
|                                 |                              |                             
|Acquired in-process R&D          |                              |                             
|                                 |                              |                             
|Total operating expenses (*)     |                              |                             
|                                 |                              |                             
|Operating income                 |                              |                             
|Financial income, net            |                              |                             
|                                 |                              |                             
|Income before taxes on income..  |                              |                             
|Taxes on income                  |                              |                             
|                                 |                              |                             
|Net Income                       |                              |                             
|                                 |                              |                             
|                                 |                              |                             
|Basic earnings per share         |                              |                             
|Shares used in computing basic   |                              |                             
|earnings per share               |                              |                             
|Diluted earnings per share       |                              |                             
|Shares used in computing diluted |                              |                             
|earnings per share               |                              |                             
|                                 |                              |                             

---

|*
Including pre-tax charges for amortization of intangible assets and acquisition related
expenses related to the acquisition of Zone Labs, NFR and Protect Data; stock-based
compensation (related to the acquisition of Zone Labs in 2005 and SFAS No. 123(R) in both
2006 and 2007); in the following items:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

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|                              | Year Ended December 31, 2006 | Year Ended December 31, 2007
|----------------------------- | ---------------------------- | ----------------------------
|
|
|
|
|Amortization of intangible    |                              |                             
|assets and acquisition        |                              |                             
|related expenses              |                              |                             
|Selling and marketing         |                              |                             
|General and administrative    |                              |                             
|                              |                              |                             
|Total                         |                              |                             
|                              |                              |                             
|                              |                              |                             
|Stock-based compensation      |                              |                             
|Cost of products and licenses |                              |                             
|Cost of software updates,     |                              |                             
|maintenance and services      |                              |                             
|Research and development      |                              |                             
|Selling and marketing         |                              |                             
|General and administrative    |                              |                             
|                              |                              |                             
|Total                         |                              |                             
|                              |                              |                             

53

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As
a percentage of revenues:

|                              | Year Ended December 31, 2006 | Year Ended December 31, 2007
|----------------------------- | ---------------------------- | ----------------------------
|
|
|
|Revenues:                     |                              |                             
|Products and licenses         |                              |                             
|Software updates, maintenance |                              |                             
|and services                  |                              |                             
|                              |                              |                             
|Total revenues                |                              |                             
|                              |                              |                             
|Operating expenses:           |                              |                             
|Cost of products and licenses |                              |                             
|Cost of software updates,     |                              |                             
|maintenance and services      |                              |                             
|Amortization of technology    |                              |                             
|                              |                              |                             
|Total cost of revenues        |                              |                             
|Research and development      |                              |                             
|Selling and marketing         |                              |                             
|General and administrative    |                              |                             
|Acquired in-process R&D       |                              |                             
|                              |                              |                             
|Total operating expenses      |                              |                             
|                              |                              |                             
|Operating income              |                              |                             
|Financial income, net         |                              |                             
|                              |                              |                             
|Income before taxes on income |                              |                             
|Taxes on income               |                              |                             
|                              |                              |                             
|Net Income                    |                              |                             
|                              |                              |                             
|                              |                              |                             

Our
future revenues and operating results are uncertain and may fluctuate from quarter to
quarter and from year to year due to several factors, as described above in Item 3
 Key Information under the caption Risk Factors  Risks Relating to
Our Business and Our Market  Our quarterly operating results are likely to
fluctuate, which could cause us to miss expectations about these results and cause the
trading price of our ordinary shares to decline.

Historically,
our revenues have reflected seasonal fluctuations related to the slowdown in spending
activities for the third quarter, and the increased activity related to the year-end
purchasing cycles of many users of our products. We believe that we will continue to
encounter quarter-to-quarter seasonality.

Our
expense levels are based, in part, on expectations as to future revenues. If our revenue
levels are below expectations, our operating results are likely to be adversely affected,
since most of our expenses are not variable. As a result, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to the above, it is likely that in
some future quarters, our operating results may be below the expectations of public market
analysts and investors. In this event, the price of our ordinary shares would likely
decline significantly.

# Adoption of New
Accounting Standards

In
September 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the
tax position taken or expected to be taken in a tax return by determining if the weight of
available evidence indicates that it is more likely than not that, on an evaluation of the
technical merits, the tax position will be sustained on audit, including resolution of any
related appeals or litigation processes. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely to be realized upon ultimate settlement.
This interpretation is effective for fiscal years beginning after December 15, 2006. The
adoption of FIN 48, on January 1, 2007, did not result in a change to our retained
earning. The total amount of gross unrecognized tax benefits as of January 1, 2007 and
December 31, 2007, were $70.5 million and $78.5 million, respectively.

54

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# New Accounting
Pronouncements

In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS No. 157). This Standard
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are effective for financial statement issued for
fiscal years beginning on January 1, 2008. The FASB issues a FASB Staff Position
(FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets
and nonfinancial liabilities, except for those items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. We are not expecting the
adoption will have material impact on our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other items at
fair value. The standard requires that unrealized gains and losses on items for which the
fair value option has been elected be reported in earnings. The provisions of
SFAS No. 159 are effective for financial statement issued for fiscal years
beginning on January 1, 2008. We are not expect the adoption will have material
impact on our consolidated financial statements

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. We are currently evaluating the
potential impact, if any, of the adoption of SFAS 141R on our consolidated results of
operations and financial condition.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". SFAS
No. 160 establishes accounting and reporting standards that require that the
ownership interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parents equity; the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly identified
and presented on the face of the consolidated statement of income; and changes in a
parents ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. We are not expecting that the adoption of SFAS No. 160 will have
significant impact on our consolidated financial statement.

55

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# Liquidity and Capital
Resources

In
2007, we have financed our operations through cash generated from operations. Our total
cash and cash equivalents, short-term investments, and long-term interest bearing
investments, were $1,649.9 million as of December 31, 2006, and $1,241.5 million as of
December 31, 2007. Our cash and cash equivalents and short-term investments were $1,091.0
million as of December 31, 2006, and $842.0 million as of December 31, 2007. Our long-term
interest bearing investments were $558.9 million as of December 31, 2006, and $399.5
million as of December 31, 2007. At the end of 2002, we established a wholly owned
subsidiary in Singapore that serves as a vehicle for our international investments and to
manage our financial assets. This subsidiary currently holds the majority of our
investments. We generated net cash from operations of $358 million in 2005, $367.5 million
in 2006, and $375 million in 2007. Net cash from operations for 2005 consisted primarily
of net income adjusted for non cash activity, plus an increase in deferred revenue, offset
by an increase in trade receivables, net, and a decrease in employee and payroll accruals.
Net cash from operations for 2006 consisted primarily of net income adjusted for non-cash
activity, including stock-based compensation expenses, plus an increase in deferred
revenue, offset by an increase in trade receivables, net. Net cash from operations for
2007 consisted primarily of net income adjusted for non-cash activity, including
in-process research and development, stock-based compensation expenses, amortization of
intangible assets, plus an increase in deferred revenue, offset by a decrease in accrued
expenses and other liabilities and trade payables and an increase in trade receivables,
net.

Net
cash provided by (used in) investing activities was $(39.9) million in 2005, $236.5
million in 2006, and $(206.5) million in 2007. In 2005, net cash used in investing
activities consisted primarily of investments in marketable securities offset by proceeds
from marketable securities. In 2006, net cash provided by investing activities consisted
primarily of proceeds from marketable securities offset by investments in marketable
securities, the purchase of an office building in Israel, and net cash paid in conjunction
with the acquisition of NFR. In 2007, net cash used in investing activities consisted
primarily of net cash paid in conjunction with the acquisition of Protect Data,
investments in marketable securities and renovations to our office building in Israel
offset by proceeds from marketable securities. Our capital expenditures amounted to $4.9
million in 2005, $44.9 million in 2006 and $16.7 million in 2007. Our capital expenditures
for 2005 consisted primarily of computer equipment and software for our research and
development and technical services organizations efforts; as well as increasing
infrastructure to enable operation expansion. In 2006, in addition to capital expenditures
specified above, we purchased an office building in Israel that was occupied in May 2007
for a total amount of $35.25 million. Additional payments in 2006 for taxes related to the
purchase and for the building renovation totaled $3.58 million. In 2007, our capital
expenditures consisted primarily of renovation of our office building in Israel for total
of $7.04 million, computer equipment and software for our research and development and
technical services organizations efforts, as well as an increasing infrastructure to
enable operation expansions.

Net
cash used in financing activities was approximately $182.0 million in 2005, $383.1 million
in 2006, and $178.3 million in 2007. In 2005, 2006 and 2007, net cash used in financing
activities was attributed primarily to the purchase of treasury shares. Our board of
directors approved $1.2 billion in the form of four programs to repurchase ordinary
shares. Each of the first three programs authorized the repurchase of up to $200 million,
and the fourth program authorized the repurchase of up to $600 million. The first program
was announced on October 28, 2003, and ended on August 24, 2004. The second program was
announced on October 28, 2004, and ended on May 31, 2005. The third program was announced
on July 25, 2005, and ended on May 18, 2006. The fourth program was announced on May 22,
2006, and is still in effect. Under the repurchase programs we may purchase our ordinary
shares from time to time, depending on market conditions, share price, trading volume, and
other factors. We fund the share purchases from available working capital. The repurchase
programs have no time limit and may be suspended from time to time or discontinued. In
2005, we purchased a total of 10.6 million shares at a total cost of $236.9 million, at an
average price of $22.3 per share. In 2006, we purchased a total of 23.2 million shares at
a total cost of $435.5 million, at an average price of $18.7 per share. In 2007, we
purchased a total of 9.0 million shares at a total cost of $209.8 million, at an average
price of $23.3 per share. Since the first repurchase program was implemented, through the
end of 2007, we purchased a total of 54.8 million shares for a total cost of $1,126.8
million, at an average price of $20.6 per share.

56

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Our
securities are classified as available-for-sale. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of tax, reported in other
comprehensive income. Amortization of premium, discount and interest is recorded in our
statements of income.

Our
principal sources of liquidity consist of our cash and cash equivalents and marketable
securities (which aggregated $1,241.5 million as of December 31, 2007), our cash flow from
operations, and our net financial income. We believe that these sources of liquidity will
be sufficient to satisfy our capital requirements for the foreseeable future.

We
have funded the acquisition of NFR in December 2006 from our operating cash flow.

We funded
the acquisition of Protect Data in 2007 for approximately $614 million from our cash and
cash equivalents balances as well as our marketable securities portfolio. We funded
roughly 62% of the acquisition price with our money markets funds balances, and the
remainder was funded by selling a small portion of our marketable securities portfolio.

# Research and
Development, Patents and Licenses, etc.

Additional
details are provided in this Item 5, under the caption Results of operations.

# Trend Information

Additional details
are provided in this Item 5, under the caption Results of operations.

# Off-Balance Sheet
Arrangements

We
are not a party to any off-balance sheet arrangements. In addition, we have no
unconsolidated special purpose financing or partnership entities that are likely to create
contingent obligations.

57

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# Tabular Disclosure of
Contractual Obligations

The
following table summarizes our material contractual obligations as of December 31, 2007:

|                                | Payments due by period
|------------------------------- | ----------------------
|
|
|
|
|Operating lease obligations     |                       
|Uncertain income tax position * |                       
|Amount due to shareholders in   |                       
|connection with Protect Data's  |                       
|acquisition                     |                       
|Severance pay**                 |                       
|                                |                       
|Total                           |                       
|                                |                       
|                                |                       

---

|* | Uncertain
income tax position under FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (FIN 48) are due upon settlement and we
are unable to reasonably estimate the ultimate amount or timing of settlement. See Note
10a of the Combined Notes to Consolidated Financial Statements for further information
regarding the Companys liability under FIN 48.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Severance
pay relates to accrued severance obligations to our Israeli employees as required under
Israeli labor law. These obligations are payable only upon termination, retirement or
death of the respective employee and there is no obligation, for funds deposited prior to
2007, if the employee voluntarily resigns. Of this amount, only $5.1 million is unfunded.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

58

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|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------

# Directors and Senior
Management

Our
directors and executive officers as of December 31, 2007, were as follows:

|Name               | Position                | Independent
Director (1) | Outside
Director (2) | Member of
Audit
Committee | Member of
Compensation
Committee | Member of
Nominating
Committee
|------------------ | ----------------------- | ------------------------ | -------------------- | ------------------------- | -------------------------------- | ------------------------------
|
|
|
|
|Gil Shwed          | Chief Executive Officer |                          |                      |                           |                                  |                               
|                   | and Chairman of the     |                          |                      |                           |                                  |                               
|                   | Board                   |                          |                      |                           |                                  |                               
|Marius Nacht       | Vice Chairman of the    |                          |                      |                           |                                  |                               
|                   | Board                   |                          |                      |                           |                                  |                               
|Jerry Ungerman     | Vice Chairman of the    |                          |                      |                           |                                  |                               
|                   | Board                   |                          |                      |                           |                                  |                               
|Eyal Desheh        | Executive Vice          |                          |                      |                           |                                  |                               
|                   | President and Chief     |                          |                      |                           |                                  |                               
|                   | Financial Officer       |                          |                      |                           |                                  |                               
|Yoav Chelouche (3) | Director                | P                        | P                    | P                         |                                  |                               
|Irwin Federman (3) | Director                | P                        | P                    | P                         | P                                | P                             
|Guy Gecht          | Director                | P                        | P                    | P                         | P                                |                               
|Dan Propper        | Director                | P                        |                      |                           |                                  |                               
|Ray Rothrock       | Director                | P                        | P                    | P                         | P                                | P                             
|David Rubner       | Director                | P                        |                      | P                         |                                  | P                             
|Tal Shavit         | Director                | P                        |                      |                           |                                  | P                             
|                   |                         |                          |                      |                           |                                  |                               

|(1) | Independent
Director under the applicable rules of the Securities                and Exchange
Commission and the NASDAQ Global Select Market regulations (see
               explanation below).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Outside
Director as required by the Israeli Companies Law (see                explanation
below).
|--- | ---------------------------------------------------------------------------------------------------

|(3) | Financial
expert as required by the Israeli Companies Law and NASDAQ
               requirements with respect to membership on the Audit Committee (see Item
               16A  Audit Committee Financial Expert).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gil
Shwed, one of our founders, is the Chairman of our board of directors, a position he has
held since 1998. He is also our Chief Executive Officer and one of our directors, both
positions he has held since we were incorporated in 1993. Mr. Shwed also served as our
President from our incorporation until 2001. Mr. Shwed has received numerous prestigious
accolades for his individual achievements and industry contributions, including an
honorary Doctor of Science from the Technion  Israel Institute of Technology, the
World Economic Forums Global Leader for Tomorrow for his commitment to public
affairs and leadership in areas beyond immediate professional interests, and the Academy
of Achievements Golden Plate Award for his innovative contribution to business and
technology. Mr. Shwed is a member of the Board of Trustees of Tel Aviv University and the
Chairman of the Board of Trustees of the Youth University of Tel Aviv University.

Marius
Nacht, one of our founders, has served as Vice Chairman of our board of directors since
2001 and continues as a board member. Mr. Nacht has served as one of our directors since
we were incorporated in 1993. From 1999 through 2005 Mr. Nacht served as our Senior Vice
President. Mr. Nacht earned a B.S. cum laude in Physics and Mathematics from the Hebrew
University of Jerusalem in 1983, and an M.S. in Electrical Engineering and Communication
Systems from Tel Aviv University in 1987.

Jerry
Ungerman was appointed Vice Chairman of our board of directors in 2005, and he is
responsible for leading our partner and customer relations. From 2001 until 2005, Mr.
Ungerman served as our President and before that, from 1998 until 2000, he served as our
Executive Vice President. Prior to joining us, Mr. Ungerman accumulated more than 30 years
of high-tech sales, marketing and management experience at Hitachi Data Systems (HDS). He
began his career with IBM after earning a bachelors degree in Business
Administration from the University of Minnesota.

59

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Eyal
Desheh has been our Chief Financial Officer since 2000 and he has also served as our
Executive Vice President since 2005. Mr. Desheh is responsible for our worldwide financial
and operational management, consumer business management and corporate development. From
1996 until 2000, he served as Chief Financial Officer of Scitex Corporation Ltd., a world
leader in digital imaging solutions for graphics communications. Before joining Scitex, he
served in numerous financial management and business development roles, including Vice
President for business development and strategy at Bezeq  The Israeli
Telecommunications Corp., Ltd., Deputy Chief Financial Officer of Teva Pharmaceutical
Industries Ltd., President of H.L. Financial Services Ltd. and Vice President of Bank
Hapoalim New York. Mr. Desheh earned a bachelors degree in Economics and an MBA in
Finance, both from the Hebrew University of Jerusalem. On May 1, 2008, Mr. Desheh will
cease to be a full time employee of our company.

Yoav
Chelouche has served on our board of directors since 2006. Mr. Chelouche has also served
as one of our outside directors under the Israeli Companies Law since 2006. Mr. Chelouche
has been Managing Partner of Aviv Venture Capital since August 2000. Prior to joining Aviv
Venture Capital, Mr. Chelouche served as President and Chief Executive Officer of Scitex
Corp., a world leader in digital imaging and printing systems (NASDAQ: SCIX), from
December 1994 until July 2000. From August 1979 until December 1994, Mr. Chelouche
held various managerial positions with Scitex, including VP Strategy and Business
Development, VP Marketing and VP Finance for Europe. Mr. Chelouche is the Chairman of the
Board of Dmatek Ltd., Chairman of the Board of Rosetta Genomics Ltd., and a member of the
board of directors of a number of private companies. He is also Chairman of Taasiyeda, an
Israeli nonprofit organization that promotes the development of leadership and technology
skills in children. Mr. Chelouche earned a B.A. in Economics and Statistics from Tel Aviv
University, and an M.B.A. from INSEAD University in Fontainebleau, France.

Irwin
Federman has served on our board of directors since 1995. Mr. Federman has also served as
one of our outside directors under the Israeli Companies Law since 2000. Mr. Federman has
been a General Partner of U.S. Venture Partners, a venture capital firm, since 1990. Mr.
Federman serves as director of SanDisk Corp., Mellanox Technologies Ltd. and a number of
private companies. Mr. Federman received a B.S. in Economics from Brooklyn College.

Guy
Gecht has served on our board of directors since 2006. Mr. Gecht has also served as one of
our outside directors under the Israeli Companies Law since 2006. Mr. Gecht is the Chief
Executive Officer and Chairman of the Board of Electronics For Imaging, Inc. (EFI), a
leader in digital imaging and print management solutions for commercial and enterprise
printing.  Mr. Gecht has served in this position since January 2000.  From
October 1995 until January 2000, Mr. Gecht held various positions with EFI, including
President of the company. Prior to joining EFI, Mr. Gecht held various software
engineering positions with technology companies.  Mr. Gecht holds a B.S. in Computer
Science and Mathematics from Ben-Gurion University in Israel.

Dan
Propper has served as one of our directors since 2006. Mr. Propper is the Chairman of the
Board of the Osem group, a leading Israeli manufacturer of food products. Mr. Propper
served as the CEO of Osem for 25 years until April 2006. In addition to his role at Osem,
from 1993 until 1999, Mr. Propper served as President of the Manufacturers
Association of Israel, an independent umbrella organization representing industrial
enterprises in Israel, and as Chairman of the Federation of Economic Organizations in
Israel, which unites economic and business organizations that represents all business
sectors in Israel. Mr. Propper has received prestigious accolades for his contributions to
the Israeli industry and economy, including an honorary Doctorate from the Technion 
Israel Institute of Technology in 1999. Mr. Propper serves as a member of the boards of
the First International Bank of Israel, Delta Galil Industries Ltd., Osem Investments
Ltd., and a number of private companies, including Tivall Ltd. and Sabra Salads Ltd.,
subsidiaries of Osem. Mr. Propper is also a member of the board of the Technion, the
Weizmann Institute of Science and Ben-Gurion University in Israel, and of the executive
committee of Tel Aviv University. Mr. Propper earned a B.Sc. summa cum laudein
Chemical Engineering and Food Technology from the Technion.

60

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Ray
Rothrock has served on our board of directors since 1995. Mr. Rothrock has also served as
one of our outside directors under the Israeli Companies Law since 2000. Mr. Rothrock is
Managing General Partner of Venrock Associates, a venture capital firm, where he has been
a member since 1988 and a general partner since 1995. Mr. Rothrock is also a director of a
number of private companies. Mr. Rothrock received a B.S. in Engineering from Texas
A&M University, an M.S. from the Massachusetts Institute of Technology, and an M.B.A.
from the Harvard Business School.

David
Rubner has served on our board of directors since 1999. Mr. Rubner is Chairman and Chief
Executive Officer of Rubner Technology Ventures Ltd., a venture capital firm, and is a
general partner in Hyperion Israel Advisors Ltd., a venture capital fund. Prior to
starting Rubner Technology Ventures, Mr. Rubner served as President and Chief Executive
Officer of ECI Telecommunications Ltd. Prior to this appointment, he held various
management positions in ECI Telecom. Mr. Rubner serves on the boards of directors of Elbit
Imaging Ltd., Messaging International Ltd., and a number of private companies. Mr. Rubner
is also a member of the Board of Trustees of Bar-Ilan University and Shaare Zedek
hospital, and chairman of the Petach-Tikva Foundation. Mr. Rubner holds a B.S. in
engineering from Queen Mary College, University of London; and an M.S. in Electrical
Engineering from Carnegie Mellon University; and he was a recipient of the Industry Prize
in 1995.

Dr.
          Tal Shavit has served on our board of directors since 2000. Dr. Shavit is an
          organizational consultant specializing in international collaboration between
          Israeli and American companies, consulting in the management of cultural
          differences in order to forge effective collaboration. Her work with leading
          management teams includes a defining of organizational culture as the engine of
          the companys activities. She consults to companies undergoing structural
          change with emphasis on organizational growth through effective mergers and
          acquisitions and a redefining of management roles in order to meet market
          changes.

Of
the individuals mentioned above, only Gil Shwed and Marius Nacht owned more than one
percent of our outstanding shares as of December 31, 2007. Additional details are provided
in this Item 6, under the caption Share ownership and in Item 7 
Major Shareholders and Related Party Transactions.

Some
of our directors are board members of multiple companies, some of which may be technology
companies. The board of directors has determined that there are no current conflicts of
interest with respect to any of our directors.

The
term of each director, other than our outside directors (as described below), will expire
at our 2008 annual meeting of shareholders. The terms of our outside directors will expire
in 2008 and 2009, as described below.

Compensation
of directors and officers

The
total direct cash compensation that we accrued for our directors and executive officers as
a group was approximately $2.1 million for the year ended December 31, 2006, and
approximately $2.0 million for the year ended December 31, 2007. This does not include
amounts we expensed for business travel, professional and business association dues, and
other business expenses reimbursed to officers. We do not have any agreements with our
directors who are also officers that provide for benefits upon termination of employment,
except for severance payments mandated by Israeli law for all employees employed in
Israel. In addition, only directors who are not officers receive compensation for serving
as directors.

61

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From
time to time we grant options and awards under our stock option and equity incentive plans
(described below) to our executive officers and directors. Option grants to directors who
are not officers are made pursuant to the automatic option grant program under these
plans, while option and award grants to directors who are officers are made only with
audit committee, board of directors and shareholder approval.

Our
non-employee directors receive an automatic option grant under the 2005 U.S. Plan or the
2005 Israel Plan (but not both), and are also eligible for discretionary awards under the
plans. Currently, automatic grants under the 2005 U.S. Plan is made primarily to
non-employee directors who are citizens or residents of the United States or other
countries other than Israel, and automatic grants under the 2005 Israel Plan is made
primarily to non-employee directors who are citizens or residents of Israel.

Each
non-employee director who is first elected or appointed to the board of directors is
granted an option to purchase 50,000 ordinary shares on the date of the initial election
or appointment, vesting in equal annual installments over a four-year period. On the date
of each annual general meeting of shareholders, each non-employee director who is to
continue to serve as a non-employee director after the annual meeting is granted an option
to purchase an additional 25,000 ordinary shares, of which 50% vest six months after the
grant date, 25% vest nine months after the grant date, and another 25% vest a year after
the grant date, provided that the director has served as a non-employee director for at
least six months prior to the date of the annual meeting. The directors in office
immediately prior to the date of initial appointment or election, or of the annual
meeting, as applicable, may determine to reduce the initial or annual grant to all
non-employee directors or specific non-employee directors.

All
options to directors are granted at an exercise price equal to 100% of the closing price
of the ordinary shares on the NASDAQ Global Select Market on the date of grant.

As
of December 31, 2007, our executive officers and directors held options to purchase an
aggregate of approximately 20.9 million shares and held 45 thousands restricted stock
units under our stock option and equity incentive plans. The exercise prices of these
options range between $13.00 and $79.79, and their expiration dates range between July
2008 and September 2014. During 2007, we granted our executive officers and directors
options to purchase an aggregate of approximately 2.2 million shares and 21 thousands
restricted stock units under our stock option and equity incentive plans. The exercise
price of these options is $23.65, and their expiration date is September 3, 2014. Other
than as specified in the share ownership table under the caption Share
ownership below, none of our directors and officers holds more than 1% of our
outstanding shares.

# Board Practices

Our
board of directors currently consists of ten members. Under our articles of association,
the board is to consist of between six and twelve members. Each director (other than an
outside director, as described below) is elected to serve until the next annual general
meeting of shareholders and until his or her successor has been elected. Each officer is
elected by the board of directors and serves at the discretion of the board. All of our
officers and directors, other than non-employee directors, devote substantially all of
their working time to our business. There are no family relationships among any of our
directors, officers, or key employees.

Our
articles of association provide that any director may, by written notice to us, appoint
another person to serve as an alternate director or may cancel the appointment of an
alternate director. Any person eligible to serve as a director, other than a person who is
already a director or an alternate director, may act as an alternate director. The term of
appointment of an alternate director may be for one meeting of the board, for a specified
period of time, a specified meeting or action of the board or until notice is given of the
cancellation of the appointment. No director has appointed, and, to our knowledge, no
director intends to appoint, any other person as an alternate director.

62

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Outside
and independent directors

Outside
directors. In accordance with the Israeli Companies Law and the relevant regulations,
we must have at least two outside directors who meet the Israeli statutory requirements of
independence. An outside director serves for a term of three years, which may be extended
for additional three-year terms. An outside director can be removed from office only under
very limited circumstances. All of the outside directors must serve on the companys
audit committee, and at least one outside director must serve on each committee of the
board of directors. As of December 31, 2007, Yoav Chelouche, Irwin Federman, Guy Gecht and
Ray Rothrock are our outside directors under the Israeli Companies Law. Irwin
Federmans and Ray Rothrocks third term of office will expire in 2008. Yoav
Chelouches and Guy Gechts first term of office will expire in 2009.

Independent
directors. The Sarbanes-Oxley Act of 2002, as well as related rules subsequently
implemented by the Securities and Exchange Commission and the NASDAQ Global Select Market,
requires issuers to comply with various corporate governance practices. Under the rules
applicable to us as a foreign private issuer, we are required to have a majority of
independent directors within the meaning of the applicable NASDAQ regulations. Our board
of directors complies with these requirements by including a majority of members who are
independent directors within the meaning of the applicable NASDAQ regulations. As of
December 31, 2007, Yoav Chelouche, Irwin Federman, Guy Gecht, Dan Propper, Ray Rothrock,
David Rubner and Tal Shavit are our independent directors under the applicable NASDAQ
regulations. Our independent directors have regularly held meetings at which only
independent directors are present.

Committees
of the board of directors

Our
articles of association provide that the board of directors may delegate all of its powers
to committees of the board as it deems appropriate, subject to the provisions of Israeli
law. Our board of directors has established an audit committee, compensation committee,
and nominating committee.

Audit
committee. Under the Israeli Companies Law, the board of directors of any public
company must establish an audit committee. The audit committee must consist of at least
three directors and must include all of the outside directors. The audit committee may not
include the chairman of the board, any director whom we employ or who provides services to
us on a regular basis, a controlling shareholder, or certain relatives of a controlling
shareholder. In addition, the NASDAQ regulations also require us to maintain an audit
committee consisting of at least three directors, all of whom must be independent under
the NASDAQ regulations. Irwin Federman is the chairman of the audit committee. Yoav
Chelouche, Guy Gecht, Ray Rothrock and David Rubner serve as the other members of our
audit committee. The audit committee has adopted an audit committee charter as required by
the NASDAQ regulations.

The
audit committees duties include providing assistance to the board of directors in
fulfilling its legal and fiduciary obligations in matters involving our accounting,
auditing, financial reporting, internal control and legal compliance functions. In this
respect the audit committee approves the services performed by our independent accountants
and reviews their reports regarding our accounting practices and systems of internal
accounting controls. The audit committee also oversees the audits conducted by our
independent accountants and takes those actions, as it deems necessary to satisfy itself
that the accountants are independent of management. Under the Israeli Companies Law, the
audit committee also is required to monitor whether there are any deficiencies in the
administration of our company, including by consulting with the internal auditor, and to
review and approve related party transactions.

63

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Compensation
committee. Our compensation committee consists of Irwin Federman, Guy Gecht, and Ray
Rothrock. The compensation committees duties include making recommendations to the
board of directors regarding the issuance of employee equity incentives under our equity
incentive plans, and determining salaries and bonuses for our executive officers and
incentives for our other employees. The compensation committee has adopted a compensation
committee charter.

Nominating
committee. The nominating committee identifies prospective board candidates,
recommends nominees for election to our board of directors, develops and recommends board
member selection criteria, considers committee member qualification, supervises the
selection and composition of committees of our board of directors, and provides oversight
in the evaluation of our board of directors and each committee. Our nominating committee
consists of Irwin Federman, Ray Rothrock, David Rubner, and Tal Shavit. The nominating
committee has adopted a nominating committee charter.

# Employees

As
of December 31, 2007, we had 1,901 employees.

Over
the past three years, the number of our employees by function was as follows:

| |                                                             | As of December 31,
| | ----------------------------------------------------------- | ------------------
|
|
|
|
| | Research, development, and quality assurance                |                   
| | Marketing, sales, and business development                  |                   
| | Customer support                                            |                   
| | Information systems, administration, finance and operations |                   
| |                                                             |                   
| | Total                                                       |                   
| |                                                             |                   
| |                                                             |                   

From
time to time, we also engage a limited number of consultants, subcontractors, and
temporary help. As of December 31, 2007, we had 31 people of this nature.

Over
the past three years, the number of our employees by geographic area was as follows:

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

We
are subject to Israeli labor laws and regulations with respect to our Israeli employees.
The Israeli labor laws differ materially from U.S. labor laws and, in some cases, impose
material obligations on us (such as severance pay and mandatory cost of living increases).
We are also subject to the labor laws and regulations of other jurisdictions in the world
where we have employees.

64

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# Share Ownership

The
following table shows information regarding beneficial ownership by our directors and
executive officers as of December 31, 2007. Beneficial ownership is determined in
accordance with rules of the Securities and Exchange Commission.

All
information with respect to the beneficial ownership of any principal shareholder has been
furnished by such shareholder and, unless otherwise indicated below, we believe that
persons named in the table have sole voting and sole investment power with respect to all
of the shares shown as beneficially owned, subject to community property laws, where
applicable. The shares beneficially owned by the directors include the shares owned by
their family members to which such directors disclaim beneficial ownership.

The
share numbers and percentages listed below are based on 218,553,498 shares outstanding as
of December 31, 2007.

|Name                       | Number of
shares
beneficially
owned (1) | % of

class of
shares (2) | Title of
securities
covered by the
options | Number of
options (3) | Exercise
price | Date of expiration
|-------------------------- | --------------------------------------- | ------------------------- | ------------------------------------------ | --------------------- | -------------- | ------------------
|
|
|
|
|Gil Shwed                  |                                         |                           |                                            | 33,309,822            |                |                   
|                           |                                         |                           |                                            |                       |                |                   
|Marius Nacht (4)           |                                         |                           |                                            | 20,851,795            |                |                   
|All directors and officers |                                         |                          
|as a group (11 persons     |                                         |                          
|including Messrs. Shwed    |                                         |                          
|and Nacht) (5)             |                                         |                           |                                            | 56,898,812            |                |                   
|                           |                                         |                           |                                            |                       |                |                   
|                           |                                         |                           |                                            |                       |                |                   

---

|(1) | The
number of ordinary shares shown includes shares that each shareholder has
                    the right to acquire pursuant to stock options that are exercisable
within 60                     days after December 31, 2007 (as determined in accordance
with footnote (3)).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | If
a shareholder has the right to acquire shares by exercising stock options (as
                    determined in accordance with footnote (3)), these shares are deemed
outstanding                     for the purpose of computing the percentage owned by the
specific shareholder                     (that is, they are included in both the
numerator and the denominator), but they                     are disregarded for the
purpose of computing the percentage owned by any other                     shareholder.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Number
of options immediately exercisable or exercisable within 60 days from
                    December 31, 2007. The exercise price of some of these options is
greater than                     our current share market price.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In
addition to the amount above, Mr. Nacht is the beneficiary of a trust that
                    holds 4,056,800.
|--- | ------------------------------------------------------------------------------------------------------------------

As
of May 2005, the date on which the trust was established by Mr. Nacht, held 1,000,000
ordinary shares. The trust is irrevocable and the portion of the trust that was deposited
in May 2005 expired in May 2007. In July 2006, Mr. Nacht added 1,000,000 shares to the
trust.   This addition to the trust is irrevocable and is scheduled to expire July
2008. Mr. Nacht is also the beneficiary of a trust that as of November 2006, the date on
which the trust was established by Mr. Nacht, held 3,000,000 ordinary shares. The trust is
irrevocable and is scheduled to expire November 2008. Mr. Nacht does not control the
trusts and has limited access to information concerning activities and holdings of the
trusts. Mr. Nacht disclaims beneficial ownership of the shares held in the trusts.

|(5) | Each
of Messrs. Ungerman, Desheh, Chelouche, Federman, Gecht, Propper, Rothrock,
                    Rubner and Dr. Shavit beneficially owns less than one percent of our
outstanding                     ordinary shares.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

65

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# Equity Incentive Plans

The
following table summarizes our equity incentive plans as of December 31, 2007:

|Plan                       | Share
reserved | Option and
RSUs grants
net * | Outstanding
options and RSUs | Options
outstanding
exercise price | Date of expiration | Options and
RSUs
exercisable
|-------------------------- | -------------- | ---------------------------- | ---------------------------- | ---------------------------------- | ------------------ | ----------------------------
|
|
|
|
|2005 United States Equity  |                |                              |                              |                                    |                    |                             
|Incentive Plan             |                |                              |                              | 24,000,000                         |                    |                             
|2005 Israel Equity         |                |                             
|Incentive Plan             |                |                              |                              | 36,000,000                         |                    |                             
|1996 United States Stock   |                |                             
|Option Plan                |                |                              |                              | 41,609,293                         |                    |                             
|1996 Israel Stock Option   |                |                             
|Plan                       |                |                              |                              | 39,159,206                         |                    |                             
|Zone Labs 1998 Stock       |                |                             
|Option Plan                |                |                              |                              | 2,461,981                          |                    |                             
|Employee Stock Purchase    |                |                             
|Plan                       |                |                              |                              | 6,000,000                          |                    |                             
|Pointsec Stock Option Plan |                |                              |                              | 751,756                            |                    |                             
|                           |                |                              |                              |                                    |                    |                             

*
Grants net is calculated by subtracting options expired or forfeited.

In
2005, we adopted two new equity incentive plans: our 2005 United States Equity Incentive
Plan, which we refer to as the 2005 U.S. Plan; and our 2005 Israel Equity Incentive Plan,
which we refer to as the 2005 Israel Plan. Both of these plans are in effect until 2015.
Following ratification of the new plans by our shareholders in September 2005, we stopped
issuing options under our 1996 United States Stock Option Plan and 1996 Israel Stock
Option Plan.

Number
of ordinary shares reserved for future grants under 2005 plans

We
initially reserved a total of 50,000,000 ordinary shares for future grants under the 2005
U.S. plan and the 2005 Israel plan (specifically, 20,000,000 ordinary shares under the
2005 U.S. Plan, and 30,000,000 ordinary shares under the 2005 Israel Plan). These are in
addition to the shares issuable upon the exercise of options outstanding under our 1996
United States Stock Option Plan, our 1996 Israel Stock Option Plan, the Zone Labs 1998
Stock Option Plan, our Employee Stock Purchase Plan, and Pointsec Mobile Technologies
2003, 2005 and 2006 Stock Option Plans, which are described in greater detail below. Since
January 2006, this number increases automatically by an aggregate of 5,000,000 shares a
year for both plans combined, of which 2,000,000 ordinary shares are added each January
1st to the number of shares reserved under the 2005 U.S. Plan, and 3,000,000
ordinary shares are added each January 1st to the number of shares reserved
under the 2005 Israel Plan.

Any
ordinary shares subject to awards under our 2005 U.S. Plan or 2005 Israel Plan are
deducted from the number of ordinary shares reserved for issuance under that plan. If any
ordinary shares are issued as Restricted Stock, Restricted Stock Units (RSUs), or
Performance Shares under our 2005 U.S. Plan or 2005 Israel Plan, and they have a per share
or unit purchase price lower than 100% of the fair market value on the date of grant,
twice this number of ordinary shares is deducted from the number of ordinary shares
reserved for issuance under that plan. Shares that are issued pursuant to any award under
our 2005 U.S. Plan or 2005 Israel Plan are not returned to the plan. However, if an award
under our 2005 U.S. Plan or 2005 Israel Plan expires or becomes unexercisable without
having been exercised in full, or is forfeited, or repurchased by us at its original price
due to the failure to vest, the shares that were subject to the award, become available
for future grant or sale under that plan.

66

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As
of December 31, 2007, we had granted options to purchase an aggregate of 6,668,690
ordinary shares under the 2005 U.S. Plan and the 2005 Israel Plan combined, of which
options to purchase 5,464,678 ordinary shares were outstanding on that date. The option
exercise prices range between $16.8 and $23.65 per share. As of December 31, 2007, we had
granted an aggregate of 1,630,528 RSUs under the 2005 U.S. Plan and the 2005 Israel Plan
combined, of which 1,232,164 RSUs were outstanding on that date.

Administration

Both
the 2005 U.S. Plan and the 2005 Israel Plan are administered by our board of directors or
a committee of our board. The compensation committee of our board of directors currently
operates as the administrator of the plans. The administrator has full power to determine
the persons to whom awards shall be granted and the other terms of the awards granted,
including (a) the number of shares subject to each award, (b) the duration of the related
award agreement, (c) the time, manner and form of payment upon the exercise of an award,
and (d) other terms and provisions governing the awards. The administrator also
establishes the vesting schedule of awards that are granted.

2005
United States Equity Incentive Plan

Awards. The 2005 U.S. Plan provides for the following kinds of awards, which we
          refer to generically as awards: (i) Incentive Stock Options (ISOs), (ii)
          Non-statutory Stock Options (NSOs), (iii) Restricted Stock, (iv) Restricted
          Stock Units (RSUs), (v) Performance Shares, (vi) Performance Units, and (vii)
          Deferred Stock Units. All of these awards can vest based on time or performance
          milestones.

Granting
of options, price and duration.Our 2005 U.S. Plan provides that each option
will expire on the date stated in the notice of grant, which will not be more than seven
years from its date of grant (or five years, in the case of an ISO granted to a person who
on the date of grant owns 10% or more of our voting power). The exercise price of an
option cannot be less than 100% of the fair market value per share on the date of grant
(or 110% of the fair market value, in the case of an ISO granted to a person who on the
date of grant owns 10% or more of our voting power). The administrator will fix the period
within which the award can be exercised and the exercise price. No award can vest until at
least six months after the grant date.

Granting
of awards other than options and price.The administrator can determine the
conditions that must be satisfied, which typically will be based principally or solely on
the recipients continuing to provide services to us, but conditions may also include
a performance-based component. We can issue ordinary shares under grants of Restricted
Stock, RSUs, Performance Shares and Performance Units upon payment of their nominal value.
No award can vest until at least one year after the grant date. Deferred Stock Units
consist of Restricted Stock, RSUs, Performance Shares or Performance Units that the
administrator permits to be paid out in installments or on a deferred basis.

2005
Israel Equity Incentive Plan

Awards. The 2005 Israel Plan provides for the following kinds of awards, which we
          refer to generically as awards: (i) Approved 102 Options/Shares,
          which are grants to employees and officers that are eligible for favorable tax
          treatment in Israel and which must be held by a trustee for a minimum period;
          (ii) Non-approved 102 Options/Shares, which are grants of options or
          shares that are not eligible for favorable tax treatment in Israel and which may
          be held, directly by the participants; (iii) Restricted Stock; (iv) RSUs; (v)
          Performance Shares; (vi) Performance Units; and (vii) Deferred Stock Units. All
          of these awards can vest based on time or performance milestones, or through
          other subsidiaries.

67

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Trustee. A trustee designated by our board of directors and approved by the Israel
          Tax Authority must hold any shares allocated or issued upon exercise of Approved
          102 Options or other shares subsequently received following any realization of
          rights, including bonus shares (stock dividends), for at least the period of
          time specified by Section 102 of Israels Income Tax Ordinance.

Granting
of options, price and duration.Our 2005 Israel Plan provides that each option
will expire on the date stated in the option agreement, which will not be more than seven
years from its date of grant. The exercise price of an option cannot be less than 100% of
the fair market value per share on the date of grant. The administrator will fix the
period within which the award can be exercised and the exercise price. No option can vest
until at least six months after the grant date.

Granting
of awards, other than options, and price.The administrator can determine the
conditions that must be satisfied, which typically will be based principally or solely on
the recipients continuing to provide services to us, but conditions may also include
a performance-based component. We can issue ordinary shares under grants of Restricted
Stock, RSUs, Performance Shares and Performance Units upon payment of their nominal value.
No award can vest until at least one year after the grant date. Deferred Stock Units
consist of Restricted Stock, RSUs, Performance Shares, or Performance Units that the
administrator permits to be paid out in installments or on a deferred basis.

Change
of control arrangements. Upon a change of control of us, if the successor entity
refuses to assume or provide substitute awards, then the administrator of the plans, which
is currently the compensation committee of our board of directors, can either terminate
all unvested awards or accelerate the vesting period of any award under our 2005 U.S. Plan
and our 2005 Israel Plan. The administrator also has the authority to accelerate the
vesting of the ordinary shares subject to outstanding awards held by our directors,
officers, and employees in connection with the subsequent termination of some
officers employment following a change of control event.

1996
United States Stock Option Plan and 1996 Israel Stock Option Plan

As
of December 31, 2007, we had outstanding options to acquire an aggregate of 18,166,849
ordinary shares under our 1996 United States Stock Option Plan and 1996 Israel Stock
Option Plan combined. The option exercise prices range between $13.00 and $79.79 per
share. We do not issue any more stock options under our 1996 United States Stock Option
Plan and 1996 Israel Stock Option Plan.

Zone
Labs 1998 Stock Option Plan

In
connection with our acquisition of Zone Labs in March 2004, we assumed all of the
outstanding Zone Labs stock options under the Zone Labs 1998 Stock Option Plan, which were
converted into options to purchase approximately 2.8 million of our ordinary shares. As of
December 31, 2007, 2,374,784 ordinary shares had been issued under the Zone Labs 1998
Stock Option Plan, and options to purchase 87,197 ordinary shares were outstanding on that
date. The stock options generally have terms of between five and ten years and generally
vest over a four-year period. The option exercise prices range between $1.66 and $6.08 per
share. No further stock options can be granted under the Zone Labs 1998 Stock Option Plan.

68

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Protect
Data Stock Option Plans

In
connection with our acquisition of Protect Data in 2007, we assumed all of the outstanding
options to purchase shares of Protect Data issued under the Pointsec Mobile Technologies
2003, 2005 and 2006 Stock Option Plans, which were converted into options to purchase
751,769 of our ordinary shares. As of December 31, 2007, we had outstanding options to
acquire an aggregate of 437,559 ordinary shares under these plans combined.

The
options generally have terms of between five and ten years and they generally vest over a
three-year period. The option exercise prices range between $2.78 and $19.45 per
share. No further stock options can be granted under these plans.

Employee
Stock Purchase Plan

In
1996, we adopted an Employee Stock Purchase Plan, which we refer to as the
ESPP. The ESPP permits our full-time employees (and full-time employees of
some of our subsidiaries) to purchase ordinary shares through payroll deductions. Under
the ESPP, 6,000,000 ordinary shares were authorized for issuance. As of January 31, 2008,
2,735,358 ordinary shares had been issued under the ESPP. The ESPP has six-month offering
periods, with purchases occurring in January and July. The compensation committee of our
board of directors administers the ESPP. According to our shareholders resolution at
our annual meeting of shareholders, held in September 2005, the ESPP will terminate on the
earliest of (i) the last business day in January 2016, (ii) when no more shares are
available for issuance under the ESPP, or (iii) when all purchase rights under the ESPP
are granted or exercised in connection with a Corporate Transaction as defined
in the ESPP.

An
eligible employee can purchase ordinary shares at a price of 85% of the fair market value
of the ordinary shares at the beginning of the six-month offering period (or 85% of the
fair market value of the ordinary shares on the semi-annual purchase date, if that is
lower). Each eligible employee can elect to purchase ordinary shares under the ESPP in an
amount of up to 15% of the employees compensation, but not more than 1,250 shares
per participant on any purchase date. Employees may terminate their participation in the
ESPP at any time during the offering period, and participation ends automatically on
termination of employment with us. Each outstanding purchase right will be exercised
immediately prior to our merger or consolidation with another company. Our board of
directors may amend or terminate the ESPP immediately after the close of any purchase
date. The board may not, unless shareholders approve, materially increase the number of
ordinary shares available for issuance, reduce the purchase price payable for ordinary
shares, or materially modify the eligibility requirements for participation or the
benefits available to participants.

69

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|ITEM 7. |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- |  | -------------------------------------------------

The
following table shows information as of December 31, 2005, 2006 and 2007, for each person
who, as far as we know, beneficially owned more than 5% of our outstanding ordinary shares
as of December 31, 2007:

|Name of Five Percent Shareholders       | No. of shares
beneficially
held (1) | % of class of
shares (2) | No. of shares
beneficially
held (1) | % of class
of shares
(2) | No. of shares
beneficially
held (1) | % of class
of shares (2)
|--------------------------------------- | ----------------------------------- | ------------------------ | ----------------------------------- | ------------------------ | ----------------------------------- | ------------------------
|
|
|
|
|Franklin Resources, Inc (3)             |                                     |                          |                                     | 27,241,741               |                                     |                         
|Gil Shwed                               |                                     |                          |                                     | 31,114,112               |                                     |                         
|                                        |                                     |                         
|Marius Nacht (4)                        |                                     |                          |                                     | 26,260,811               |                                     |                         
|Genesis Fund Managers, LLP (5)          |                                     |                          |                                     |                          |                                     |                         
|Barclays Global Investors, NA (6)       |                                     |                          |                                     |                          |                                     |                         
|J. & W. Seligman & Co. Incorporated (7) |                                     |                          |                                     |                          |                                     |                         
|                                        |                                     |                          |                                     |                          |                                     |                         

---

|(1) | The amount includes ordinary shares owned by each of the individuals, directly
or indirectly, and options immediately exercisable or that are exercisable
within 60 days from December 31st, of each of the years shown in this table. The
exercise price of some of these options is greater than our current share market
price.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | If a shareholder has the right to acquire shares by exercising stock options
exercisable within 60 days from December 31st, of each of the years shown in
this table, these shares are deemed outstanding for the purpose of computing the
percentage owned by the specific shareholder (that is, they are included in both
the numerator and the denominator), but they are disregarded for the purpose of
computing the percentage owned by any other shareholder.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As of December 31, 2005, 2006 and 2007, based on information contained in a
          Schedule 13G filed with the Securities and Exchange Commission. In the Schedule
          13G filed on February 14, 2006, Franklin Resources, Inc., Charles B. Johnson,
          Rupert H. Johnson, Jr., Templeton Global Advisors Limited, Templeton Investment
          Counsel, LLC, Franklin Templeton Investments Corp., Franklin Templeton
          Investment Management Limited, Franklin Templeton Alternative Strategies, Inc.,
          Templeton Asset Management, Ltd., Franklin Advisers, Inc., Franklin Templeton
          Portfolio Advisors, Inc. and Fiduciary Trust Company disclaim any pecuniary
          interest in any of the securities. In the Schedule 13G filed on February 5,
          2007, Franklin Resources, Inc., Charles B. Johnson, Rupert H. Johnson, Jr.,
          Templeton Global Advisors Limited, Templeton Investment Counsel, LLC, Franklin
          Templeton Investments Corp., Franklin Templeton Investment Management Limited,
          Franklin Templeton Portfolio Advisors, Inc., Templeton Asset Management, Ltd.,
          Franklin Templeton Investments (Asia) Limited, Franklin Templeton Investments
          Australia Limited, Franklin Templeton Investments Japan Limited and Franklin
          Templeton Alternative Strategies, Inc. disclaim any pecuniary interest in any of
          the securities. In the Schedule 13G filed on February 7, 2008, Franklin
          Resources, Inc., Charles B. Johnson, Rupert H. Johnson, Jr., Templeton Global
          Advisors Limited, Templeton Investment Counsel, LLC, Franklin Templeton
          Investments Corp., Franklin Templeton Portfolio Advisors, Inc., Franklin
          Templeton Investments (Asia) Limited, Franklin Templeton Investment Management
          Limited, Franklin Advisors, Inc., Franklin Templeton Investments Australia
          Limited, Templeton Asset Management, Ltd. and Franklin Templeton Investments
          Japan Limited disclaim any pecuniary interest in any of the securities. The
          address for Franklin Resources, Inc. is One Franklin Parkway, San Mateo,
          California 94403.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In addition to the amount above, Mr. Nacht is the beneficiary of a trust that
          holds 4,056,800
|--- | -------------------------------------------------------------------------------------------------------

| | As
of May 2005, the date on which the trust was established by Mr. Nacht, held 1,000,000
ordinary shares. The trust is irrevocable and the portion of the trust that was deposited
in May 2005 expired in May 2007. In July 2006, Mr. Nacht added 1,000,000 shares to the
trust.   This addition to the trust is irrevocable and is scheduled to expire July
2008. Mr. Nacht is also the beneficiary of a trust that as of November 2006, the date on
which the trust was established by Mr. Nacht, held 3,000,000 ordinary shares. The trust is
irrevocable and is scheduled to expire November 2008. Mr. Nacht does not control the
trusts and has limited access to information concerning activities and holdings of the
trusts. Mr. Nacht disclaims beneficial ownership of the shares held in the trusts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(5) | As of December 31, 2006 and 2007, based on information contained in a Schedule
          13G filed with the Securities and Exchange Commission on February 14, 2007 and
          February 13, 2008. In the Schedule 13G filed on February 14, 2007, Genesis Fund
          Managers, LLP reported that it has the power to vote or direct the vote of
          11,459,468 of the 15,329,868 ordinary shares of which it had the power to
          dispose or direct the disposition as of December 31, 2006. In the Schedule 13G
          filed on February 13, 2008, Genesis Fund Managers, LLP reported that it has the
          power to vote or direct the vote of 9,662,342 of the 12,364,268 ordinary shares
          of which it had the power to dispose or direct the disposition as of December
          31, 2007. Based on information available to us, as of December 31, 2005, Genesis
          Fund Managers, LLP did not beneficially own more than 5% of our outstanding
          ordinary shares. The address for Genesis Fund Managers, LLP is Barclays
          Court, Les Echelons, St. Peter Port, Guernsey GY1 6AW, Guernsey, Channel
          Islands.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | As of December 31, 2006 and 2007, based on information contained in a Schedule
          13G filed with the Securities and Exchange Commission on January 23, 2007 and
          February 5, 2008. Based on information available to us, as of December 31, 2005,
          Barclays Global Investors, NA did not beneficially own more than 5% of our
          outstanding ordinary shares. The address for Barclays Global Investors, NA is 45
          Fremont Street, San Francisco, California 94105.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | As of December 31, 2007, based on information contained in a Schedule 13G filed
          with the Securities and Exchange Commission on January 28, 2008. Based on
          information available to us, as of December 31, 2005 and December 31, 2006, J.
          & W. Seligman & Co. Incorporated did not beneficially own more than 5%
          of our outstanding ordinary shares. The address for J. & W. Seligman &
          Co. Incorporated is 100 Park Avenue, New York, New York 10017.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
major shareholders do not have different voting rights from other shareholders with
respect to our ordinary shares.

According
to our transfer agent, as of December 31, 2007, there were 218 holders of record of our
ordinary shares in the United States, representing approximately 62% of our outstanding
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 by brokers or other nominees.

We
are not controlled by another corporation or by any foreign government, directly or
through any other entity. Each of our outstanding ordinary shares has identical rights in
all respects.

As
of December 31, 2006, we had employee and payroll accrual for related parties, for the
years 1999 through 2006, in a total amount of $8.9 million. As of December 31, 2007, this
accrual decreased to a total of $7.9 million, for the years 1999 through 2007.

71

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|ITEM 8. |  | FINANCIAL INFORMATION
|------- |  | ---------------------

Consolidated Financial
Statements

You
can find our financial statements in Item 18  Financial Statements.

Dividend
policy. Out of our retained earnings of $2,298 million as of December 31, 2007,
approximately $797 million are from tax-exempt income because they are attributable to our
facilities status as Approved Enterprises and Privileged Enterprises under the
Investment Law. Our board of directors has currently resolved not to distribute any
dividend from our undistributed tax-exempt income. The undistributed tax-exempt income is
currently expected to be essentially permanent in duration.

Legal Proceedings

Beginning
on August 29, 2003, we received a number of class action complaints filed in the United
States District Court for the Southern District of New York by holders of our ordinary
shares, alleging violations of the United States federal securities laws. On January 14,
2004, the court-appointed lead plaintiffs filed a Consolidated Amended Complaint on behalf
of a putative class of all purchasers of ordinary shares between July 10, 2001 and April
4, 2002. A settlement was approved, without an admission of wrongdoing, in January of 2007
in the amount of $13 million, which was paid by our insurance carrier.

On
November 16, 2004, Etay Bogner, a shareholder and director of SofaWare, filed a motion in
the Tel Aviv District Court asking that the court authorize him to conduct a shareholders
derivative suit against us on behalf of SofaWare. The court granted the motion on April
20, 2006. The derivative suit against us is in the amount of NIS 22.7 million
(approximately $5.9 million as of December 31, 2007). The suit relates to discounts, sales
commissions and royalties that Bogner alleges we owe to SofaWare, with respect to products
that were sold by or through us. On February 14, 2008, the court partially accepted
Bogners claims and ordered that we pay SofaWare a total sum of NIS 13.7 million
(approximately $3.6 million as of December 31, 2007), plus interest. We are currently
reviewing this judgment and our available course of actions.

On
December 14, 2004, Adi Ruppin, a shareholder, director and former employee of SofaWare,
filed an initiating motion against us in the Tel Aviv District Court. The motion alleges
that we are oppressing Ruppin, who is a minority shareholder of SofaWare. Ruppin is asking
the court to compel us to purchase his shares in SofaWare, based upon a valuation to be
determined by an independent expert. Ruppin is also seeking disclosure of information and
documents relating to the business plans of SofaWare and us, and to the inter-company
balances between the two companies. The initiating motion was converted into a regular
claim in late 2006, and we subsequently filed our statement of defense. On February 13,
2007, we filed a motion to stay the proceedings as long as Bogners first suit is
pending, and on January 3, 2008, the court granted our motion. We also filed a motion to
dismiss the claim or to oblige Ruppin to pay regular court fees for the claim, and the
State filed a response in support of our position. The court ordered Ruppin to respond to
the States response. We believe that the claim is without merit and intend to
contest the claim vigorously.

72

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On
November 22, 2005, Bogner filed an initiating motion against us and against SofaWare,
which alleges that Bogner and other shareholders of SofaWare are entitled to exercise veto
rights with respect to certain actions of SofaWare. Bogner also filed a motion to obtain
injunctive relief that would prevent us and SofaWare from taking certain actions. The
court rejected Bogners initiating motion and motion for injunctive relief. On
November 23, 2006, Bogner filed an appeal of the courts decision. The parties
submitted their briefs in this matter and a hearing before the Israeli Supreme Court is
scheduled for July 28, 2008. We believe that the appeal is without merit and intend to
contest it vigorously.

On
December 27, 2007, following an audit of our 2002 corporate tax return, the Israeli Tax
Authority (the ITA) issued an order which identified several matters in which
the ITA disagreed with our positions as it pertains to taxes. Specifically, this includes
our treatment of certain issues relating to cash that is held and managed by our
wholly-owned Singapore subsidiary. The ITA therefore issued an order classifying the
transfer of funds from Check Point to our subsidiary in Singapore as a dividend for
purposes of the Law for the Encouragement of Capital Investments, which would result in a
tax payment on the funds transferred.  The ITA order also contests our position with
respect to taxation of interest earned outside of Israel, the deductibility of employee
stock options and benefits to which we are entitled to under applicable Israeli law
regarding approved enterprise status. The ITA therefore demanded the payment of additional
taxes in the aggregate amount of NIS 963 million, which represents approximately $162
million of additional tax plus an additional $84 million for interest in equivalent USD as
of the end of 2007.

Based
on our review of the ITA order, and on our analysis of our tax positions and applicable
law, we believe that we have meritorious defenses to the ITA order, and we intend to
vigorously contest the order. There can be no assurance, however, that we will
prevail. An unfavorable outcome in our dispute with the ITA regarding the order could
require that we pay the amounts due in such order, in whole or in part.

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|ITEM 9. |  | THE OFFER AND LISTING
|------- |  | ---------------------

Our
ordinary shares are traded publicly on the NASDAQ Global Select Market under the symbol
CHKP.

The
following table lists the high and low prices of the ordinary shares on the NASDAQ Global
Select Market for the periods indicated:

|                       | High | Low
|---------------------- | ---- | ---
|
|
|
|
|Year                   |      |    
|2003                   |      |    
|2004                   |      |    
|2005                   |      |    
|2006                   |      |    
|2007                   |      |    
|                       |      |    
|2006                   |      |    
|First quarter          |      |    
|Second quarter         |      |    
|Third quarter          |      |    
|Fourth quarter         |      |    
|                       |      |    
|2007                   |      |    
|First quarter          |      |    
|Second quarter         |      |    
|Third quarter          |      |    
|Fourth quarter         |      |    
|                       |      |    
|Most recent six months |      |    
|September 2007         |      |    
|October 2007           |      |    
|November 2007          |      |    
|December 2007          |      |    
|January 2008           |      |    
|                       |      |    
|February 2008          |      |    
|                       |      |    

On
February 29, 2008, the last reported sale price of our ordinary shares on the NASDAQ
Global Select Market was $21.92  per share.

|ITEM 10. |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------

We
were incorporated in Israel in July 1993, and we are registered with the Israeli Registrar
of Companies as public company number 52-004282-1.

The
objectives and purposes stated in our articles of association are to engage in any lawful
activity worldwide. We develop market and support a wide range of software and combined
hardware and software products and services for IT security, and offer our customers an
extensive portfolio of network security, data security and management solutions. A broad
range of our network security solutions operate under a unified security architecture,
with central management and enforcement of security policy, and with centralized real-time
security updates. Our products and services are sold to enterprises, service providers,
small and medium-sized businesses, and consumers.

74

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# Articles of Association
and Israeli Companies Law

The
following is a summary of the material provisions of our articles of association and
related provisions of Israeli corporate law. For the complete text of our articles of
association, see Item 19  Exhibits.

Description
of shares

Our
authorized share capital consists of 500,000,000 ordinary shares, NIS 0.01 nominal value;
5,000,000 preferred shares, NIS 0.01 nominal value; and 10 deferred shares, NIS 1 nominal
value. On December 31, 2007, we had 218,553,498 ordinary shares outstanding, and on
January 1, 2007, we had 225,689,619 ordinary shares outstanding. During 2007, we issued
1,885,379 ordinary shares from our treasury account, all pursuant to equity incentive
plans. On December 31, 2007, we held 42,670,472 ordinary shares in our treasury. No
preferred shares are outstanding. We have 1 deferred share issued and outstanding, which
is not entitled to any rights other than the right to receive its nominal value upon our
liquidation.

Description
of ordinary shares

All
of the issued and outstanding ordinary shares are validly issued, fully paid, and
non-assessable. The ordinary shares do not have pre-emptive rights. Our memorandum of
association, our articles of association, and Israeli law do not restrict in any way the
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries that are in a state of war with Israel.

Dividend
and liquidation rights. The holders of our ordinary shares will be entitled to their
proportionate share of any cash dividend, share dividend, or dividend in kind distributed
with respect to our ordinary shares. This right may be changed if shares with special
dividend rights are authorized in the future. Under the Israeli Companies Law, we may
declare dividends out of the higher of retained earnings and earnings generated over the
two most recent years (the profits test), in either case, provided that our board of
directors reasonably believes that the dividend will not render us unable to meet our
current or foreseeable obligations when due (the solvency test). Even if we do not comply
with the profits test, a court may allow us to distribute a dividend as long as the court
is convinced that the solvency test is fulfilled.

Our
articles of association provide that the board of directors may declare and distribute
interim dividends without the approval of the shareholders. Shareholder approval is
required for the payment of a final dividend proposed by the board of directors, but
shareholders cannot approve a final dividend that is greater than the boards
proposal. In addition, once an interim dividend has been declared and paid, it cannot be
affected by any subsequent resolution of the shareholders or the shareholders
failure to approve a final dividend.

In
the event of our liquidation, holders of our ordinary shares have the equal right to
participate in the distribution of assets remaining after payment of liabilities. This
right may be changed if shares with special liquidation or dividend rights are issued in
the future.

Voting,
shareholder meetings and resolutions. Holders of ordinary shares have one vote for
each ordinary share held on all matters submitted to a vote of shareholders. This right
may be changed if shares with special voting rights are issued in the future.

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Under
the Israeli Companies Law, we must hold an annual meeting of our shareholders once every
calendar year and not more than 15 months from the date of the previous annual
shareholders meeting. The board of directors determines the location of the meeting,
which can be in Israel or elsewhere. In addition, our board of directors may, in its
discretion, convene additional meetings as special shareholders
meetings. The board of directors is also required to convene a special
shareholders meeting upon the demand of any of the following: two directors; one
quarter of the directors in office; the holder or holders of 5% of our outstanding share
capital and 1% of our voting power; or the holder or holders of 5% of our voting power.
Our articles of association provide that each shareholder of record is entitled to receive
prior notice of any shareholders meeting in accordance with the requirements of the
Israeli Companies Law. The law currently provides for at least 21 days notice, with
certain specified matters requiring at least 35 days notice. For purposes of
determining the shareholders entitled to notice and to vote at such meeting, the board of
directors may fix a record date, which shall be between 4 and 40 days prior to the date of
the meeting.

The
quorum required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy and holding more than 50% of the voting power. The chairman
of the board of directors presides at each of our shareholders meetings. The
chairman of the meeting does not have an additional or casting vote. A meeting adjourned
for lack of a quorum will be adjourned to the same day in the following week, at the same
time and place, or to the day, time and place that the chairman determines, with the
consent of the holders of a majority of the shares present in person or by proxy and
voting on the question of adjournment. At the reconvened meeting, the required quorum
consists of any two shareholders, regardless of the number of shares they hold or
represent.

The
Israeli Companies Law requires that shareholders approve certain transactions, actions and
arrangements, as described below under the caption Approval of certain transactions;
obligations of directors, officers and shareholders.

Shareholders
resolutions will be deemed adopted if approved by the holders of a majority of the voting
power voting at a shareholders meeting, except for the following decisions which
require a different majority:

| | (1) | A
special or extraordinary resolution (such as a resolution amending our
               memorandum of association or articles of association). A majority of at
least                75% of the shares voting on the matter is needed.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | A
voluntary liquidation or a merger. A majority of at least 75% of the shares
               voting on the matter is needed.
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | (3) | A
compromise or arrangement between us and our creditors or shareholders,
               reorganization, stock split or reverse split. This has to be approved by a
               majority in the number of the persons participating in the vote (except
for                those abstaining) who together hold at least 75% of the value
represented at the                vote. In addition, court approval is needed.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | The
nomination and dismissal of outside directors. Outside directors may be
               elected or removed by a majority vote at a shareholders meeting, as
long                as either:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | The
majority of shares includes at least one-third of the shares of non-controlling
shareholders voted at the meeting, or
| | - | -------------------------------------------------------------------------------------------------------------------------

| | n | The
total number of shares of non-controlling shareholders voted against the proposal does
not exceed 1% of our aggregate voting rights.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Extraordinary
transactions with a controlling shareholder (i.e., any shareholder                that
has the ability to direct our actions, including any shareholder who holds
               25% or more of our voting rights if no other shareholder owns more than
50% of                our voting rights), with another person in which the controlling
shareholder has                a personal interest, or a transaction with a controlling
shareholder (or a                relative of such controlling shareholder) concerning
terms of compensation for                service as an office holder. Following audit
committee and board of directors                approval, these transactions must be
approved by a majority vote at a                shareholders meeting, as long as
either:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | n | The
majority of shares includes at least one-third of the shares of the voting shareholders
who have no personal interest in the transaction, or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | n | The
total shareholdings of those who have no personal interest in the transaction and who
vote against the transaction does not exceed 1% of our aggregate voting rights.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Transfer
of shares. Fully paid ordinary shares are issued in registered form and, subject to
applicable securities laws, may be transferred freely.

Election
of directors. Our ordinary shares do not have cumulative voting rights in the election
of directors. Therefore, the holders of shares representing more than 50% of the voting
rights at the shareholders meeting, voting in person or by proxy, have the power to
elect any or all of the directors whose positions are being filled at that meeting,
subject to the special approval requirements for outside directors described above.

Transfer
agent and registrar. The transfer agent and registrar for our ordinary shares is
American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY
10038 U.S.A., tel: 718-921-8124.

Description
of preferred shares

We
have 5,000,000 preferred shares authorized. Our articles of association provide that the
board of directors has the authority to issue the preferred shares in one or more series
and to fix the rights, preferences, privileges and restrictions of the preferred shares,
including dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series, without further vote or action by the shareholders. If this
provision withstands judicial scrutiny under the Israeli Companies Law, the issuance of
preferred shares may have the effect of delaying, deferring or preventing a change in
control of us without further action by the shareholders. For example, the board of
directors could issue preferred shares with voting and conversion rights that may
adversely affect the voting power of the holders of ordinary shares, including the loss of
voting control to others. We currently have no plans to issue any preferred shares.

Anti-takeover
measures

Some
of the provisions of our articles of association and Israeli law could, together or
separately:

| | n | Discourage
potential acquisition proposals.
| | - | -------------------------------------------

| | n | Delay
or prevent a change in control.
| | - | -------------------------------------

| | n | Limit
the price that investors might be willing to pay in the future for our ordinary shares.
| | - | ---------------------------------------------------------------------------------------------

Israeli
corporate law regulates acquisitions of shares through tender offers and mergers, requires
special approvals for transactions involving directors, officers or significant
shareholders, and regulates other matters that may be relevant to these types of
transactions.

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Under
the Israeli Companies Law, in the case of a merger the shareholders and board of directors
of each of the merging companies generally need to approve the merger. Shares held in one
of the merging companies by the other merging company (or certain of its affiliates) are
not counted toward the required approval. If a merging company has different classes of
shares, the approval of each class may be required. Under the Israeli Companies Law, a
merger of our company requires the approval of a supermajority of at least 75% of our
shares that are voted on the merger. A merger cannot be completed until 30 days have
passed after shareholder approval of each of the merging companies, all approvals have
been submitted to the Israeli Registrar of Companies and 50 days have passed from the time
that a proposal for approval of the merger is filed with the Registrar of Companies. In
addition, a creditor can seek to block a merger on the ground that the surviving company
will not be able to meet its obligations.

The
Israeli Companies Law also provides that an acquisition of shares in a public company,
such as our 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
another 25% shareholder of the company, or the shares are acquired from another 25%
shareholder). Similarly, the Israeli Companies Law provides that an acquisition of shares
in a public company, such as our company, must be made by means of a tender offer, if as a
result of the acquisition the purchaser would hold more than 45% of the shares of the
company (unless there is another holder of more than 45% of the shares of the company, or
the shares are acquired from another holder of more than 45% of the shares of the
company). These rules do not apply if the acquisition takes the form of a merger.

Regulations
promulgated under the Israeli Companies Law provide that these tender offer requirements
do not apply to companies whose shares are listed for trading outside of Israel, if
according to the law in the country in which the shares are traded or the rules and
regulations of the stock exchange on which the shares are traded:

| | n | There
is a limitation on acquisition of any level of control of the company, or
| | - | -------------------------------------------------------------------------------

| | n | The
acquisition of any level of control requires the purchaser to make a tender offer to the
public.
| | - | ----------------------------------------------------------------------------------------------------

The
Israeli Companies Law provides specific rules and procedures for the acquisition of shares
held by minority shareholders, if the majority shareholder holds more than 90% of the
outstanding shares. Israeli tax law treats specified acquisitions, including a
stock-for-stock swap between an Israeli company and a foreign company, less favorably than
does U.S. tax law.

In
addition, our articles of association contain certain provisions that may make it more
difficult to acquire us, such as the ability of our board of directors to issue preferred
shares, as described above under the caption Description of preferred shares.

Our
articles of association provide that we may not engage in any business combination with an
interested shareholder for a period of three years after the date that the shareholder
became an interested shareholder, unless:

| | n | Prior
to that date, the board of directors approved either the business combination or the
transaction that resulted in the shareholder becoming an interested shareholder, or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Upon
consummation of the transaction that resulted in the shareholder becoming an interested
shareholder, the interested shareholder owned at least 75% of our voting shares
outstanding at the time the transaction commenced.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A
business combination includes:

| | n | Any
merger or consolidation between the interested shareholder and us,
| | - | ----------------------------------------------------------------------

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| | n | Any
sale, transfer, pledge or other disposition of 10% or more of our assets in a transaction
involving the               interested shareholder,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Subject
to certain exceptions, any transaction that results in our issuance or transfer of any of
our shares to               the interested shareholder,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Any
transaction in which we are involved that has an effect of increasing the proportionate
share of our shares, of any class or series, beneficially owned by the interested
shareholder, or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | The
receipt by the interested shareholder of the benefit of any loans, advances, guarantees,
pledges, or other financial benefits provided by or through us.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

In
general, the articles of association define an interested shareholder as any entity or
person that beneficially owns 15% or more of our outstanding voting shares and any entity
or person affiliated with, controlling or controlled by such entity or person.

In
addition, our shareholders are not able to cumulate votes at a meeting, which may require
the acquiror to hold more shares to gain representation on the board of directors than if
cumulative voting were permitted.

Approval
of certain transactions; obligations of directors, officers and shareholders

Officers
and directors. The Israeli Companies Law codifies the fiduciary duties that office
holders, which under the law, includes our directors and executive officers, owe to a
company.

Fiduciary
duties. An office holders fiduciary duties consist of a duty of loyalty and a
duty of care. The duty of loyalty requires an office holder to act in good faith and for
the benefit of the company, including to avoid any conflict of interest between the office
holders position in the company and personal affairs, and proscribes any competition
with the company or the exploitation of any business opportunity of the company in order
to receive personal advantage for himself or herself or for others. This duty also
requires an office holder to reveal to the company any information or documents relating
to the companys affairs that the office holder has received due to his or her
position as an office holder. A company may approve any of the acts mentioned above;
provided, however, that all the following conditions apply: the office holder acted in
good faith; neither the act nor the approval of the act prejudices the good of the
company; and the office holder disclosed the essence of his or her personal interest in
the act, including any substantial fact or document, in a reasonable time before the date
for discussion of the approval. The duty of care requires an office holder to act with a
level of care that a reasonable office holder in the same position would employ under the
same circumstances. This includes the duty to use reasonable means to obtain information
regarding the advisability of a given action submitted for his or her approval or
performed by virtue of his or her position and all other relevant information material to
these actions.

Compensation.
Under the Israeli Companies Law, the compensation arrangements for officers who
          are not directors require the approval of the board of directors, unless the
          articles of association provide otherwise. Arrangements regarding the
          compensation of directors require the approval of the audit committee, the
          board, and the shareholders, in that order.

Disclosure
of personal interest. The Israeli Companies Law requires that an office holder
promptly disclose to the company any personal interest that he or she may have and all
related material information or documents known to him or her, in connection with any
existing or proposed transaction by the company. Personal interest, as defined
by the Israeli Companies Law, includes a personal interest of any person in an act or
transaction of the company, including a personal interest of his relative or of a
corporation in which that person or a relative of that person is a 5% or greater
shareholder, a holder of 5% or more of the voting rights, a director or general manager,
or in which he or she has the right to appoint at least one director or the general
manager; personal interest does not apply to a personal interest stemming
merely from holding shares in the company.

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The
office holder must immediately make the disclosure of his or her personal interest and no
later than the first meeting of the companys board of directors that discusses the
particular transaction. This duty does not apply to the personal interest of a relative of
the office holder in a transaction unless it is an extraordinary transaction.
The Israeli Companies Law defines an extraordinary transaction as a
transaction that is not in the ordinary course of business of a company; that is not on
market terms or that is likely to have a material impact on the companys
profitability, assets or liabilities; and defines a relative as a spouse,
sibling, parent, grandparent, descendent, spouses descendant, and the spouse of any
of the foregoing.

Approvals. The Israeli Companies Law provides that a transaction with an office holder or a
          transaction in which an office holder has a personal interest requires board
          approval, unless the transaction is an extraordinary transaction or the articles
          of association provide otherwise. The transaction may not be approved if it is
          adverse to the companys interest. If the transaction is an extraordinary
          transaction, or if it concerns exculpation, indemnification or insurance of an
          office holder, then the approval of the companys audit committee and the
          board of directors is required. Exculpation, indemnification, insurance or
          compensation of a director also requires shareholder approval. A director who
          has a personal interest in a matter that is considered at a meeting of the board
          of directors or the audit committee generally may not attend that meeting or
          vote on that matter, unless a majority of the board of directors or the audit
          committee also has a personal interest in the matter. If a majority of the board
          of directors has a personal interest in the transaction all directors may attend
          that meeting and vote and a shareholder approval also would be required.

Shareholders. The Israeli Companies Law imposes the same disclosure requirements described
          above on a controlling shareholder of a public company that it imposes on an
          office holder. For this purpose, a controlling shareholder is any
          shareholder who has the ability to direct the companys actions, including
          any shareholder holding 25% or more of the voting rights, if no other
          shareholder owns more than 50% of the voting rights in the company. Two or more
          shareholders with a personal interest in the approval of the same transaction
          are deemed to be one shareholder.

Under
the Israeli Companies Law, a shareholder has a duty to act in good faith toward the
company and other shareholders and refrain from abusing his or her power in the company,
including, among other things, voting in the general meeting of shareholders on the
following matters:

| | n | Any
amendment to the articles of association,
| | - | ---------------------------------------------

| | n | An
increase of the company's authorized share capital,
| | - | ------------------------------------------------------

| | n | A
merger, or
| | - | ------------

| | n | Approval
of interested party transactions that require shareholder approval.
| | - | ----------------------------------------------------------------------------

In
addition, any controlling shareholder, any shareholder who can determine the outcome of a
shareholder vote and any shareholder who, under the companys articles of
association, can appoint or prevent the appointment of an office holder, is under a duty
to act with fairness towards the company. The Israeli Companies Law provides that a breach
of the duty of fairness will be governed by the laws governing breach of contract. The
Israeli Companies Law does not describe the substance of this duty.

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Indemnification
and insurance of directors and officers; limitations on liability

Our
articles of association allow us to indemnify, exculpate, and insure our office holders to
the fullest extent permitted under the Israeli Companies Law, provided that procuring this
insurance or providing this indemnification or exculpation is approved by the audit
committee and the board of directors, as well as by the shareholders if the office holder
is a director.

Under
the Israeli Companies Law, we may indemnify an office holder for any of the
following liabilities or expenses that they may incur due to an act performed or failure
to act in his or her capacity as our office holder:

| | n | Monetary
liability imposed on the office holder in favor of a third party in a judgment, including
a settlement or an arbitral award confirmed by a court.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Reasonable
legal costs, including attorneys fees, expended by an office holder as a result of
an investigation or proceeding instituted against the office holder by a competent
authority, provided that such investigation or proceeding concludes without the filing of
an indictment against the office holder, and either:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | No
financial liability was imposed on the office holder in lieu of criminal proceedings, or
| | - | -------------------------------------------------------------------------------------------

| |  | Financial
liability was imposed on the office holder in lieu of criminal proceedings, but the
alleged criminal offense does not require proof of criminal intent.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | Reasonable
legal costs, including attorneys fees, expended by the office holder or for which
the office holder is charged by a court:
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | In
an action brought against the office holder by us, on our behalf or on behalf of a third
party,
| | - | --------------------------------------------------------------------------------------------------

| |  | In
a criminal action in which the office holder is found innocent, or
| | - | ---------------------------------------------------------------------

| |  | In
a criminal action in which the office holder is convicted, but in which proof of criminal
intent is not required.
| | - | --------------------------------------------------------------------------------------------------------------------

A
company may indemnify an office holder in respect of these liabilities either in advance
of an event or following an event. If a company undertakes to indemnify an office holder
in advance of an event, the indemnification, other than litigation expenses, must be
limited to foreseeable events in light of the companys actual activities when the
company undertook such indemnification, and reasonable amounts or standards, as determined
by the board of directors.

A
company may obtain insurance for an office holder against liabilities incurred in his or
her capacity as an office holder. These liabilities include a breach of duty of care to
the company or a third party, including a breach arising out of negligent conduct of the
office holder, a breach of duty of loyalty and any monetary liability imposed on the
office holder in favor of a third party. A company may also exculpate an office holder
from a breach of duty of care in advance of that breach. Our articles of association
provide for exculpation both in advance or retroactively, to the extent permitted under
Israeli law. A company may not exculpate an office holder from a breach of duty of loyalty
towards the company or from a breach of duty of care concerning dividend distribution or a
purchase of the companys shares by the company or other entities controlled by the
company.

Under
the Israeli Companies Law, a company may indemnify or insure an office holder against a
breach of duty of loyalty only to the extent that the office holder acted in good faith
and had reasonable grounds to assume that the action would not prejudice the company. In
addition, a company may not indemnify, insure or exculpate an office holder against a
breach of duty of care if committed intentionally or recklessly (excluding mere
negligence), or committed with the intent to derive an unlawful personal gain, or for a
fine or forfeit levied against the office holder in connection with a criminal offense.

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Our
audit committee, board of directors, and shareholders, have resolved to indemnify our
directors and officers to the extent permitted by law and by our articles of association
for liabilities not covered by insurance, that are of certain enumerated types of events,
and subject to limitations as to amount.

We
have also entered into indemnification, insurance, and exculpation agreements with our
directors and officers undertaking to indemnify, insure, and exculpate them to the full
extent permitted by the Israeli Companies Law. The entry into such agreements received the
prior approval of our audit committee, board of directors, and shareholders.

Borrowing
power: amendment of rights of ordinary shares

Our
articles of association grant broad powers to the board of directors to have us borrow,
repay borrowings, make guarantees, and grant security interests in borrowings. The rights
and provisions of the ordinary shares may be cancelled, added to, restricted, amended, or
otherwise altered with a vote of the holders of at least 75% of the outstanding ordinary
shares voting at a duly convened shareholders meeting.

# NASDAQ Global Select
Market corporate governance rules

In
the past, in accordance with Rule 4350(a)(1) of the Rules of Corporate Governance of the
NASDAQ Global Select Market, we received an exemption from the requirement to distribute
an annual report to our shareholders prior to our annual general meeting of shareholders.
In 2005, in response to changes to the Israeli Companies Law, we amended our articles of
association to permit the electronic distribution of our financial statements to our
shareholders. Accordingly, we will post our Annual Report on Form 20-F on our Web site
(www.checkpoint.com), rather than mail it to shareholders as required by the NASDAQ
rules. This will comply with the legal requirements in Israel.

NASDAQ
Rule 4350(f) requires that an issuer listed on the NASDAQ Global Select Market should have
a quorum requirement that in no case be less than 33 1/3% of the outstanding shares of the
companys common voting stock. However, our articles of association, consistent with
the Israeli Companies Law, provide that the quorum requirements for an adjourned meeting
are the presence of a minimum of two shareholders present in person. Our quorum
requirements for an adjourned meeting do not comply with the requirements of Rule 4350(f)
and we instead follow our home country practice.

# Material Contracts

In
March 2006, we purchased a building in Tel Aviv, Israel, for a total amount of $35.25
million. Additional payments in 2006 and 2007 for taxes related to the purchase and for
the building renovation totaled $3.58 million and $7.04 million, respectively. In May
2007, we relocated to our new international headquarters to the building. For more
information, please see Item 3  Information on Check Point  Property,
plants and equipment. A translation of the agreement was filed as Exhibit 4.11 to
our 2006 Annual Report on Form 20-F.

# Israeli Taxation,
Foreign Exchange Regulation and Investment Programs

The
following is a summary of the principal Israeli tax laws applicable to us, the Israeli
Government programs from which we benefit, and Israeli foreign exchange regulations. This
section also contains a discussion of material Israeli tax consequences to our
shareholders who are and a Privileged Enterprise not residents or citizens of Israel. This
summary does not discuss all aspects of Israeli tax law that may be relevant to a
particular investor in light of his or her personal investment circumstances, or to some
types of investors subject to special treatment under Israeli law. Examples of investors
subject to special treatment under Israeli law include residents of Israel, traders in
securities, or persons who own, directly or indirectly, 10% or more of our outstanding
voting capital, all of whom are subject to special tax regimes not covered in this
discussion. Some parts of this discussion are based on new tax legislation that has not
been subject to judicial or administrative interpretation. The discussion should not be
construed as legal or professional tax advice and does not cover all possible tax
consequences.

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You
are urged to consult your own tax advisor as to the Israeli and other tax consequences of
the purchase, ownership and disposition of our ordinary shares, including, in particular,
the effect of any non-Israeli, state or local taxes.

General
corporate tax structure in Israel

Israeli
companies were subject to corporate tax at the rate of 29% in 2007. Pursuant to tax reform
legislation that came into effect in 2005, the corporate tax rate is to undergo further
staged reductions to 25% by the year 2010. In order to implement these reductions, the
corporate tax rate is scheduled to decline to 27% in 2008 and 26% in 2009.

However,
as discussed below, the rate is effectively reduced for income derived from an Approved
Enterprise and a Privileged Enterprise.

Law
for the Encouragement of Capital Investments, 1959

Our
facilities in Israel have been granted Approved Enterprise status under the Law for the
Encouragement of Capital Investments, 1959, commonly referred to as the Investment
Law. The Investment Law provides that capital investments in a production facility
(or other eligible assets) may be designated as an Approved Enterprise. Until 2005, the
designation required advance approval from the Investment Center of the Israel Ministry of
Industry, Trade and Labor. 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.

Under
the Approved Enterprise programs, a company is eligible for governmental grants, but may
elect to receive an alternative package comprised of tax benefits (Alternative Track).
Under the alternative package, a companys undistributed income derived from an
Approved Enterprise is exempt from corporate tax for an initial period (two to ten years,
depending on the geographic location of the Approved Enterprise within Israel). The
exemption begins in the first year that the company realizes taxable income from the
Approved Enterprise.

After
expiration of the initial tax exemption period, the company is eligible for a reduced
corporate tax rate of 10% to 25% for the following five to eight years, depending on the
extent of foreign investment in the company (as shown in the table below). The benefits
period is limited to 12 years from completion of the investment or commencement of
production, or 14 years from the date of the approval, whichever is earlier.

On
April 1, 2005, an amendment to the Investment Law came into effect. The amendment 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 period of tax benefits for a new Privileged Enterprise commences in the
Year of Commencement. This year is the later of (1) the year in which taxable
income is first generated by a company, or (2) a year selected by the company for
commencement, on the condition that the company meets certain provisions provided by the
Investment Law (Year of Election). The amendment does not apply to investment programs
approved prior to December 31, 2004. The new tax regime applies to new investment programs
only. Therefore, our five active Approved Enterprises will not be subject to the
provisions of the amendment.

83

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The
tax benefits available under Approved Enterprise or Privileged Enterprise relate only to
taxable income attributable to the specific Approved Enterprise or Privileged Enterprise
and our effective tax rate will be the result of a weighted combination of the applicable
rates.

|Percent of
Foreign Ownership | Rate of
Reduced Tax | Reduced Tax Period | Tax Exemption Period
|---------------------------- | ------------------- | ------------------ | --------------------
|
|
|
|
|0-25%                        |                     |                    |                     
|25-49%                       |                     |                    |                     
|49-74%                       |                     |                    |                     
|74-90%                       |                     |                    |                     
|90-100%                      |                     |                    |                     
|                             |                     |                    |                     

As
mentioned above, currently, we have five active Approved Enterprise programs under the
Alternative Track of the Investment Law which entitle to tax benefits. Our first
investment program benefits period has ended, and therefore not entitled to tax benefits.
Currently we have one Privileged Enterprise program. We have derived, and expect to
continue to derive, a substantial portion of our operating income from our Approved
Enterprise and Privileged Enterprise facilities. We are, therefore, eligible for a tax
exemption for a limited period on undistributed Approved Enterprise and Privileged
Enterprise income, and an additional subsequent period of reduced corporate tax rates
ranging between 10% and 25%, depending on the level of foreign ownership of our shares.
The tax benefits attributable to our current Approved Enterprises and Privileged
Enterprise are scheduled to expire in phases by 2016.

The
benefits available to an Approved Enterprise and a Privileged Enterprise are conditioned
upon terms stipulated in the Investment Law and the related regulations and the criteria
set forth in the applicable certificate of approval (for an Approved Enterprise). If we do
not fulfill these conditions, in whole or in part, the benefits can be cancelled and we
may be required to refund the amount of the benefits, linked to the Israeli consumer price
index plus interest. We believe that our Approved Enterprise and Privileged Enterprise
programs currently operate in compliance with all applicable conditions and criteria, but
we cannot assure you that they will continue to do so. See Item 8, Legal proceedings
(ITA).

If
a company requested the alternative package of benefits for an Approved Enterprise under
the old law before the 2005 amendment, it is precluded from filing a Year of Election
notice for a Privileged Enterprise for three years after the year in which the Approved
Enterprise was activated.

If
a company distributes dividends from tax-exempt income, the company will be taxed on the
otherwise exempt income at the same reduced corporate tax rate that applies to it after
the initial exemption period. Distribution of dividends derived from income that was taxed
at reduced rates, but not tax-exempt, does not result in additional tax consequences to
the company. Shareholders who receive dividends derived from Approved Enterprise or
Privileged Enterprise income are generally taxed at a rate of 15%, which is withheld and
paid by the company paying the dividend, if the dividend is distributed during the
benefits period or within the following 12 years, (the 12-year limitation does not apply
to a Foreign Investors Company).

84

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The
amendment to the Investment Law treats repurchase of shares out of Privileged Enterprise
tax exempt income as deem-dividend. Through December 31, 2007, we repurchased $1,126,763
of our Ordinary shares. Our retained earnings attributed to taxable income are higher than
the total shares repurchased and therefore should not trigger a deem-dividend event. See
Note 11e of the Combined Notes to Consolidated Financial Statements for further
information regarding our repurchase program.

As
a result of the 2005 amendment, tax-exempt income attributed to Privileged Enterprise will
subject us to taxes also upon complete liquidation. As of December 31, 2007, tax-exempt
income in the amount of $82.2 million was generated from Privileged Enterprise.

Our
board of directors has determined that we will not distribute any amounts of our
undistributed tax-exempt income as 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 and a Privileged
Enterprise programs as the undistributed tax-exempt income is essentially permanent in
duration.

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 (the Industrial Encouragement
Law). The Industrial Encouragement Law defines an Industrial Company as
a company that is resident in Israel and that derives at least 90% of its income in any
tax year, other than income from defense loans, capital gains, interest and dividends,
from an enterprise whose major activity in a given tax year is industrial production.

The
following are the principal corporate tax benefits that are available to Industrial
Companies:

| | n | Amortization
of the cost of purchased know-how and patents over an eight-year period for tax purposes.
| | - | ------------------------------------------------------------------------------------------------------

| | n | Accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

| | n | Under
specified conditions, an election to file consolidated tax returns with related Israeli
Industrial Companies.
| | - | -------------------------------------------------------------------------------------------------------------------

| | n | Expenses
related to a public offering are deductible in equal amounts over three years.
| | - | ---------------------------------------------------------------------------------------

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We cannot assure you that we qualify or will
continue to qualify as an Industrial Company or that the benefits described above will be
available in the future.

85

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Taxation
of Non-Israeli Shareholders on Receipt of Dividends

Under
Israeli tax law, a distribution of dividends from income attributable to an Approved
Enterprise will be subject to tax in Israel at the rate of 15%, which is withheld and paid
by the company paying the dividend, if the dividend is distributed during the benefits
period or within the following 12 years (the 12-year limitation does not apply to a
Foreign Investors Company). Any distribution of dividends from income that is not
attributable to an Approved Enterprise will be subject to tax in Israel at the rate of
25%, except that dividends distributed on or after January 1, 2006, to an individual who
is deemed a non-substantial shareholder will be subject to tax at the rate of
20%.

Under
the United States-Israel tax treaty, the maximum tax on dividends paid to a holder of the
ordinary shares who is a United States resident is 25%. Dividends received by a United
States company that holds at least 10% of our voting rights, will be subject to
withholding tax at the rate of 12.5%, provided that certain other conditions in the tax
treaty are met (or at the tax rate of 15% in respect of dividends paid from income
attributable to our Approved Enterprises).

Capital
Gains Taxes Applicable to Non-Israeli Shareholders

Capital
gains from the sale of our ordinary shares by non-Israeli shareholders are exempt from
Israeli taxation, provided that the capital gain is not derived from a permanent
establishment in Israel. In addition, the United States-Israel tax treaty exempts United
States residents who hold less than 10% of our voting rights, and who held less than 10%
of our voting rights during the 12 months prior to a sale of their shares, from Israeli
capital gains tax in connection with such sale.

Foreign
Exchange Regulations

Dividends,
if any, paid to the holders of our ordinary shares, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of
our ordinary shares to an Israeli resident, may be paid in non-Israeli currency. If these
amounts are paid in Israeli currency, they may be converted into freely repatriable U.S.
dollars at the rate of exchange prevailing at the time of conversion. In addition, the
statutory framework for the potential imposition of exchange controls has not been
eliminated, and may be restored at any time by administrative action.

86

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# United States Federal
Income Tax Considerations

The
following discussion describes the material U.S. federal income tax considerations
relating to the ownership or disposition of our ordinary shares to a holder who is:

| | n | A
citizen or resident (as defined for U.S. federal income tax purposes) of the United
States,
| | - | ---------------------------------------------------------------------------------------------

| | n | A
corporation, or other entity taxable as a corporation, created or organized in or under
the laws of the               United States or any of its states,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | An
estate, if the estate's income is subject to U.S. federal income taxation regardless of
its source, or
| | - | ---------------------------------------------------------------------------------------------------------

| | n | A
trust, if a U.S. court is able to exercise primary supervision over its administration
and one or more U.S.               persons (e.g., a U.S. citizen, resident, or
corporation) have the authority to control all of its               substantial decisions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We refer to any of the above as a
U.S. Shareholder.

This
discussion is based on the provisions of the Internal Revenue Code of 1986, as amended,
referred to as the Code, U.S. Treasury Regulations promulgated under the Code
and administrative and judicial interpretations of the Code, all as in effect as of the
date of this Annual Report on Form 20-F. This discussion generally considers only U.S.
Shareholders who will hold the ordinary shares as capital assets. The discussion does not
consider:

| | n | Aspects
of U.S. federal income taxation relevant to U.S. Shareholders by reason of their
particular          circumstances (including potential application of the alternative
minimum tax).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | U.S.
Shareholders subject to special treatment under the U.S. federal income tax laws, such as
financial institutions, insurance companies, broker-dealers, tax-exempt organizations,
and foreign individuals or entities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | U.S.
Shareholders who own 10% or more of our outstanding voting shares, either directly or by
attribution.
| | - | ----------------------------------------------------------------------------------------------------------

| | n | U.S.
Shareholders who hold our ordinary shares as part of a hedging, straddle, or conversion
transaction.
| | - | ---------------------------------------------------------------------------------------------------------

| | n | U.S.
Shareholders who acquire their ordinary shares in a compensatory transaction.
| | - | ----------------------------------------------------------------------------------

| | n | U.S.
Shareholders whose functional currency is not the U.S. dollar.
| | - | -------------------------------------------------------------------

| | n | Any
aspect of state, local, or non-U.S. tax law.
| | - | ------------------------------------------------

The
following summary does not address all of the tax consequences of owning or disposing of
our ordinary shares to you based on your individual tax circumstances. Accordingly, you
should consult your own tax advisor as to the particular tax consequences to you of owning
or disposing of our ordinary shares, including the effects of applicable state, local, or
non-U.S. tax laws, and possible changes in the tax laws.

87

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Dividends
Paid on the Ordinary Shares

A
U.S. Shareholder, as defined above, will generally be required to include in gross income
the amount of any distributions paid in respect of the ordinary shares to the extent that
the distributions are paid out of our current or accumulated earnings and profits, as
determined for U.S. federal income tax purposes. The amount of the distribution would
include any Israeli taxes withheld as part of the distributions. A maximum U.S. federal
income tax rate of 15% will apply for individual shareholders and 35% for corporate
shareholders if certain holding period requirements are met. The individual shareholder
rate is applicable in tax years beginning after December 31, 2002, and before January 1,
2011, for qualified dividend income received by an individual as well as
certain trusts and estates. Qualified dividend income generally includes dividends paid by
a U.S. corporation or a qualified foreign corporation. A non-U.S. corporation,
such as ours, generally will be considered to be a qualified foreign corporation if (i)
our shares are readily tradable on an established securities market in the United States,
or (ii) we are eligible for the benefits of a comprehensive U.S. income tax treaty
determined to be satisfactory to the U.S. Department of the Treasury. The U.S. Department
of the Treasury and the Internal Revenue Service have determined that the United
States-Israel tax treaty is satisfactory for this purpose. In addition, the U.S.
Department of the Treasury and the Internal Revenue Service have determined that ordinary
shares are considered readily tradable on an established securities market if they are
listed on an established securities market in the United States, such as the NASDAQ Global
Select Market. The information returns, reporting the dividends paid to U.S. Shareholders,
will identify the amount of dividends eligible for the reduced rates.

Any
distributions in excess of earnings and profits will be treated first as non-taxable
return of capital, reducing a U.S. Shareholders tax basis in the ordinary shares to
the extent of the distributions, and then as capital gain from a sale or exchange of the
ordinary shares. Our dividends will generally not qualify for the dividends received
deduction available to corporations. Any cash distribution paid in Israeli Shekels will
equal the U.S. dollar value of the distribution, calculated based on the spot exchange
rate in effect on the date of the distribution.

Credit
for Israeli Taxes Withheld

Subject
to certain conditions and limitations, a U.S. Shareholder will generally be eligible for a
credit against United States federal income tax liability for any Israeli tax withheld or
paid with respect to dividends on the ordinary shares. The Code provides limitations on
the amount of foreign tax credits. These limitations include extensive separate
computation rules under which foreign tax credits allowable with respect to specific
categories of income cannot exceed the U.S. federal income taxes otherwise payable with
respect to each such category of income. A shareholder who does not elect to claim a
foreign tax credit may instead claim a deduction for Israeli income tax withheld or paid,
but only if the shareholder elects to do so for all foreign income taxes in that year.
Special rules for determining a U.S. Shareholders foreign tax credit limitation
apply in the case of qualified dividend income. Rules similar to those concerning
adjustments to the foreign tax credit limitation to reflect any capital gain rate
differential also apply to any qualified dividend income. The rules relating to foreign
tax credits are complex and each shareholder should consult his, her, or its own tax
advisor to determine whether and if the specific shareholder would be entitled to this
credit.

88

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Disposition
of the Ordinary Shares

The
sale or exchange of ordinary shares will generally result in the recognition of capital
gain or loss. The amount of gain or loss is the difference between the amounts realized on
the sale or exchange and the tax basis in the ordinary shares. If a U.S.
Shareholders holding period for the ordinary shares exceeds one year at the time of
the disposition, the amount of the shareholders gain or loss generally will be
long-term capital gain or loss. Long-term capital gains realized upon a sale or exchange
of ordinary shares generally will be subject to a maximum U.S. federal income tax rate of
15% for taxable years which begin before January 1, 2011. Gain or loss recognized by a
U.S. Shareholder on a sale or exchange of ordinary shares generally will be treated as
U.S. source income or loss for U.S. foreign tax credit purposes. Under the United
States-Israel tax treaty, gain derived from the sale, exchange, or other disposition of
ordinary shares by a holder, who is a resident of the United States for purposes of the
treaty and who sells the ordinary shares within Israel, may be treated as foreign source
income for U.S. foreign tax credit purposes.

Passive
Foreign Investment Company Status

Based
upon our income, assets, and activities, we believe that we are not currently, and have
not been in prior years, a passive foreign investment company (PFIC) for U.S. federal
income tax purposes. We do not currently anticipate that we will be a PFIC for any
subsequent year. We would be classified as a PFIC if, for any taxable year, either:

| | n | 75%
or more of our gross income in the taxable year is passive income, or
| | - | -------------------------------------------------------------------------

| | n | 50%
or more of the average percentage of our assets held during the taxable year, produce or
are held for the production of passive income.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

For
this purpose, passive income includes dividends, interest, royalties, rents, annuities,
and the excess of gain over losses from the disposition of assets that produce passive
income.

If
we were a PFIC for any taxable year during which you held shares as a U.S. Shareholder and
you did not timely elect to treat us as a qualified electing fund under
Section 1295 of the Code or elect to mark the ordinary shares to market, you would be
subject to special tax rules on the receipt of an excess distribution on the
ordinary shares. Generally, a distribution is considered an excess distribution to the
extent it exceeds 125% of the average annual distributions in the prior three years. You
would also be subject to special tax rules on the gain from the disposition of the
ordinary shares.

A
U.S. Shareholder may be able to mitigate certain adverse tax consequences of holding
shares in a PFIC by making a qualified electing fund, deemed sale,
or mark-to-market election. However, as a U.S. Shareholder you may make a
qualified electing fund election only if we agree to furnish certain tax information
annually. We do not presently prepare or provide this information, and this information
may not be available to you if we are subsequently determined to be a PFIC. A number of
specific rules and requirements apply to a U.S. Shareholder under either of the elections
available to owners of a PFIC. You are urged to consult your tax advisor concerning these
elections.

89

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Information
Reporting and Back up Withholding

Dividend
payments and proceeds from the sale or disposal of ordinary shares may be subject to
information reporting to the Internal Revenue Service and possible U.S. federal backup
withholding at the current rate of 28% (increases to 31% for taxable years beginning in
2011 or later). However, backup withholding will not apply to a holder who furnishes a
correct taxpayer identification number or certificate of foreign status and makes any
other required certification; or who is otherwise exempt from backup withholding (for
example, a corporation). Any U.S. Shareholder who is required to establish exempt status
generally must file IRS Form W-9 (Request for Taxpayer Identification Number and
Certification). Amounts withheld as backup withholding may be credited against a U.S.
Shareholders federal income tax liability. A U.S. Shareholder may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the Internal Revenue Service and furnishing any required
information.

# Documents on Display

This
report and other information filed or to be filed by us can be inspected and copied at the
public reference facilities maintained by the Securities and Exchange Commission at:

| | Securities and Exchange Commission
100 F Street, NE
Public Reference Room
Washington, D.C. 20549
| | ------------------------------------------------------------------------------------------------

Copies
of these materials can also be obtained from the Public Reference Section of the
Securities and Exchange Commission, 100 F Street, NE, Washington, D.C. 20549, at
prescribed rates.

The
Securities and Exchange Commission maintains a Web site at www.sec.gov that
contains reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the Securities and Exchange Commission using
its EDGAR system.

Additionally,
documents referred to in this Annual Report on Form 20-F may be inspected at our principal
executive offices located at 5 HaSolelim Street, Tel Aviv 67897 Israel.

|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

We
are exposed to market risks that 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.

The
securities in our portfolio are rated at the least as (A-) according to Standard and
Poors rating or (A3), according to Moodys rating. Securities representing
50.8% of the portfolio are rated as AAA; securities representing 29.6% of the portfolio
are rated as AA; and securities representing 19.6% of the portfolio are rated as A.

90

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The
table below provides information regarding our investments in cash, cash equivalents, and
marketable securities, as of December 31, 2007.

|                                    |  | Maturity | Total | Fair
Value at
Dec. 31,
2007
|----------------------------------- |  | -------- | ----- | ---------------------------
|
|
|
|
|Government and corporate            |  |          |       | Amortized cost             
|debentures - fixed interest rates   |  |          |       | WAIR*                      
|Structured notes **                 |  |          |       | Amortized cost             
|                                    |  |          |       | WAIR*                      
|Mortgage and asset backed           |  |          |       | Amortized cost             
|securities***                       |  |          |       | WAIR*                      
|Auction rate securities****         |  |          |       | Cost                       
|                                    |  |          |       | WAIR*                      
|Government and corporate debentures |  |          |       | Amortized cost             
|- floating interest rates           |  |          |       | WAIR*                      
|Money market instruments &          |  |          |       | Book value                 
|cash                                |  |          |       | WAIR*                      
|                                    |  |          |       |                            
|Total                               |  |          |       |                            
|                                    |  |          |       | WAIR*                      
|                                    |  |          |       |                            
|                                    |  |          |       |                            

---

|* | WAIR
 Weighted Average Interest Rate
|- | -------------------------------------

|** | The
structured notes include mainly inverse floating interest rate bonds and range accrual
bonds. Range accrual bonds are bonds where interest is paid only if a specified interest
rate stays within a pre-established range, otherwise the bond pays no interest. Inverse
floating rate bonds are bonds where the coupon varies inversely with changes in specified
interest rates or indices (for example, LIBOR). The effective maturity dates may differ
from the contractual maturities because debtors have the right to call the obligations
without penalties.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Debtors
will likely exercise call options when forward markets rates are below the interest rate
range of the structured note. In 2007, structured notes balance was classified according
to its contractual maturity dates. Interest rates decreased during 2007, mainly towards
the end of the year. This trend led some of the debtors to exercise their call option. A
total of $ 47 million in structured notes were called and settled till December 31,
2007. An additional amount of $ 35 million in structured notes were called and
settled after December 31, 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | The
effective maturity may differ from the contractual maturities, because debtors may have
the right to call or prepay obligations without penalties, therefore, the mortgage and
asset backed securities balance was classified according to its next forecasted
prepayment date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**** | The
effective maturity may differ from the contractual maturities, due to the periodical
auction mechanism. The balance is comprised from four auction rate securities, which
suffer from failed auctions since September 2007. For determining the effective maturity
dates for these securities, the Company used its asset managers Valuation analysis.
The analysis was made as to the projected source of capital that each of the issuers will
be able to obtain in order to pay back its debt holders.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

91

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# Foreign Currency Risk

Most
of our sales are denominated in U.S. dollars, and we incur most of our expenses in U.S.
dollars, Euros, Swedish Kronas, and Israeli Shekels. According to the salient economic
factors indicated in SFAS No. 52, Foreign Currency Translation, our cash flow,
sale price, sales market, expense, financing and inter-company transactions, and
arrangement indicators, are predominantly denominated in U.S. dollars. In addition, the
U.S. dollar is the primary currency of the economic environment in which we operate, and
thus, the U.S. dollar is our functional and reporting currency.

In
our balance sheet, we remeasure into U.S. dollars all monetary accounts (principally cash
and cash equivalents and liabilities) that are maintained in other currencies. For this
remeasurement we use the foreign exchange rate at the balance sheet date. Any gain or loss
that results from this remeasurement is reflected in the statement of income as financial
income or financial expense, as appropriate.

We
measure and record non-monetary accounts in our balance sheet (principally fixed assets,
prepaid expenses, and share capital) in U.S. dollars. For this measurement we use the U.S.
dollar value in effect at the date that the asset or liability was initially recorded in
our balance sheet (the date of the transaction).

We
attempt to limit our exposure resulting from assets that are denominated in Japanese Yen
and from liabilities that are denominated in Israeli Shekels, through forward contracts.
We monitor foreign exchange rates and trends periodically, to measure the effectiveness of
our foreign currency hedging. If our forward contracts meet the definition of a hedge, and
are so designated, changes in the fair value of the contracts will be offset against
changes in the fair value of the hedged assets or liabilities through earnings.

The
ineffective portion of our foreign currency hedging is recognized in earnings.

As
of December 31, 2007, we had outstanding forward contracts in the amount of $12 million.
These transactions were for a period of up to twelve months.

Historically,
the effect of fluctuations in currency exchange rates has had low impact on our
consolidated financial statements. In managing our foreign exchange risk, from time to
time, we enter into various foreign exchange hedging contracts. Our policy is to hedge
significant net exposures in the major foreign currencies in which we operate. We
periodically assess the applicability of the U.S. dollar as our functional currency by
reviewing the salient indicators.

# Interest Rate Risk

Our
exposure to market risk for changes in interest rates relates primarily to our investment
in marketable securities. Our marketable securities portfolio includes government and
government agencies debt instruments (U.S., European, and other) and corporate debt
instruments. The fair value of our long and short-term securities is based upon their
market values as of December 31, 2007.

|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------

Not
applicable.

92

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# PART II

|ITEM 13. |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- |  | -----------------------------------------------

There
are no defaults, dividend arrearages, or delinquencies that are required to be disclosed.

|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- |  | ----------------------------------------------------------------------------

There
are no material modifications to, or qualifications of, the rights of security holders
that are required to be disclosed.

|ITEM 15. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

# Disclosure Controls and
Procedures

As
of December 31, 2007, we performed an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial
Officer, 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) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)). Our management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and our management necessarily applies
its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective as of December
31, 2007, to provide reasonable assurance that the information required to be disclosed in
filings and submissions under the Exchange Act, is recorded, processed, summarized, and
reported within the time periods specified by the Securities and Exchange
Commissions rules and forms, and that such information related to us and our
consolidated subsidiaries is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions about required disclosure.

# Managements Annual
Report on Internal Control Over Financial Reporting and Attestation Report of Registered
PublicAccounting Firm

Our
management report on our internal control over financial reporting (as such defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act), and the related attestation report
of our independent public accounting firm, are included in pages F-2 and F-4 to F-5 of our
audited consolidated financial statements set forth in Item 18  Financial
Statements, and are incorporated herein by reference.

# Changes in Internal
Control Over Financial Reporting

During
the period covered by this Annual Report on Form 20-F, no changes in our internal control
over financial reporting have occurred that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

93

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|ITEM 16. |  | Reserved.
|-------- |  | ---------

|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our
board of directors has determined that Messrs. Yoav Chelouche and Irwin Federman are
audit committee financial experts and that they are independent under the
applicable Securities and Exchange Commission and NASDAQ Global Select Market rules.

|ITEM 16B. |  | CODE OF ETHICS
|--------- |  | --------------

In
March 2004, our board of directors adopted a Code of Ethics that applies to all of our
employees, directors and officers, including the Chief Executive Officer, Chief Financial
Officer, principal accounting officer or controller and other individuals who perform
similar functions. The Code of Ethics is updated from time to time. You can obtain a copy
of our Code of Ethics without charge, by sending a written request to our investor
relations department at Check Point Software Technologies Inc., Attn: Investor Relations,
800 Bridge Parkway, Redwood City, California 94065 U.S.A; Tel: 650-628-2000; Email:
ir@us.checkpoint.com.

|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

# Fees and Services

The
following table sets forth the aggregate fees billed to us for the audit and other
services provided by Ernst & Young (E&Y) during the years ended
December 31, 2006 and 2007 (in thousands):

|                       | Year Ended December 31, 2006 | Year Ended December 31, 2007
|---------------------- | ---------------------------- | ----------------------------
|
|
|
|
|Audit fees (1)         |                              |                             
|Audit-related fees (2) |                              |                             
|Tax fees (3)           |                              |                             
|                       |                              |                             
|Total                  |                              |                             
|                       |                              |                             
|                       |                              |                             

---

|(1) | Audit
fees are fees for audit services for each of the years shown                     in
this table, including fees associated with the annual audit (including audit
                    of our internal control over financial reporting) and reviews of our
quarterly                     financial results submitted on Form 6-K, consultations on
various accounting                     issues and audit services provided in connection
with other statutory or                     regulatory filings.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related
fees are fees related to due diligence investigations.
|--- | ----------------------------------------------------------------------

|(3) | Tax
fees are fees for professional services rendered by our auditors
                    for tax compliance, tax planning and tax advice on actual or
contemplated                     transactions, tax consulting associated with
international transfer prices and                     employee benefits.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

94

---

---



Audit
committees pre-approval policies and procedures

Our
audit committee chooses and engages our independent auditors to audit our financial
statements, with the approval of our shareholders as required by Israeli law. In March
2004, our audit committee adopted a policy requiring our management to obtain the audit
committees approval before engaging our independent auditors to provide any audit or
permitted
 non-audit services to us or our subsidiaries. The policy was last amended in
October 2004. This policy, which is designed to assure that such engagements do not impair
the independence of our auditors, requires pre-approval from the audit committee on an
annual basis for the various audit and non-audit services that may be performed by our
auditors. In addition, the audit committee limited the aggregate amount of fees our
auditors may have received during 2006 and 2007, and may receive during 2008 for non-audit
services in certain categories.

Our
controller reviews all management requests to engage our auditors to provide services and
approves a request if the requested services are of those that have received pre-approval
from our audit committee. We inform our audit committee of these approvals at least
quarterly and prior to the commencement of the related services. If the services are not
included in those categories that were pre-approved by our audit committee, then specific
approval is needed from our audit committee before these services are commenced. Our audit
committee is not permitted to approve the engagement of our auditors for any services that
would be inconsistent with maintaining the auditors independence or that are not
permitted by applicable law.

|ITEM 16D. |  | EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|--------- |  | ---------------------------------------------------------

Not
applicable.

95

---

---



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

Our
board of directors approved four programs to repurchase ordinary shares. The first program
was announced on October 28, 2003, and ended on August 24, 2004, and authorized the
repurchase of up to $200 million of our ordinary shares. The second program was announced
on October 28, 2004, and ended on May 31, 2005, and authorized the repurchase of up to
$200 million of our ordinary shares. The third program was announced on July 25, 2005, and
ended on May 18, 2006, and authorized the repurchase of up to $200 million of our ordinary
shares. The fourth program was announced on May 22, 2006, and as of the date of this
filing is still in effect, and authorizes the repurchase of up to $600 million of our
ordinary shares.

During
2007, we spent $209.8 million to repurchase approximately 9 million ordinary shares under
the fourth repurchase program. The table below provides detailed information.

|Period                     | (a) Total
Number of
Ordinary Shares
Purchased | (b) Average
Price per
Ordinary Share | (c) Total
Number of
Ordinary Shares
Purchased as
Part of Publicly
Announced Plans
or Programs | (d)
Approximate
Dollar Amount
Available for
Repurchase
under the Plans
or Programs
|-------------------------- | --------------------------------------------- | ------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------
|
|
|
|
|January 1 - January 31     |                                               |                                      |                                                                                               | 100,000                                                                           
|February 1 - February 28   |                                               |                                      |                                                                                               | 1,900,000                                                                         
|March 1 - March 31         |                                               |                                      |                                                                                               | 300,000                                                                           
|April 1 - April 30         |                                               |                                      |                                                                                               | N/A                                                                               
|May 1 - May 31             |                                               |                                      |                                                                                               | 1,900,00                                                                          
|June 1 - June 30           |                                               |                                      |                                                                                               | 195,300                                                                           
|July 1 - July 31           |                                               |                                      |                                                                                               | N/A                                                                               
|August 1 - August 31       |                                               |                                      |                                                                                               | 1,800,000                                                                         
|September 1 - September 30 |                                               |                                      |                                                                                               | N/A                                                                               
|October 1 - October 31     |                                               |                                      |                                                                                               | N/A                                                                               
|November 1 - November 30   |                                               |                                      |                                                                                               | 2,600,000                                                                         
|December 1 - December 31   |                                               |                                      |                                                                                               | 226,200                                                                           
|                           |                                               |                                      |                                                                                               |                                                                                   
|Total                      |                                               |                                      |                                                                                               | 9,021,500                                                                         
|                           |                                               |                                      |                                                                                               |                                                                                   
|                           |                                               |                                      |                                                                                               |                                                                                   

96

---

---



# PART III

|ITEM 17. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

Check
Point has responded to Item 18.

|ITEM 18. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

See
pages F-1 to F-48 below.

97

---

---



|ITEM 19. |  | EXHIBITS
|-------- |  | --------

|1 |  | Articles
of Association of Check Point Software Technologies Ltd. (1)
|- |  | ---------------------------------------------------------------------

|4.1 |  | Form
 of  Director  Insurance,   Indemnification  and  Exculpation  Agreement  between  Check
 Point  Software              Technologies Ltd. and its directors (2)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Check
Point Software Technologies Ltd. 1996 Israel Stock Option Plan (3)
|--- |  | ------------------------------------------------------------------------

|4.3 |  | Check
Point Software Technologies Ltd. Restated and Amended 1996 Section 102 Share Option Plan
(4)
|--- |  | --------------------------------------------------------------------------------------------------

|4.4 |  | Addendum  Israel
 to the Check Point  Software  Technologies  Ltd.  Restated and Amended 1996 Section 102
Share              Option Plan (5)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Check
Point Software Technologies Ltd. 1996 United Stated Stock Option Plan (6)
|--- |  | -------------------------------------------------------------------------------

|4.6 |  | Check
Point Software Technologies Ltd. 2005 Israel Equity Incentive Plan (7)
|--- |  | ----------------------------------------------------------------------------

|4.7 |  | Check
Point Software Technologies Ltd. 2005 United States Equity Incentive Plan (8)
|--- |  | -----------------------------------------------------------------------------------

|4.8 |  | Zone
Labs, Inc. 1998 Stock Option Plan (9)
|--- |  | ------------------------------------------

|4.9 |  | Pointsec
Mobile Technologies Inc. 2003 Stock Option Plan (10)
|--- |  | -------------------------------------------------------------

|4.10 |  | Pointsec
Mobile Technologies Inc. 2005 Stock Option Plan (11)
|---- |  | -------------------------------------------------------------

|4.11 |  | Pointsec
Mobile Technologies Inc. 2006 Stock Option Plan (12)
|---- |  | -------------------------------------------------------------

|4.12 |  | Check
Point Software Technologies Ltd. Employee Stock Purchase Plan (13)
|---- |  | ------------------------------------------------------------------------

|4.13 |  | A
 translation  of an agreement  between Tzlil Ad Ltd. and Check Point  Software
 Technologies  Ltd.,  for the              purchase of the leasing rights of a building
in Tel Aviv, Israel, dated as of March 19, 2006 (14)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 |  | List
of subsidiaries (15)
|- |  | -------------------------

|10 |  | Consent
of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global
|-- |  | ---------------------------------------------------------------------------

|12.1 |  | Certification
of the Chief Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Chief Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------

|13 |  | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
|-- |  | -------------------------------------------------------------------------------------------------------

98

---

---



|(1) | Incorporated
by reference to Exhibit 1 of Check Points Annual Report on                Form 20-F
for the year ended December 31, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference to Exhibit 4.1 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
by reference to Exhibit 10.3 of Check Points Registration                Statement
on Form F-1 originally filed with the Securities and Exchange                Commission
on May 31, 1996.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
by reference to Exhibit 4.6 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
by reference to Exhibit 4.7 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated
by reference to Exhibit 4.8 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated
by reference to Exhibit 4.7 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated
by reference to Exhibit 4.8 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated
by reference to Exhibit 4.1 of Check Point Software Technologies                Ltd.s
Registration Statement on Form S-8 filed with the Securities and                Exchange
Commission on April 15, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated
by reference to Exhibit 4.1 of Check Point Software Technologies                Ltd.s
Registration Statement on Form S-8 filed with the Securities and                Exchange
Commission on April 19, 2007.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated
by reference to Exhibit 4.2 of Check Point Software Technologies                Ltd.s
Registration Statement on Form S-8 filed with the Securities and                Exchange
Commission on April 19, 2007.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated
by reference to Exhibit 4.3 of Check Point Software Technologies                Ltd.s
Registration Statement on Form S-8 filed with the Securities and                Exchange
Commission on April 19, 2007.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated
by reference to Exhibit 4.10 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2005.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated
by reference to Exhibit 4.11 of Check Points Annual Report on                Form
20-F for the year ended December 31, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated
by reference to Item 4  Information on Check Point                 Organizational
Structure in this Annual Report on Form 20-F.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

99

---

---



# CHECK POINT SOFTWARE
TECHNOLOGIES LTD.

# AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2007

# IN U.S. DOLLARS

# INDEX

|                                                                 | Page       
|---------------------------------------------------------------- | -----------
|
|Management's Report on Internal Control Over Financial Reporting | F-2        
|                                                                
|Reports of Independent Registered Public Accounting Firm         | F-3 - F-5  
|                                                                
|Consolidated Balance Sheets                                      | F-6 - F-7  
|                                                                
|Consolidated Statements of Income                                | F-8        
|                                                                
|Statements of Changes in Shareholders' Equity                    | F-9 - F-10 
|                                                                
|Consolidated Statements of Cash Flows                            | F-11       
|                                                                
|Notes to Consolidated Financial Statements                       | F-12 - F-48



---

---



# MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our
management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Our internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and
procedures that:

| | pertain
to the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect        the transactions and dispositions of our assets
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
management recognizes that there are inherent limitations in the effectiveness of any
system of internal control over financial reporting, including the possibility of human
error and the circumvention or override of internal control. Accordingly, even effective
internal control over financial reporting can provide only reasonable assurance with
respect to financial statement preparation, and may not prevent or detect all
misstatements. Further, because of changes in conditions, the effectiveness of internal
control over financial reporting may vary over time.

Our
management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. In conducting its assessment of internal control over financial
reporting, management based its evaluation on the framework in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Our management has concluded based on its assessment, that
our internal control over financial reporting was effective as of December 31, 2007 based
on these criteria.

Our
financial statements and internal control over financial reporting have been audited by
Kost, Forer, Gabbay & Kasierer (A Member of Ernst & Young Global), an independent
registered public accounting firm.

F - 2

---

---





# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders
and Board of Directors of

# CHECK POINT SOFTWARE
TECHNOLOGIES LTD.

We
have audited the accompanying consolidated balance sheets of Check Point Software
Technologies Ltd. (the Company) and subsidiaries as of December 31, 2006 and
2007, 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,
2007. 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
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 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 management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above, present fairly, in all material
respects, the consolidated financial position of the Company and subsidiaries at
December 31, 2006 and 2007, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.

As
discussed in Note 2(r) to the consolidated financial statements, the Company adopted the
provision of Statement of Financial Accounting Standard No. 123(R), Shared-Based
Payment, effective January 1, 2006.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company and subsidiaries internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2008 expressed an unqualified
opinion thereon.

|                  |                                 
|----------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel  | KOST FORER GABBAY & KASIERER    
|February 28, 2008 | A Member of Ernst & Young Global
|                  |                                 

F - 3

---

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
CHECK POINT SOFTWARE TECHNOLOGIES LTD.

We
have audited Check Point Software Technologies Ltd.s (Check Point or the
Company) internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Check Points management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
the Companys internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A
companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

F - 4

---

---





In
our opinion, Check Point maintained in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Check Point and
subsidiaries as of December 31, 2006 and 2007, 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, 2007 and our report dated February 28, 2008 expressed
an unqualified opinion thereon.

|                  |                                 
|----------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel  | KOST FORER GABBAY & KASIERER    
|February 28, 2008 | A Member of Ernst & Young Global
|                  |                                 

F - 5

---

---



|                                                           
|-----------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. Dollars in Thousands (except share amounts)           

|                                                                                  | December 31,
|--------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                            |             
|                                                                                  |             
|CURRENT ASSETS:                                                                   |             
|Cash and Cash Equivalents                                                         |             
|Marketable Securities                                                             |             
|Trade Receivables (net of allowances for doubtful accounts and product returns of |             
|$ 5,746 and $ 6,535 as of December 31, 2006 and 2007, respectively)               |             
|Other Current Assets                                                              |             
|                                                                                  |             
|                                                                                  |             
|Total Current Assets                                                              |             
|                                                                                  |             
|                                                                                  |             
|LONG-TERM ASSETS:                                                                 |             
|Marketable Securities                                                             |             
|Property and Equipment, Net                                                       |             
|Severance Pay Fund                                                                |             
|Deferred Tax Asset, Net                                                           |             
|Other Intangible Assets, Net                                                      |             
|Goodwill                                                                          |             
|Other Assets                                                                      |             
|                                                                                  |             
|                                                                                  |             
|Total Long-Term Assets                                                            |             
|                                                                                  |             
|                                                                                  |             
|Total Assets                                                                      |             
|                                                                                  |             

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

F - 6

---

---



|                                                           
|-----------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. Dollars in Thousands (except share amounts)           

|                                                                                   | December 31,
|---------------------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                               |             
|                                                                                   |             
|CURRENT LIABILITIES:                                                               |             
|Trade Payables                                                                     |             
|Employee and Payroll Accruals                                                      |             
|Deferred Revenues                                                                  |             
|Accrued Expenses and Other Liabilities                                             |             
|                                                                                   |             
|                                                                                   |             
|Total Current Liabilities                                                          |             
|                                                                                   |             
|                                                                                   |             
|LONG-TERM LIABILITIES:                                                             |             
|Income Tax Accrual                                                                 |             
|Deferred Tax Liability, Net                                                        |             
|Accrued Severance Pay                                                              |             
|                                                                                   |             
|                                                                                   |             
|                                                                                   |             
|                                                                                   |             
|                                                                                   |             
|Total Liabilities                                                                  |             
|                                                                                   |             
|                                                                                   |             
|SHAREHOLDERS' EQUITY:                                                              |             
|Share Capital -                                                                    |             
|Preferred shares, NIS 0.01 par value, 5,000,000 shares authorized, no              |             
|shares issued                                                                      |             
|Deferred shares, NIS 1 par value, 10 shares authorized, 1 share issued and         |             
|outstanding                                                                        |             
|Ordinary shares, NIS 0.01 par value, 500,000,000 shares authorized, 261,223,970    |             
|shares issued as of December 31, 2006 and 2007; 225,689,619 and 218,553,498 shares |             
|outstanding as of December 31, 2006 and 2007, respectively                         |             
|Additional Paid-in Capital                                                         |             
|Treasury Shares at Cost - 35,534,351 and 42,670,472 Ordinary shares as of          |             
|December 31, 2006 and 2007, respectively                                           |             
|Accumulated Other Comprehensive Income (loss)                                      |             
|Retained Earnings                                                                  |             
|                                                                                   |             
|                                                                                   |             
|Total Shareholders' Equity                                                         |             
|                                                                                   |             
|                                                                                   |             
|Total Liabilities and Shareholders' Equity                                         |             
|                                                                                   |             
|                                                                                   |             

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

F - 7

---

---



|                                                           
|-----------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF INCOME                          
|                                                           
|U.S. Dollars in Thousands (except per share amounts)       

|                                                       | Year ended December 31,
|------------------------------------------------------ | -----------------------
|
|
|
|
|Revenues:                                              |                        
|Products and licenses                                  |                        
|Software updates, maintenance and services             |                        
|                                                       |                        
|                                                       |                        
|Total Revenues                                         |                        
|                                                       |                        
|                                                       |                        
|Operating expenses: *)                                 |                        
|Cost of products and licenses **)                      |                        
|Cost of software updates, maintenance and services **) |                        
|Amortization of technology                             |                        
|                                                       |                        
|                                                       |                        
|Total Cost of Revenues                                 |                        
|                                                       |                        
|Research and development                               |                        
|Selling and marketing                                  |                        
|General and administrative                             |                        
|Acquired in-process research and development           |                        
|                                                       |                        
|                                                       |                        
|Total Operating Expenses                               |                        
|                                                       |                        
|                                                       |                        
|Operating Income                                       |                        
|Financial Income, Net                                  |                        
|                                                       |                        
|                                                       |                        
|Income Before Taxes on Income                          |                        
|Taxes on Income                                        |                        
|                                                       |                        
|                                                       |                        
|Net Income                                             |                        
|                                                       |                        
|                                                       |                        
|Basic Earnings per Ordinary Share                      |                        
|                                                       |                        
|                                                       |                        
|Diluted Earnings per Ordinary Share                    |                        
|                                                       |                        

|*) | Includes
stock-based compensation to employees in the following items:
|-- | ----------------------------------------------------------------------

|                                                   |  |  |  
|-------------------------------------------------- |  |  | -
|
|
|
|
|Cost of products and licenses                      |  |  | $
|Cost of software updates, maintenance and services |  |  |  
|Research and development                           |  |  |  
|Selling and marketing                              |  |  |  
|General and administrative                         |  |  |  
|                                                   |  |  |  
|                                                   |  | 
|Total Stock-Based Compensation Expenses            |  |  | $
|                                                   |  |  |  
|                                                   |  |  |  

|**) | Not
including amortization of technology shown separately below.
|--- | ----------------------------------------------------------------

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

F - 8

---

---



|                                                           
|-----------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY              
|                                                           
|U.S. Dollars in Thousands (except share amounts)           

|                                                                                     | Share
Capital | Additional
Paid-in
Capital | Deferred
Stock-Based
Compensation | Treasury
Shares
at Cost | Accumulated
Other
Comprehensive
Income (loss) | Retained
Earnings | Total
Comprehensive
Income | Total
Shareholders'
Equity
|------------------------------------------------------------------------------------ | ------------- | -------------------------- | --------------------------------- | ----------------------- | --------------------------------------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2005                                                        |               |                            | $                                 | 771                     |                                               | $                 | 369,246                    |                           
|                                                                                     |               |                           
|Tax benefit related to exercise of stock options                                     |               |                            |                                   | -                       |                                               |                   | 12,613                     |                           
|Issuance of shares under stock purchase plan and upon                                |               |                           
|exercise of options (1,030,741 Ordinary shares) and                                  |               |                           
|Issuance of shares in conjunction with the acquisition of                            |               |                           
|Zone Labs (1,631 Ordinary shares)                                                    |               |                            |                                   | 3                       |                                               |                   | 8,436                      |                           
|Issuance of treasury shares under stock purchase   plan and upon exercise of options |               |                           
|(5,675,259 Ordinary shares)                                                          |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Reversal of deferred stock-based compensation upon                                   |               |                           
|forfeiture of options issued to employees in conjunction                             |               |                           
|with the acquisition of Zone Labs                                                    |               |                            |                                   | -                       |                                               |                   | (3,766                     | )                         
|Treasury shares at cost (10,615,500 Ordinary shares)                                 |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Amortization of deferred stock-based compensation in                                 |               |                           
|conjunction with the acquisition of Zone Labs                                        |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Comprehensive income, net of tax -                                                   |               |                           
|Realized losses on hedging derivative instruments                                    |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Unrealized gain on hedging derivative instruments                                    |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Unrealized losses on marketable securities,                                          |               |                           
|net of $ 3,044 tax                                                                   |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Net income                                                                           |               |                            |                                   | -                       |                                               |                   | -                          |                           
|                                                                                     |               |                            |                                   |                         |                                               |                   |                            |                           
|Total Comprehensive Income                                                           |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                                     |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                                     |               |                           
|                                                                                     |               |                            |                                   |                         |                                               |                   |                            |                           
|Balance as of December 31, 2005                                                      |               |                            | $                                 | 774                     |                                               | $                 | 386,529                    |                           
|                                                                                     |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                                     |               |                           
|Unrealized losses on marketable securities,                                          |               |                           
|net of $ 3,044 tax                                                                   |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                                     |               |                           
|Unrealized gain on hedging derivative instruments                                    |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                                     |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                                     |               |                           
|Accumulated other comprehensive loss as   of December 31, 2005                       |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                                     |               |                            |                                   |                         |                                               |                   |                            |                           

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

F - 9

---

---



|                                                           
|-----------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY              
|                                                           
|U.S. Dollars in Thousands (except share amounts)           

|                                                                          | Share
capital | Additional
paid-in
capital | Deferred
stock-based
compensation | Treasury
shares
at cost | Accumulated
other
comprehensive
income (loss) | Retained
earnings | Total
comprehensive
income | Total
shareholders'
Equity
|------------------------------------------------------------------------- | ------------- | -------------------------- | --------------------------------- | ----------------------- | --------------------------------------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of December 31, 2005                                           |               |                            | $                                 | 774                     |                                               | $                 | 386,529                    |                           
|Tax benefit related to exercise of stock options                          |               |                            |                                   | -                       |                                               |                   | 2,291                      |                           
|Issuance of treasury shares under stock 
 purchase plan and upon exercise |               |                           
|of options (4,630,614 Ordinary shares)                                    |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Treasury shares at cost (23,250,924 Ordinary  shares)                     |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Reclassification of deferred compensation to                              |               |                           
|additional paid-in capital                                                |               |                            |                                   | -                       |                                               |                   | (2,831                     | )                         
|Stock-based compensation expense related to  employees                    |               |                            |                                   | -                       |                                               |                   | 36,392                     |                           
|Comprehensive income, net of tax -                                        |               |                           
|Realized losses on hedging derivative  instruments                        |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Realized gains on marketable securities                                   |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Unrealized gains on marketable securities, net                            |               |                           
|of $ 988 tax                                                              |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Net income                                                                |               |                            |                                   | -                       |                                               |                   | -                          |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|Total Comprehensive Income                                                |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                           
|Balance as of December 31, 2006                                           |               |                            | $                                 | 774                     |                                               | $                 | 422,381                    |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                           
|Unrealized losses on marketable securities, net                           |               |                           
|of $ 2,056 tax                                                            |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|Accumulated other comprehensive loss as of December 31, 2006              |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                           
|Balance as of December 31, 2006                                           |               |                            |                                   | 774                     |                                               |                   | 422,381                    |                           
|Tax benefit related to exercise of stock options                          |               |                            |                                   | -                       |                                               |                   | 6,828                      |                           
|Issuance of treasury shares under stock plans,                            |               |                           
|upon exercise of options and vesting of                                   |               |                           
|restricted stock units (1,885,379 Ordinary shares                         |               |                           
|net of 16,578 for taxes)                                                  |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Treasury shares at cost (9,021,500 Ordinary  shares)                      |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Stock-based compensation expense related to
 employees                    |               |                            |                                   | -                       |                                               |                   | 34,052                     |                           
|Issuance of stock options related to the                                  |               |                           
|acquisition of Protect Data                                               |               |                            |                                   | -                       |                                               |                   | 1,069                      |                           
|Comprehensive income, net of tax -                                        |               |                           
|Realized losses on marketable securities                                  |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Unrealized gains on marketable securities, net                            |               |                           
|of $ 2,430 tax                                                            |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Net income                                                                |               |                            |                                   | -                       |                                               |                   | -                          |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|Total Comprehensive Income                                                |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                           
|Balance as of December 31, 2007                                           |               |                            | $                                 | 774                     |                                               | $                 | 464,330                    |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                           
|Unrealized gains on marketable securities, net  of $ 374 tax              |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|Accumulated other comprehensive loss as of December 31, 2007              |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                                          |               |                            |                                   |                         |                                               |                   |                            |                           

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

F - 10

---

---



|                                                           
|-----------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF CASH FLOWS                      
|                                                           
|U.S. Dollars in Thousands                                  

|                                                                           | Year ended December 31,
|-------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                                      |                        
|Net income                                                                 |                        
|Adjustments  required to reconcile  net income to net cash provided by     |                        
|operating activities:                                                      |                        
|Depreciation and amortization of property and equipment                    |                        
|Amortization  of  marketable securities premium and (accretion of          |                        
|discount), net                                                             |                        
|Realized loss on sale of marketable securities, net                        |                        
|Acquisition of in-process research and development                         |                        
|Amortization of intangible assets                                          |                        
|Stock-based compensation                                                   |                        
|Deferred income taxes, net                                                 |                        
|Increase in trade receivables, net                                         |                        
|Decrease (increase) in other current assets and other assets               |                        
|Increase (decrease) in trade payables                                      |                        
|Increase (decrease) in employees and payroll accruals                      |                        
|Increase (decrease) in accrued expenses and other liabilities              |                        
|Increase in deferred revenues                                              |                        
|Tax benefit related to exercise of stock options                           |                        
|Excess tax benefit from stock-based compensation                           |                        
|Increase in accrued severance pay, net                                     |                        
|                                                                           |                        
|                                                                           |                        
|Net cash provided by operating activities                                  |                        
|                                                                           |                        
|                                                                           |                        
|Cash flows from investing activities:                                      |                        
|Cash paid in conjunction with the acquisition of NFR, net of acquired cash |                        
|Cash paid in conjunction with the acquisition of Protect Data, net of      |                        
|acquired cash                                                              |                        
|Payments made in connection with prior years acquisitions                  |                        
|Proceeds from maturity of marketable securities                            |                        
|Proceeds from sale of marketable securities                                |                        
|Investment in marketable securities                                        |                        
|Purchase of property and equipment                                         |                        
|                                                                           |                        
|                                                                           |                        
|Net cash provided by (used in) investing activities                        |                        
|                                                                           |                        
|                                                                           |                        
|Cash flows from financing activities:                                      |                        
|Proceeds  from  issuance of shares under stock purchase plan and upon      |                        
|exercise of options                                                        |                        
|Purchase of treasury shares at cost                                        |                        
|Repayment of loans related to NFR                                          |                        
|Excess tax benefit from stock-based compensation                           |                        
|                                                                           |                        
|                                                                           |                        
|Net cash used in financing activities                                      |                        
|                                                                           |                        
|                                                                           |                        
|Increase (decrease) in cash and cash equivalents                           |                        
|Cash and cash equivalents at the beginning of the year                     |                        
|                                                                           |                        
|                                                                           |                        
|Cash and cash equivalents at the end of the year                           |                        
|                                                                           |                        
|                                                                           |                        
|Supplemental disclosure of cash flow information:                          |                        
|Cash paid during the year for income taxes                                 |                        
|                                                                           |                        
|                                                                           |                        
|Supplemental disclosures of non cash financing and investing activities    |                        
|Net change in unrealized loss (gain) on marketable securities              |                        
|Amount due to shareholders in connection with NFR's acquisition            |                        
|                                                                           |                        
|Fair value of vested Protect Data's options assumed                        |                        
|Amount due to shareholders in connection with Protect Data's               |                        
|acquisition (see Note 3 for liabilities assumed in acquisitions)           |                        
|                                                                           |                        

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

F - 11

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 1: |  | GENERAL
|------- | - | -------

| | a. | Check Point Software Technologies Ltd. (Check Point Ltd.), an
               Israeli corporation, and its subsidiaries (collectively the Company
               or Check Point), are engaged in developing, marketing and supporting
               internet and data security solutions for enterprise networks and service
               providers.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company operates in one reportable segment and its revenues are mainly derived from the
sales of its network and data security products including licenses, related software
updates, maintenance, support and other services The Company sells its products worldwide
primarily through multiple distribution channels (channel partners) including
distributors, resellers, system integrators, Original Equipment Manufacturers
(OEMs) and Managed Security service Providers (MSPs).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys Singaporean subsidiary holds most of the Companys financial assets.
The financial assets management is performed by the subsidiarys U.S. branch.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | During 2005, approximately 24% of the Companys revenues were derived from
               two channel partners, 12% each. During 2006 approximately 26% of the
               Companys revenues were derived from the same two channel partners, 15%
               from one channel partner and 11% from the other. During 2007, approximately 30%
               of the Companys revenues were derived from the same two channel partners,
               16% from one channel partner and 14% from the other. Trade receivable balance
               from the two largest channel partners was $ 37,140 as of December 31, 2006
               and $ 53,047 as of December 31, 2007.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

| | The
 consolidated   financial  statements  are  prepared  according  to  United  States
 generally  accepted               accounting principles ("U.S. GAAP").
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of Estimates:
| | -- | -----------------

| | The
preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates, judgments and assumptions. The
Companys management believes that the estimates, judgments and assumptions used are
reasonable based upon information available at the time they are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial statements,
and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | b. | Financial
Statements in United States Dollars:
| | -- | ----------------------------------------------

| | Most
of the Companys revenues are denominated in United States dollars
(dollars). In addition, most of the Companys costs are incurred in
dollars, Euro, Swedish Kronas and Israeli shekel. The Companys management believes
that the dollar is the primary currency of the economic environment in which Check Point
Ltd. and each of its subsidiaries operate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Thus,
the dollar is their functional and reporting currency. Accordingly, monetary accounts
maintained in currencies other than the dollar are remeasured into dollars in accordance
with Statement of Financial Accounting Standard (SFAS) No. 52 Foreign
Currency Translation. Changes in currency exchange rates between the Companys
functional currency and the currency in which a transaction is denominated are included in
the Companys results of operations as financial income (expense) in the period in
which the currency exchange rates change.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Principles
of Consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of Check Point Ltd. and its
subsidiaries. Intercompany transactions and balances have been eliminated upon
consolidation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Reclassifications:
| | -- | ------------------

| | Certain
amounts in prior years financial statements have been reclassified to conform to the
current years presentation.
| | --------------------------------------------------------------------------------------------------------------------------

| | e. | Cash
Equivalents:
| | -- | -----------------

| | Cash
equivalents are short-term highly liquid investments that are readily convertible to cash
with original maturities of three months or less at acquisition.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Investments
in Marketable Securities:
| | -- | -------------------------------------

| | The
Company accounts for investments in marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
determines the appropriate classification of its investments at the time of purchase and
reevaluates such determinations at each balance sheet date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company classifies all of its securities as available for sale. Available for sale
securities are carried at fair value, with the unrealized gains and losses, net of tax,
reported in accumulated other comprehensive income (loss) in
shareholders equity. Realized gains and losses on sale of investments are included
in earnings and are derived using the specific identification method for determining the
cost of securities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
amortized cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization together with interest and dividends on
securities are included in financial income, net.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
income resulting from investments in structured notes is accounted for under the provision
of Emerging Issue Task Force No. 96-12, Recognition of Interest Income and Balance
Sheet Classification of Structured Notes (EITF No. 96-12). Under EITF
No. 96-12, the retrospective interest method should be used for recognizing interest
income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Property
and Equipment:
| | -- | -----------------------

| | Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated useful lives of the assets at
the following annual rates:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                    | %                                  
| | ---------------------------------- | -----------------------------------
|
|
|
|
| | Computers and peripheral equipment | 33-50                              
| | Office furniture and equipment     | 10-20                              
| | Building                           | 4                                  
| | Land                               | 0                                  
| | Leasehold improvements             | The shorter of term of the lease or
| |                                    | the useful life of the asset       
| |                                    |                                    

| | Property
and equipment are periodically reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
During 2005, 2006 and 2007, no impairment was recorded.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Goodwill
and Other Intangible Assets:
| | -- | -------------------------------------

| | Goodwill
and certain other purchased intangible assets have been recorded as a result of
acquisitions. Goodwill represents the excess of the purchase price in a business
combination over the fair value of net tangible and intangible assets acquired. Goodwill
is not amortized, but rather is subject to an annual impairment test. The Company
performs an annual impairment test during the fourth quarter of each fiscal year, or more
frequently if impairment indicators are present. The Company operates in one operating
segment, and this segment comprises its only reporting unit. Intangible assets that are
not considered to have an indefinite useful life are amortized using the straight-line
basis over their estimated useful lives, which range from one to 20 years. The carrying
amount of these assets is reviewed whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Recoverability of these
assets is measured by comparison of the carrying amount of the asset to the future
undiscounted cash flows the asset is expected to generate. If the asset is considered to
be impaired, the amount of any impairment is measured as the difference between the
carrying value and the fair value (usually discounted cash flow) of the impaired asset.
During 2005, 2006 and 2007, no impairment loss was recorded.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | i. | Research
and Development Costs:
| | -- | -------------------------------

| | Research
and development costs are charged to the statement of income as incurred. SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, requires capitalization of certain software development costs subsequent
to the establishment of technological feasibility.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on the Companys product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company between
completion of the working models and the point at which the products are ready for
general release has been insignificant. Therefore, allresearch and development
costs have been expensed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Revenue
Recognition:
| | -- | --------------------

| | The
Company derives its revenues mainly from products and licenses, software updates,
maintenance and support services. The Company sells its products primarily through
channel partners including distributors, resellers, OEMs, system integrators and MSPs,
all of whom are considered end-users. The Company also sells its products directly to end
users primarily through its web site.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for software sales in accordance with Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, as amended by SOP No. 98-9, Modification
of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain
Transactions. (collectively SOP 97-2). Software license revenue is
recognized when persuasive evidence of an arrangement exists, the software license has
been delivered, there are no uncertainties surrounding product acceptance, there are no
significant future performance obligations, the license fees are fixed or determinable
and collection of the license fee is considered probable. Amounts received in advance of
meeting these criteria are deferred. Fees for arrangements with payment terms extending
beyond customary payment terms are considered not to be fixed or determinable, in which
case revenue is deferred and recognized when payments become due from the customer or are
actually collected, providing that all other revenue recognition criteria have been met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
required by SOP 97-2, the Company determines the value of the software component of
its multiple-element arrangements using the residual method when vendor specific
objective evidence (VSOE) of fair value exists for the undelivered elements of the
support and maintenance agreements. VSOE is based on the price charged when an element is
sold separately or renewed. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements and is recognized as revenue.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Software
updates and maintenance provide customers with rights to unspecified software product
upgrades released during the term of the agreement. Support services grant the Companys
customers telephone access to technical support personnel during the term of the service.
The Company recognizes revenues from software updates, maintenance and support services
ratably over the term of the agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenues represent mainly the unrecognized fees billed for updates, maintenance and
support services.
| | --------------------------------------------------------------------------------------------------------------

| | The
Company follows very specific and detailed guidelines in measuring revenue, several of
which are discussed above. The Company determines the fair value of each type of
undelivered element as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
enterprise products, the Company determines the fair value based on the renewal prices
charged for software updates, maintenance and support services. The Company offers
several levels of services, classified by services offered, response time, and
availability. The Company has defined classes of customers, based on the total gross
value of licensed software products the customer purchased from the Company. The Company
prices renewals for each service level and each class of customer as a fixed percentage
of the total gross value of licensed software products the customer purchased.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
its consumer products, the Company determines the fair value based on the renewal prices
of software updates, maintenance and support services for the different products offered.
The renewal prices are based on its price list.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Company reported license related revenue, pursuant to sale of the right to use
one of the Companys patents for unlimited period. Such revenues were recognized in
accordance with Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company records a provision for estimated sales returns and allowances on product and
service related sales in the same period the related revenues are recorded in accordance
with FASB Statement No. 48, Revenue Recognition When Right of Return Exists.
These estimates are based on historical sales returns, analysis of credit memo data and
other known factors. Such provisions amounted to $ 1,868 and $ 912 as of
December 31, 2006 and 2007, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Cost
of Revenues:
| | -- | -----------------

| | In
2007 the Company changed its presentation of cost of revenues to separately show cost of
products and licenses, cost of software updates, maintenance and services and
amortization of technology. 2005 and 2006 cost of revenues have been reclassified to
conform to the current years presentation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
of products and licenses is comprised of cost of software and hardware production,
manuals, packaging and license fees paid to third party.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Cost
of Software updates, maintenance and services is comprised of cost of post sale customer
support, training and consulting.
| | -------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of technology is comprised of amortization of core technology assets which are used in
the Companys operations, and is included separately in cost of revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Severance
Pay:
| | -- | --------------

| | The
Companys liability for severance pay is calculated pursuant to Israeli severance
pay law based on the most recent salary of the employees multiplied by the number of
years of employment as of the balance sheet date. The Company records as expenses the
increase in the severance liability, net of earnings from the related investment fund.
Employees are entitled to one months salary for each year of employment, or a
portion thereof. Until December 31, 2006, the Companys liability is partially
provided by monthly payments deposited with insurers; any unfunded amounts would be paid
from operating funds and are covered by a provision established by the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
from January 1, 2007, the Company increased its contribution to the deposited funds to
cover the full amount of the employees monthly salary accrual for the year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying value of deposited funds includes profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor agreements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2005, 2006 and 2007, were $ 2,570, $ 3,169
and $ 3,982, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

| | m. | Employee
Benefit Plan:
| | -- | ----------------------

| | The
Company has a 401(K) defined contribution plan covering certain employees in the U.S. All
eligible employees may elect to contribute up to 50%, but generally not greater than $ 15
per year, of their annual compensation to the plan through salary deferrals, subject to
IRS limits. Effective from January 1, 2006 the Company matches 50% of employee
contributions to the plan up to a limit of 3% of their eligible compensation. In 2006 and
2007, the Company matched contributions in the amount of $ 571 and $ 623,
respectively. Prior to January 1, 2006, the Company made no matching contributions
to the plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Income
Taxes:
| | -- | -------------

| | The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109). SFAS No. 109 prescribes the use of the
liability method whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to amounts more likely than not to be realized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Deferred
tax liabilities and assets are classified as current or non current based on the
classification of the related asset or liability for financial reporting, or according to
the expected reversal dates of the specific temporary differences if not related to an
asset or liability for financial reporting.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. The Company accrues interest and penalties related to
unrecognized tax benefits in its provision for income tax.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Advertising
Expenses:
| | -- | ---------------------

| | Advertising
costs are expensed as incurred. Advertising expenses for the years ended December 31,
2005, 2006 and 2007, were $ 2,692, $ 3,145 and $ 3,736, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Concentrations
of Credit Risk:
| | -- | ------------------------------

| | Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, marketable securities and trade receivables.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of the Companys cash and cash equivalents and marketable securities is
held by the Companys Singaporean subsidiary, invested in dollar and dollar-linked
investments, and is deposited in major banks in the U.S. and Europe. Deposits in the U.S.
may be in excess of insured limits and are not insured in other jurisdictions. Generally,
these deposits may be redeemed upon demand and, therefore, bear minimal risk.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities consist of investment-grade corporate bonds,
mortgage and asset-backed securities, structured notes, U.S. government agency securities
and sovereign bonds. The Companys investment policy, approved by the Investment
Committee, limits the amount the Company may invest in any one type of investment or
issuer, thereby reducing credit risk concentrations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the recent turmoil in capital markets, the Company has tightened its control
and monitoring over its marketable securities portfolio in order to minimize potential
risks stemming from current capital markets environment. Such measures included among
others: reducing credit exposure to financial sector securities and increasing the
overall credit quality of the portfolio.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Companys trade receivables are geographically diversified and derived from sales to
channel partners mainly in the United States, Europe and Asia. Concentration of credit
risk with respect to trade receivables is limited by credit limits, ongoing credit
evaluation and account monitoring procedures. The Company performs ongoing credit
evaluations of its channel partners and establishes an allowance for doubtful accounts
based upon a specific review of all significant outstanding invoices. For those invoices
not specifically reviewed, provisions are recorded at a specific rate, based upon the age
of the receivable, the collection history and current economic trends. Allowance for
doubtful accounts amounted to $ 3,878 and $ 5,623 as of December 31, 2006
and 2007, respectively. The Company charges off receivables when they are deemed
uncollectible. Actual collection experience may not meet expectations and may result in
increased bad debt expense. Bad debt expense amounted to $ 648, $ 490 and $ 2,316
in 2005, 2006 and 2007, respectively. Total write offs during 2005, 2006 and 2007
amounted to $ 1,072, $ 1,208 and $ 571, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Basic
and Diluted Earnings per Share:
| | -- | -------------------------------------

| | Basic
earnings per share is computed based on the weighted average number of Ordinary shares
outstanding during each year. Diluted earnings per share is computed based on the
weighted average number of Ordinary shares outstanding during each year, plus dilutive
potential Ordinary shares outstanding during the year, in accordance with SFAS No. 128,
Earnings Per Share .
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total weighted average number of shares related to the outstanding options excluded from
the calculations of diluted earnings per share, since they would have an anti-dilutive
effect, were 10,879,154, 15,474,949 and 14,284,200 for 2005, 2006 and 2007, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Accounting
for Stock-Based Compensation:
| | -- | ----------------------------------------

| | On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which requires the measurement and
recognition of compensation expense based on estimated fair values for all stock-based
payment awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB
No. 25), for periods beginning in fiscal year 2006. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107)
relating to SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its
adoption of SFAS No. 123(R). SFAS No. 123(R) requires companies to estimate the fair
value of equity-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is recognized
as an expense over the requisite service periods in the Companys consolidated
income statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Prior
to the adoption of SFAS No. 123(R), the Company accounted for equity-based awards to
employees and directors using the intrinsic value method in accordance with APB No. 25 as
allowed under SFAS No. 123, Accounting for Stock-Based Compensation(SFAS
No. 123). Pursuant to these accounting standards, the Company recorded deferred
compensation for stock options granted to employees at the date of grant equal to the
excess of the market value of the underlying shares at that date over the exercise price
of the options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS No. 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting the first day of the Companys
fiscal year 2006. Under that transition method, compensation cost recognized in the years
ended December 31, 2006 and 2007, includes: (a) compensation cost for all stock-based
payments granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS No. 123, and
(b) compensation cost for all stock-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). Results for prior periods have not been restated. The Company selected the
Black-Scholes option pricing model as the most appropriate fair value method for its
stock-options awards and values restricted stock based on the market value of the
underlying shares at the date of grant.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards granted subsequent
to January 1, 2006 based on the straight line method over the requisite service period of
each of the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Estimated forfeitures are based on actual
historical pre-vesting forfeitures. For awards granted prior to January 1, 2006, the
Company recognizes compensation expenses based on the accelerated attribution method over
the requisite service period of each of the awards. Forfeitures were previously accounted
for as they occurred, but have been estimated with the adoption of SFAS No. 123(R) for
those awards not yet vested.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the statement of
cash flows. SFAS No. 123(R) requires the cash flows resulting from the tax deductions in
excess of the compensation costs recognized for those stock options to be classified as
financing cash flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of stock options granted using the Black-Scholes-Merton
valuation model. The option-pricing model requires a number of assumptions, of which the
most significant are the expected stock price volatility and the expected option term.
Expected volatility was calculated based upon actual historical stock price movements.
The expected term of options granted is based upon historical experience and represents
the period of time that options granted are expected to be outstanding. The risk-free
interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The
Company has historically not paid dividends and has no foreseeable plans to pay dividends.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
fair value for options granted in 2005, 2006 and 2007 is estimated at the date of grant
using a Black-Scholes options pricing model with the following weighted average
assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                      | Year ended December 31,
| | ------------------------------------ | -----------------------
|
|
|
|
| | Expected volatility                  |                        
| | Risk-free interest rate              |                        
| | Dividend yield                       |                        
| | Expected life from vest date (years) |                        

| | Employee Stock Purchase Plan |  |  | 
| | ---------------------------- |  |  | 
|
|
|
|
| | Expected volatility          |  |  | 
| | Risk-free interest rate      |  |  | 
| | Dividend yield               |  |  | 
| | Expected life (years)        |  |  | 
| |                              |  |  | 

| | The
following table illustrates the effect on 2005 net income and earnings per share,
assuming that the Company had applied the fair value recognition provision of SFAS No.
123 on its stock-based employee compensation:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                          | Year ended
December 31,
2005
| | ------------------------------------------------------------------------ | ----------------------------
|
|
|
|
| | Net income, as reported                                                  |                             
| |                                                                          |                             
| | Add: Stock-based compensation expense included in reported net income in |                             
| | conjunction with the acquisition of Zone Labs                            |                             
| | Deduct: Stock-based compensation expense determined under fair value     |                             
| | method for all awards                                                    |                             
| |                                                                          |                             
| |                                                                          |                             
| | Pro forma net income                                                     |                             
| |                                                                          |                             
| |                                                                          |                             
| | Basic earnings per Ordinary share, as reported                           |                             
| |                                                                          |                             
| |                                                                          |                             
| | Diluted earnings per Ordinary share, as reported                         |                             
| |                                                                          |                             
| |                                                                          |                             
| | Basic pro forma earnings per Ordinary share                              |                             
| |                                                                          |                             
| |                                                                          |                             
| | Diluted pro forma earnings per Ordinary share                            |                             
| |                                                                          |                             

F - 21

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | s. | Fair
Value of Financial Instruments:
| | -- | ------------------------------------

| | The
following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | 1. | The
carrying amount of cash and cash equivalents, trade receivables and trade
          payables approximates their fair values due to the short-term maturities of
          these instruments.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
fair value of marketable securities with quoted market prices is based on
          quoted market prices.
| | -- | -------------------------------------------------------------------------------------------------------------

| | 3. | For
marketable securities not actively traded, fair values are estimated using
          values obtained from the Companys asset managers. To estimate the value
of           these investments the asset managers employ various models that take into
          consideration such factors, among others, as the credit rating of the issuer,
          effective maturity of the security, yields on comparably rated publicly traded
          securities, availability of insurance and risk-free yield curves. The actual
          value at which such securities could actually be sold or settled with a willing
          buyer or seller may differ from such estimated fair values depending on a
number           of factors including, but not limited to, current and future economic
          conditions, the quantity sold or settled, the presence of an active market and
          the availability of a willing buyer or seller.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
fair value of derivative instruments is estimated by obtaining quotes from
          brokers.
| | -- | -------------------------------------------------------------------------------------------------

| | t. | Comprehensive
Income
| | -- | --------------------

| | The
Company accounts for comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
stockholders equity during the period except those resulting from investments by,
or distributions to, stockholders. The Company determined that its items of other
comprehensive income relates to gain and loss on hedging derivative instruments and
unrealized gains and losses on available for sale securities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Treasury
Stock
| | -- | --------------

| | The
Company repurchases its Ordinary Shares from time to time on the open market or in other
transactions and holds such shares as treasury stock. The Company presents the cost to
repurchase treasury stock as a reduction of shareholders equity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | From
time to time the Company reissues treasury shares under the stock purchase plan, upon
exercise of option and upon vesting of restricted stock units. When treasury stock is
reissued, the Company accounts for the re-issuance in accordance with Accounting
Principles Board No. 6, Status of Accounting Research Bulletins (APB
No. 6) and charges the excess of the purchase cost over the re-issuance price
(loss) to retained earnings. The purchase cost is calculated based on the specific
identification method. In case the purchase cost is lower than the re-issuance price, the
Company credits the difference to additional paid-in capital.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | v. | Impact
of Recently Issued accounting Standards:
| | -- | -----------------------------------------------

| | In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS No. 157). This
Standard defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value
measurements. The provisions of SFAS No. 157 are effective for the Company
beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the
effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial
liabilities, except for those items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company does not expect the adoption will
have material impact on its consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on items for
which the fair value option has been elected be reported in earnings. The provisions of
SFAS No. 159 are effective for the Company beginning January 1, 2008. The
Company does not expect the adoption of SFAS No. 159 will have an impact on its
consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any non controlling interest
in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after December 15,
2008. Earlier adoption is prohibited. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS 141R on its consolidated results of
operations and financial condition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". SFAS No. 160
establishes accounting and reporting standards that require that the ownership interests
in subsidiaries held by parties other than the parent be clearly identified, labeled, and
presented in the consolidated statement of financial position within equity, but separate
from the parents equity; the amount of consolidated net income attributable to the
parent and to the noncontrolling interest be clearly identified and presented on the face
of the consolidated statement of income; and changes in a parents ownership
interest while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. The
Company does not expect the adoption of SFAS No. 160 will have significant impact on its
consolidated financial statement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 3: |  | ACQUISITIONS
|------- | - | ------------

| | a. | On
January 17, 2007 the Company completed the acquisition of 98.5% of shares of
          Protect Data AB (Protect Data) that at the time of the acquisition
          was a public company listed on the Stockholm Stock Exchange. During January
          2007, the Company initiated a delisting of the shares in Protect Data from the
          Stockholm Stock Exchange. On February 13, 2007, Protect Data has, in
          consultation with the Stockholm Stock Exchange, resolved to delist the shares
in           Protect Data from the Stockholm Stock Exchange. Protect Datas last day
of           trading was February 12, 2007. As of December 31, 2007, the Company obtained
          legal ownership of all of the shares of Protect Data on a fully diluted basis
          and recorded a liability to Protect Datas former shareholders in the
          amount of $ 8,579.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Protect
Data operates its business through its wholly-owned subsidiary, Pointsec Mobile
Technologies AB, a worldwide provider of mobile data protection. Pointsec delivers
solutions for automatic data encryption that keeps sensitive information, stored on
mobile computing devices such as laptops, PDAs, smartphones and removable media (e.g.,
USB devices) confidential and secure. With the acquisition of Protect Data, the
Company entered into the data security market and acquired strategic technology. Now the
Companys product portfolio has broadened beyond the boundaries of network security.
The acquisition was accounted for using the purchase method of accounting and,
accordingly the operating results of Protect Data are included in the Companys
accompanying consolidated financial statements from the date of acquisition, January 17,
2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total purchase price of Protect Data was composed of the following:
| | -----------------------------------------------------------------------

| |                                                   | 
| | ------------------------------------------------- | 
|
|
|
|
| | Cash paid                                         | 
| | Amount due to remaining shareholders              | 
| | Fair value of vested protect data options assumed | 
| | Acquisition related transaction costs             | 
| |                                                   | 
| |                                                   | 
| | Total Purchase Price                              | 
| |                                                   | 

| | The
fair value of the vested option assumed was determined using a Black-Scholes-Merton
valuation model with the following assumptions: expected life of 3 years, risk-free
interest rate of 4.69%, expected volatility of 31% and no dividend yield. The fair value
of unvested Protect Data options related to future service is being amortized on a
straight-line basis over the remaining service period, while the value of vested options
is included in total purchase price.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Acquisition
related transaction costs include investment banking fees, legal and accounting fees and
other external costs directly related to the acquisition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 3: |  | ACQUISITIONS (Cont.)
|------- | - | --------------------

| | Purchase
Price Allocation
| | -------------------------

| | Under
business combination accounting, the total purchase price was allocated to Protect Datas
net tangible and identifiable intangible assets based on their estimated fair values as
set forth below. The excess of the purchase price over the net tangible and identifiable
intangible assets was recorded as goodwill.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 | 
| | ----------------------------------------------- | 
|
|
|
|
| | Cash and cash equivalents                       | 
| | Accounts receivable                             | 
| | Other assets                                    | 
| | Accounts payable and other liabilities          | 
| | Deferred revenues                               | 
| | Intangible assets                               | 
| | In process research and development             | 
| | Goodwill (Not tax deductible)                   | 
| | Other accrued liabilities (including payable to | 
| | remaining shareholders)                         | 
| | Deferred tax liabilities                        | 
| |                                                 | 
| |                                                 | 
| | Total Purchase Price                            | 
| |                                                 | 
| |                                                 | 

| | Intangible
Assets
| | -----------------

| | In
performing the purchase price allocation, the Company considered, among other factors,
the intention for future use of acquired assets, analyses of historical financial
performance and estimates of future performance of Protect Datas products. The fair
value of intangible assets was based on a valuation completed by a third party valuation
firm using an income approach and estimates and assumptions provided by management. The
following table sets forth the components of intangible assets associated with the
Protect Data acquisition:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | Fair Value | Useful Life
| | ----------------------- | ---------- | -----------
|
|
|
|
| | Customer relationships  |            |            
| | Core technology         |            |            
| | Trade names             |            |            
| |                         |            |            
| |                         |            |            
| | Total Intangible Assets |            |            
| |                         |            |            
| |                         |            |            

| | (*) | Weighted
average amortization period of 6 years.
| | --- | ------------------------------------------------

F - 25

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 3: |  | ACQUISITIONS (Cont.)
|------- | - | --------------------

| | Customer
relationships represent the underlying relationships and agreements with Protect Datas
installed customer base.
| | -------------------------------------------------------------------------------------------------------------------------

| | Core
technology represents a combination of Protect Data processes, patents and trade secrets
related to the design and development of its software products. This proprietary know-how
can be leveraged to develop new technology and improve the Companys software
products.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
names value represents the recognition value of Protect Data s brand name as a
result of advertising expenditures for customer relations and the technological
development to provide consistent, leading edge products and a strong research and
development commitment by the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company expensed in-process research and development (IPR&D) in the
amount of $ 17 million upon acquisition as it represents incomplete Protect Data
research and development projects that had not reached technological feasibility and had
no alternative future use as of the date of the acquisition. The value assigned to
IPR&D was determined by considering the importance of the project to the Companys
overall development plan, estimating costs to develop the purchased IPR&D into
commercially viable products, estimating the resulting net cash flow from the project
when completed and discounting the net cash flow to its present value based on the
percentage of completion of the IPR&D projects.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded a deferred tax liability on the purchase date for the difference between
the assigned values and the tax bases of the net assets acquired in the acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the first quarter of fiscal year 2007, the Company approved a plan to restructure certain
operations of Protect Data to eliminate redundant costs resulting from the acquisition
and improve efficiencies in operations. The restructuring charges recorded are based on
restructuring plan that have been committed to by management.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total estimated restructuring costs associated with exiting activities of Protect Data
are $ 2,742, consisting of employee severance costs as well as excess facilities
obligations through fiscal 2008. These costs were recognized as a liability assumed in
the purchase business combination and included in the allocation of the cost to acquire
Protect Data and, accordingly, have resulted in an increase to goodwill. The
restructuring costs may change as management executes the approved plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Summary of the Plan | Estimated

costs | Cash

payments | Accrued as of
December 31,
2007
| | ------------------- | ---------------- | -------------- | -------------------------------
|
|
|
|
| | Severance           |                  |                | $                              
| | Facilities          |                  |                |                                
| |                     |                  |                |                                
| |                     |                  |               
| | Total Restructuring |                  |                | $                              
| |                     |                  |                |                                
| |                     |                  |                |                                

F - 26

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 3: |  | ACQUISITIONS (Cont.)
|------- | - | --------------------

| | The
following unaudited condensed combined pro forma information for the year ended December
31, 2006, gives effect to the acquisition of Protect Data as if the acquisition had
occurred on January 1, 2006. For the purposes of the pro forma information, the Company
has assumed that, net income for the period presented excludes the write-off of acquired
IPR&D of $ 17,000 and includes amortization of intangible assets related to the
acquisition of $ 33,000 per year, stock-based compensation charges for unvested
options assumed of $ 835 thousand in 2006 and related tax effects.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            | Year ended
December 31,
2006
| | -------------------------- | ----------------------------
|
|
|
|
| | Revenues                   |                             
| |                            |                             
| |                            |                             
| | Net income                 |                             
| |                            |                             
| |                            |                             
| | Basic earnings per share   |                             
| |                            |                             
| |                            |                             
| | Diluted earnings per share |                             
| |                            |                             
| |                            |                             

| | The
acquisition does not have a material effect on pro forma financial data for the period
from January 1, 2007 to January 16, 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
December 2006, the Company acquired NFR Security, Inc. (the Minor
          acquisition) a leader in real-time threat prevention for $ 14,558 in
          cash and $ 334 in related acquisition costs. The purchase price was
          allocated to tangible and intangible assets acquired and liabilities assumed
          based on their respective fair values. As part of the allocation, $ 7,820
          was allocated to goodwill and $ 8,920 was allocated to amortizable
          intangible assets (technology, customer relationships and trademarks) that are
          being amortized over their estimated useful lives of one to four years. During
          2007, the Company recorded additional goodwill of $ 1,552 thousand as a
          result of a change in assumptions related to deferred taxes. At the
          acquisition date, the Company recorded a $ 1,060 charge for acquired
          in-process research and development (IPR&D) in conjunction with
          projects which have not yet reached technological feasibility and which have no
          alternative future use. The results of the aforementioned acquisition are
          included with that of the Company for the period subsequent to the acquisition
          date. Significant liabilities assumed included loans from banks and bridge
loans           from investors in a total amount of approximately $ 1,833 that were
settled           by December 31, 2006 and accounts payable and other accrued expenses in
a total           amount of approximately $ 3,043.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition does not have a material effect on pro forma financial data.
| | ----------------------------------------------------------------------------

F - 27

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 4: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | Marketable
Securities with Contractual Maturities of Less than 1 year are as Follows:
| | -------------------------------------------------------------------------------------

|                       | December 31,
|---------------------- | ------------
|
|
|
|
|Government and         |             
|corporate              |             
|debentures -           |             
|fixed interest         |             
|rate                   |             
|Structured notes (*)   |             
|Government and         |             
|corporate              |             
|debentures -           |             
|floating interest      |             
|rate                   |             
|Mortgage and asset     |             
|backed securities (**) |             
|Auction rate           |             
|securities             |             
|                       |             
|                       |             
|                       |             
|                       |             

| | Marketable
 Securities  with  Contractual  Maturities  of after 1 year through 5 ears are as
                     Follows:
| | --------------------------------------------------------------------------------------------------------------------------

|                       | December 31,
|---------------------- | ------------
|
|
|
|
|
|Government and         |             
|corporate              |             
|debentures - fixed     |             
|interest rate          |             
|Structured notes (*)   |             
|Government and         |             
|corporate              |             
|debentures -           |             
|floating interest      |             
|rate                   |             
|Mortgage and asset     |             
|backed securities (**) |             
|Auction rate           |             
|securities (***)       |             
|                       |             
|                       |             
|                       |             
|                       |             
|                       |             

| | The
unrealized losses on the Companys investments in all types of securities are due
primarily to interest rate increases. Out of the unrealized loss as of December 31, 2006
and 2007, $ 11,641 and $ 4,587, respectively, of losses are outstanding over 12
month period. Since the Company has the ability and intent to hold these investments
until a recovery of fair value, which may be until maturity, the Company does not
consider these investments to be other-than-temporarily impaired as of December 31, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (*) | The
structured notes include mainly inverse floating interest rate bonds and           range
accrual bonds. Range accrual bonds are bonds where interest is paid only           if a
specified interest rate stays within a pre-established range, otherwise the
          bond pays no interest. Inverse floating rate bonds are bonds where the coupon
          varies inversely with changes in specified interest rates or indices (for
          example, LIBOR). The effective maturity dates may differ from the contractual
          maturities because debtors have the right to call the obligations without
          penalties.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 4: |  | MARKETABLE SECURITIES (Cont.)
|------- | - | -----------------------------

| | Debtors
will likely exercise call options when forward markets rates are below the interest rate
range of the structured note. In 2006, forward interest rates increased and therefore the
structured notes balance was classified according to its contractual maturity dates. In
2007, structured notes balance was classified according to its contractual maturity
dates. Interest rates decreased during 2007, mainly towards the end of the year. This
trend led some of the debtors to exercise their call option. A total of $ 47 million
in structured notes were called and settled till December 31, 2007. An additional amount
of $ 35 million in structured notes were called and settled after December 31, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (**) | The
effective maturity may differ from the contractual maturities, because           debtors
may have the right to call or prepay obligations without penalties,           Therefore
the mortgage and asset backed securities balance was classified           according
to its next forecasted prepayment date.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (***) | The
effective maturity may differ from the contractual maturities, due to the
          periodical auction mechanism. The balance is comprised from four auction rate
          securities, which suffer from failed auctions since September 2007. For
          determining the effective maturity dates for these securities, the Company used
          its asset managers valuation analysis. The analysis was made as to the
          projected source of capital that each of the issuers will be able to obtain in
          order to pay back its debt holders.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006 and 2007, interest receivable amounted to $ 13,793 and $ 9,372,
respectively, and is included within other current assets in the balance sheets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| |                                           | December 31,
| | ----------------------------------------- | ------------
|
|
|
|
| | Cost:                                     |             
| | Computers and peripheral equipment        |             
| | Office furniture and equipment            |             
| | Building                                  |             
| | Land                                      |             
| | Leasehold improvement                     |             
| |                                           |             
| |                                           |             
| |                                           |             
| | Accumulated Depreciation and Amortization |             
| |                                           |             
| |                                           |             
| | Property and Equipment, Net               |             
| |                                           |             
| |                                           |             

| | In
March 2006, the Company purchased a land and a building in Tel-Aviv, Israel, for a total
amount of $ 35,250. Additional payments for taxes related to the purchase and for
the building renovations totaled $ 3,580 and $ 7,043 in 2006 and 2007,
respectively. The Company moved into the new building in May 2007, and commenced
depreciation of the building at that time.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 5: |  | PROPERTY AND EQUIPMENT, NET (Cont.)
|------- | - | -----------------------------------

| | During
2006 and 2007, the U.S. subsidiary of the Company recorded a reduction of $ 218 and
$ 5,041, respectively, to the cost and accumulated depreciation of fully depreciated
equipment no longer in use.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 6: |  | GOODWILL
AND OTHER INTANGIBLE ASSETS, NET
|------- | - | -----------------------------------------

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

| | Changes
in goodwill for the years ended December 31, 2006 and 2007 is as follows:
| | ---------------------------------------------------------------------------------

| |                             | Year ended December 31,
| | --------------------------- | -----------------------
|
|
|
|
| | Goodwill, beginning of year |                        
| | Acquisition of NFR          |                        
| | Acquisition of Protect Data |                        
| |                             |                        
| |                             |                        
| | Goodwill, End of Year       |                        
| |                             |                        

| | b. | Other
Intangible Assets, Net
| | -- | ----------------------------

| | Net
other intangible assets consisted of the following:
| | -------------------------------------------------------

| |                               |  | December 31,
| | ----------------------------- |  | ------------
|
|
|
|
| | Original Amount:              |  |             
| | Core technology               |  |             
| | Trademarks                    |  |             
| | Customer relationship         |  |             
| | Contracts                     |  |             
| |                               |  |             
| |                               |  |             
| |                               |  |             
| |                               |  |             
| |                               |  |             
| | Accumulated Amortization:     |  |             
| | Core technology               |  |             
| | Trademarks                    |  |             
| | Customer relationship         |  |             
| | Contracts                     |  |             
| |                               |  |             
| |                               |  |             
| |                               |  |             
| |                               |  |             
| | Other Intangible Assets, Net: |  |             
| | Core technology               |  |             
| | Trademarks                    |  |             
| | Customer relationship         |  |             
| | Contracts                     |  |             
| |                               |  |             
| |                               |  |             
| |                               |  |             

F - 30

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 6: |  | GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)
|------- | - | -------------------------------------------------

| | The
estimated future  amortization  expense of other intangible assets as of December
                     31, 2007 is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------

| |                     | 
| | ------------------- | 
|
|
|
|
| | 2008                | 
| | 2009                | 
| | 2010                | 
| | 2011                | 
| | 2012                | 
| | 2013 and thereafter | 
| |                     | 
| |                     | 
| |                     | 

|NOTE 7: |  | EMPLOYEE
AND PAYROLL ACCRUALS
|------- | - | -----------------------------

| | As
of December 31, 2006 and 2007, employee and payroll accruals include a total amount of $ 8,948
and $ 7,878, respectively, related to payroll accrued for the benefit of certain
related parties since 1999.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 8: |  | ACCRUED
EXPENSES AND OTHER LIABILITIES
|------- | - | --------------------------------------

| |                                                 | December 31,
| | ----------------------------------------------- | ------------
|
|
|
|
| | Income taxes payable                            |             
| | Liability to former Protect Data's shareholders |             
| | Current deferred tax liability, net             |             
| | Acquisition related restructuring costs         |             
| | Marketing expenses payable                      |             
| | Accrued hardware costs                          |             
| | Other                                           |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             

F - 31

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 9: |  | COMMITMENTS
AND CONTINGENT LIABILITIES
|------- | - | --------------------------------------

| | a. | Lease
commitments
| | -- | -----------------

| | The
facilities of the Company are rented under operating lease agreements that expire on
various dates. The Company leases vehicles under standard commercial operating leases.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Aggregate
minimum lease commitments under non-cancelable operating leases as of December 31,
2007, were as follows:
| | -------------------------------------------------------------------------------------------------------------------

| |                     | 
| | ------------------- | 
|
|
|
|
| | 2008                | 
| | 2009                | 
| | 2010                | 
| | 2011                | 
| | 2012                | 
| | 2013 and thereafter | 
| |                     | 
| |                     | 
| |                     | 
| |                     | 

| | Rent
expenses for the years ended December 31, 2005, 2006 and 2007, were $ 7,385,
$ 7,752 and $ 8,295, respectively.
| | --------------------------------------------------------------------------------------------------------------------

| | b. | Litigation:
| | -- | -----------

| | 1. | Beginning
on August 29, 2003, Check Point received a number of class action
                    complaints filed in the United States District Court for the Southern
District                     of New York by holders of Check Point ordinary shares,
alleging violations of                     the United States federal securities laws. On
January 14, 2004, the                     court-appointed lead plaintiffs filed a
Consolidated Amended Complaint on behalf                     of a putative class of all
purchasers of ordinary shares between July 10, 2001                     and April 4,
2002.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
settlement was approved, without an admission of wrongdoing, in January of 2007, in the
amount of $ 13 million, which was paid by the Companys insurance carrier.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
November 16, 2004, a shareholder of SofaWare, a 64% owned subsidiary of the
                    Company, filed a motion in the Tel-Aviv District Court requesting
that the court                     authorize him to conduct a shareholders derivative
suit against the Company on                     behalf of SofaWare. On April 20, 2006,
the court granted the motion. The                     derivative suit against the Company
on behalf of SofaWare is in the amount of                     NIS 22.7 million
(approximately $ 5,900 as of December 31, 2007). The                     suit
relates to discounts, sales commissions and royalties that the plaintiff
                    alleges the Company owes to SofaWare, with respect to products that
were sold by                     or through the Company. On February 14, 2008, the court
partially accepted                     Bogners claims and ordered that we pay
SofaWare a total sum of                     NIS 13.7 million (approximately $3.6
million as of December 31, 2007), plus                     interest. The Company is
currently reviewing this judgment and its available                     course of
actions.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 9: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | 3. | On November 22, 2005, the same shareholder also filed an initiating motion
                    against the Company and against SofaWare. The motion alleges that some
                    shareholders of SofaWare, among them the plaintiff, are entitled to exercise
                    veto rights with respect to various actions of SofaWare. The plaintiff also
                    filed a motion to obtain injunctive relief that would prevent SofaWare and the
                    Company from taking certain actions. The court rejected the plaintiffs
                    initiating motion and motion for injunctive relief. On November 23, 2006, the
                    plaintiff filed an appeal on the courts decision. The parties submitted
                    their briefs in this matter and a hearing before the Israeli Supreme Court is
                    scheduled for July 28, 2008. The Companys management believes that the
                    appeal is without merit and intends to contest it vigorously.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On December 14, 2004, another shareholder, director and former employee of
                    SofaWare filed an initiating motion in the Tel-Aviv District Court against the
                    Company. The motion alleges that the Company is oppressing the plaintiff, who is
                    a minority shareholder of SofaWare. Therefore, the plaintiff is requesting the
                    court to compel the Company to purchase the plaintiffs shares in SofaWare,
                    based upon a valuation to be determined by an independent expert. The plaintiff
                    is also seeking disclosure of information and documents relating to the business
                    plans of the Company and SofaWare, and to the inter-company balances between the
                    two companies. During pre-trial hearings on November 26, 2006, the plaintiff
                    agreed to convert the initiating motion into a regular claim and the Company
                    subsequently filed its statement of defense. On February 13, 2007, the Company
                    filed a motion to stay the proceedings as long as the other shareholders
                    first suit is pending. On January 3, 2008 the court granted the Companys
                    motion. The Company also filed a motion to dismiss the claim or to oblige the
                    plaintiff to pay regular court fees for the claim and the State filed a response
                    in support of the Companys arguments. The court ordered the plaintiff to
                    respond to the States response. The Companys management believes
                    that the claim is without merit and intends to contest the claim vigorously.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Following an audit of the Companys 2002 corporate tax return, the Israeli
                    Tax Authority (the ITA) disagreed with several of the Companys
                    positions as it pertains to the treatment of taxes. Specifically, this includes
                    the Companys treatment of certain issues relating to cash that is held and
                    managed by its wholly-owned Singapore subsidiary. The ITA therefore issued an
                    order on December 27, 2007 classifying the transfer of funds from the Company to
                    its subsidiary in Singapore as a dividend for purposes of the Law for the
                    Encouragement of Capital Investments, which would result in a tax payment on the
                    funds transferred. The ITA order also contests the Companys position with
                    respect to taxation of interest earned outside of Israel, the deductibility of
                    employee stock options and benefits to which the Company is entitled to under
                    applicable Israeli law regarding approved enterprise status. The ITA
                    therefore demanded the payment of additional taxes in the aggregate amount of
                    NIS 963 million, which represents approximately $ 162 million of additional
                    tax plus an additional $ 84 million for interest in equivalent USD as of
                    the end of 2007.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE9: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|------ | - | ----------------------------------------------

| | Based
on the Companys review of the ITA order, and on its analysis of the tax positions
and applicable law, the Company believes that it has meritorious defenses to the ITA
order, and intends to vigorously contest the order. There can be no assurance, however,
that the Company will prevail. An unfavorable outcome in the Companys dispute with
the ITA regarding the order could require the Company to pay the amounts due in such
order, in whole or in part.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | The Company is involved in various other legal proceedings arising in the normal
                    course of its business. Based upon the advice of counsel, the Company does not
                    believe that the ultimate resolution of these matters will have a material
                    adverse effect on the Companys consolidated financial position, results of
                    operations or cash flows.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE10: |  | TAXES
ON INCOME
|------- | - | ---------------

| | a. | The Company adopted the provisions of FIN 48 on January 1, 2007. The
               adoption of FIN 48 did not result in a change to the Company retained earning.
               The total amount of gross unrecognized tax benefits as of January 1, 2007
               was $70.5 million. A reconciliation of the beginning and ending amount of
               unrecognized tax benefits is as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | (in thousands)
| | --------------------------------------- | --------------
|
|
|
|
| | Balance as of January 1, 2007           |               
| | Additions for prior year tax positions  |               
| | Reductions for prior year tax positions |               
| |                                         |               
| |                                         |               
| | Balance as of December 31, 2007         |               
| |                                         |               

| | As
of December 31, 2007, the entire amount of the unrecognized tax benefits could affect
our income tax provision and the effective tax rate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with our accounting policy, both before and after adoption of FIN 48,
interest expense and penalties related to income taxes are included in the tax expense
line of our condensed consolidated statements of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2007, the Company recorded $3,400 for interest expense related
to uncertain tax positions. As of December 31, 2006 and 2007, the Company had accrued
interest liability related to uncertain tax positions in the amounts of $6,200 and
$9,600, respectively, which is included within income tax accrual on the balance sheet.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE10: |  | TAXES
ON INCOME (Cont.)
|------- | - | -----------------------

| | Domestically,
the Israeli Tax Authorities (ITA) are currently examining income tax returns
of the Company for years 2002 and 2003. The ITA disagreed with several of the
Companys positions as it pertains to the treatment of taxes. Specifically, this
includes the Companys treatment of certain issues relating to cash that is held and
managed by its wholly-owned Singapore subsidiary, taxation of interest earned outside of
Israel, its position with respect to benefits to which the Company is entitled under
applicable Israeli law regarding approved enterprise status and the deductibility of
employee stock options. The Companys Israeli income tax returns have been examined
for all years prior to fiscal 2002, and the Company is no longer subject to audit for
those periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys U.S. subsidiaries file income tax return in the U.S. federal
jurisdiction, and various states. All the Companys tax years are subject to
examination by the U.S. federal and most U.S. state tax authorities due to the
Companys Net Operating Loss and overall credit carry-forward position.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that it has adequately provided for any reasonably foreseeable outcomes
related to tax audits and settlement. The final tax outcome of our tax audits could be
different from that which is reflected in the Companys income tax provisions and
accruals. Such differences could have a material effect on the Companys income tax
provision and net income in the period in which such determination is made.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Israeli
Taxation:
| | -- | -----------------

| | 1. | Corporate
tax structure:
| | -- | ------------------------

| | Taxable
income of Israeli companies is subject to tax at the rate of 31% in 2006, 29% in 2007, 27%
in 2008, 26% in 2009 and 25% in 2010 and thereafter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959
                    (the Law):
| | -- | --------------------------------------------------------------------------------------------------------------

| | Check
Point Ltd. is entitled to tax benefits under the Law. Certain production and development
facilities of Check Point Ltd. have been granted Approved Enterprise status
pursuant to the Law, which provides certain tax benefits to its investment programs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
company that obtained an Approved Enterprise approval may elect to forego the entitlement
to grants and apply for an alternative package of tax benefits (the Alternative
Package). Under the Alternative Package, undistributed income from the Approved
Enterprise operations is fully tax exempt (the tax holiday) for a defined
period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed the provisions of the Law (the Old Law). Generally,
investment programs of Check Point Ltd. that have already obtained approval for an
Approved Enterprise by the Israeli Investment Center will continue to be subject to the
Old Laws provisions. On the Alternative Package the Amendment enacted major changes
in the manner in which tax benefits are awarded under the Law so that companies are no
longer required to obtain Investment Center approval in order to qualify for tax benefits.
Such an enterprise is a Privileged Enterprise, rather than the previous
terminology of Approved Enterprise. The period of tax benefits for a new Privileged
Enterprise commences in the Year of Commencement. This year is the later of:
(1) the year in which taxable income is first generated by the company, or (2) the Year of
Election. If a company requested the Alternative Package of benefits for an Approved
Enterprise under the Law, it is precluded from filing a Year of Election notice for a
Privileged Enterprise for three years after the year in which the Approved Enterprise was
activated (Cooling Period).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Check
Point Ltd. has been granted the status of Approved Enterprises, under the Law, in six
investment programs (the Programs). Out of the Programs, the Companys
benefit period related to its first investment program ended, therefore the Companys
income attributed to the first investment program is not entitled to tax benefits. For all
of such Approved Enterprises, the Company has elected the Alternative Package.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007 Check Point Ltd. has elected the status of Privileged Enterprise,
under the Amendment, for its seventh plan.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | The
tax benefits attributable to the Companys current Approved and Privileged
Enterprises are scheduled to expire in phases by 2016.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | The
tax benefits available under Approved Enterprise or Privileged Enterprise relate only to
taxable income attributable to the specific investment program and are contingent upon
compliance with the conditions set out in the approval (for an Approved Enterprise).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Should
Check Point Ltd. fail to meet such requirements in the future, income attributable to its
Approved Enterprise and Privileged Enterprise programs could be subject to the statutory
Israeli corporate tax rate and the Company could be required to refund a portion of the
tax benefits already received, with respect to such programs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys income attributed to the Approved Enterprise and Privileged Enterprise
under the alternative package is tax exempt for a period of two years and is subject to a
reduced corporate tax rate of 10%  25% for an additional period of five to eight
years, based on the percentage of foreign investment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of distribution of dividends from the above mentioned tax-exempt income, the
amount distributed will be subject to corporate tax at the rate ordinarily applicable to
the Approved Enterprises and Privileged Enterprises income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
amendment to the Investment Law treats repurchase of shares out of Privileged Enterprise
tax exempt income as deem-dividend. Through December 31, 2007, the Company repurchased
$ 1,126,763 of its Ordinary shares. The Companys retained earnings attributed
to taxable income are higher than the total shares repurchased and therefore should not
trigger a deem-dividend event. For further information about the Companys repurchase
program refer to Note 11e.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out
of the Companys retained earnings as of December 31, 2007, $ 714,396 are
tax-exempt attributable to its Approved Enterprise programs. If such tax-exempt income is
distributed in a manner other than upon complete liquidation of the Company, it would be
taxed at the reduced corporate tax rate applicable to such profits (between 20%-25%) and
an income tax liability of up to $ 166,214 would be incurred as of December 31,
2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, as a result of the amendment, tax-exempt income attributed to Privileged
Enterprise, will subject the Company to taxes upon any distribution manner including
complete liquidation. As of December 31, 2007, the Company has $ 82,164 tax-exempt
income attributed to its Privileged Enterprise plan. In case of distribution or complete
liquidation of the Company, it would be taxed at the reduced corporate tax rate of 20% and
an income tax liability of up to $ 16,433 would be incurred as of December 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys board of directors has determined that it will not distribute any amounts
of its undistributed tax-exempt income as dividend. The Company intends to reinvest its
tax-exempt income and not to distribute such income as a dividend. Accordingly, no
deferred income taxes have been provided on income attributable to the Companys
Approved Enterprise and Privileged Enterprise programs as the undistributed tax exempt
income is essentially permanent in duration.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved and Privileged Enterprise programs is subject to tax
at regular Israeli corporate tax rate.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | c. | Income
Taxes on Non-Israeli Subsidiaries:
| | -- | -----------------------------------------

| | Non-Israeli
subsidiaries are taxed according to the tax laws in their respective country of residence.
| | ------------------------------------------------------------------------------------------------------

| | Israeli
income taxes and foreign withholding taxes were not provided for undistributed earnings of
the Companys foreign subsidiaries. The Companys board of directors has
determined that the Company will not distribute any amounts of its undistributed earnings
as dividend. The Company intends to reinvest these earnings indefinitely in their foreign
subsidiaries. Accordingly, no deferred income taxes have been provided. If these earnings
were distributed to Israel in the form of dividends or otherwise, the Company would be
subject to additional Israeli income taxes (subject to an adjustment for foreign tax
credits) and foreign withholding taxes. Determination of the amount of unrecognized
deferred tax liability related to these earnings is not practicable.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | d. | Deferred
Tax Assets and Liabilities:
| | -- | ------------------------------------

| | Deferred
taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. As of December 31, 2006 and 2007, the Companys deferred taxes were in
respect of the following:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 | December 31,
| | ----------------------------------------------- | ------------
|
|
|
|
| | Carry-forward tax losses                        |             
| | Deferred revenues                               |             
| | Employee stock based compensation               |             
| | Accrued employees costs                         |             
| | Reserves and allowances                         |             
| | Unrealized losses on marketable securities, net |             
| | Fixed assets                                    |             
| | Research and development tax credit             |             
| |                                                 |             
| |                                                 |             
| | Deferred tax assets before valuation allowance  |             
| | Valuation allowance                             |             
| |                                                 |             
| |                                                 |             
| | Deferred tax asset                              |             
| |                                                 |             
| |                                                 |             
| | Intangible assets                               |             
| | Unrealized gains on marketable securities, net  |             
| | Other                                           |             
| |                                                 |             
| |                                                 |             
| | Deferred tax liability                          |             
| |                                                 |             
| |                                                 |             
| | Deferred tax asset (liability), net             |             
| |                                                 |             
| |                                                 |             
| | Domestic:                                       |             
| | Current deferred tax asset, net                 |             
| | Non current deferred tax asset, net             |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| | Foreign:                                        |             
| | Current deferred tax asset, net                 |             
| | Current deferred tax liability, net             |             
| | Non current deferred tax asset, net             |             
| | Non current deferred tax liability              |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             

| | Current
deferred tax asset, net, is included within other current assets in the balance sheets.
Current deferred tax liability, net, is included within accrued expenses and other
liabilities in the balance sheets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
subsidiaries in the U.S. have provided valuation allowances in respect of deferred tax
assets resulting from net operating loss carry-forwards and research and development tax
credit. SFAS No. 123(R) prohibits recognition of a deferred income tax asset for excess
tax benefits due to stock option exercises that have not yet been realized through a
reduction in income tax payable. All net operating loss carry-forwards relate to excess
tax deductions from stock options which have not yet been realized. Such unrecognized
deferred tax benefits will be accounted for as a credit to additional paid-in-capital, if
and when realized. The Company has recorded a valuation allowance for the research and
development Credit carry-forwards due to uncertainties about whether it will be able to
utilize these assets before they expire. The net change in the valuation allowance was $
7,433, which primarily relates to stock option benefits, which were accounted for as a
credit to additional paid-in-capital. Additionally, an amount of $2,456 was recorded to
the Consolidate Statements of Income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2007, the U.S. subsidiaries had a U.S. federal loss carry forward of
approximately $ 713,000 resulting from tax benefits related to employees stock option
exercises that can be carried forward and offset against taxable income up to 20 years,
expiring before 2026. Excess tax benefits related to employee stock option exercises for
which no compensation expense was recognized will be credited to additional paid-in
capital when realized. Through December 31, 2007, the U.S. subsidiaries had research and
development tax credits of approximately $ 5,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Income
Before Taxes on Income is Comprised of the Following:
| | -- | ------------------------------------------------------------

| |          | Year Ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | *) | Including write off of acquired in-process research and development of
                    $ 1,060 in 2006 and $ 17,000 in 2007.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | f. | Taxes
on Income are Comprised of the Following:
| | -- | -----------------------------------------------

| |          | Year Ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Current  |                        
| | Deferred |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

F - 39

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| |                                | Year Ended December 31,
| | ------------------------------ | -----------------------
|
|
|
|
| | Foreign Taxes - U.S.:          |                        
| |                                |                        
| | Federal Taxes:                 |                        
| | Current                        |                        
| | Deferred                       |                        
| |                                |                        
| |                                |                        
| |                                |                        
| | State Taxes:                   |                        
| | Current                        |                        
| | Deferred                       |                        
| |                                |                        
| |                                |                        
| |                                |                        
| | Other International Locations: |                        
| | Current                        |                        
| | Deferred                       |                        
| |                                |                        
| |                                |                        
| |                                |                        
| |                                |                        
| | Total Foreign Taxes:           |                        
| |                                |                        
| |                                |                        
| | Domestic Taxes:                |                        
| | Current                        |                        
| | Deferred                       |                        
| |                                |                        
| |                                |                        
| |                                |                        
| |                                |                        
| |                                |                        
| | Taxes on Income                |                        
| |                                |                        

F - 40

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | g. | Reconciliation
of the Theoretical Tax Expenses:
| | -- | -----------------------------------------------

| | A
reconciliation between the theoretical tax expenses, assuming all income is taxed at the
statutory rate applicable and the actual income tax as reported in the statements of
income, is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                   | Year ended December 31,
| | ------------------------------------------------- | -----------------------
|
|
|
|
| | Income before taxes as reported in the            |                        
| | statements of income                              |                        
| |                                                   |                        
| |                                                   |                        
| | Statutory tax rate in Israel                      |                        
| |                                                   |                        
| |                                                   |                        
| | Decrease in taxes resulting from:                 |                        
| | Effect of "Approved and Privileged  Enterprise"   |                        
| | status *)                                         |                        
| | Stock based compensation - non deductible expense |                        
| | Others, net                                       |                        
| |                                                   |                        
| |                                                   |                        
| | Effective tax rate                                |                        
| |                                                   |                        
| |                                                   |                        
| | (*)  Basic earnings per share amounts of the      |                        
| | benefit resulting from the "Approved and          |                        
| | Privileged Enterprise" status                     |                        
| |                                                   |                        
| |                                                   |                        
| | Diluted earnings per share amounts of the         |                        
| | benefit resulting from the "Approved and          |                        
| | Privileged Enterprise" status                     |                        
| |                                                   |                        
| |                                                   |                        
| | (**) less than 1%                                 |                        

|NOTE 11: |  | SHAREHOLDERS EQUITY
|-------- | - | --------------------

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

| | Ordinary
shares confer upon their holders the right to receive notice to participate and vote in
general meetings of the Company, and the right to receive dividends if declared.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Dividends
declared on Ordinary shares will be paid in NIS. Dividends paid to shareholders outside
Israel will be converted into U.S. dollars, on the basis of the exchange rate prevailing
at the date of payment. The Companys board of directors has determined that it will
not distribute any amounts of its undistributed tax exempt income as dividend.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 11: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | b. | Deferred
Share:
| | -- | ---------------

| | The
Deferred share is not entitled to any rights other than the right to receive its nominal
value upon liquidation of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | c. | Employee
Stock Purchase Plan (ESPP):
| | -- | --------------------------------------

| | The
Company reserved a total of 6,000,000 Ordinary shares for issuance under the ESPP.
Eligible employees use up to 15% of their salaries to purchase Ordinary shares but no more
than 1,250 shares per participant on any purchase date. The ESPP is implemented through an
offering every six months. The price of an Ordinary share purchased under the ESPP is
equal to 85% of the lower of the fair market value of the Ordinary share on the
subscription date of each offering period or on the purchase date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2005, 2006 and 2007 employees purchased 331,170, 360,289 and 389,367 Ordinary shares at
average prices of $ 17.89, $ 16.08 and $ 16.73 per share, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, 3,491,693 Ordinary shares were available for future issuance under
the ESPP.
| | -----------------------------------------------------------------------------------------------------

| | In
accordance with SFAS No. 123(R), the ESPP is compensatory and as such results in
recognition of compensation cost. For the years ended December 31, 2006 and 2007, the
Company recognized $1,481 and $ 1,666, respectively of compensation expense in
connection with the ESPP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Stock
Options:
| | -- | --------------

| | In
2005, the Company adopted two new equity incentive plans: the 2005 United States Equity
Incentive Plan, which is referred to as the 2005 U.S. Plan, and the 2005 Israel Equity
Incentive Plan, which is referred to as the 2005 Israel Plan. Both of these plans will be
in effect until 2015. Following ratification of the new plans by its shareholders in
September 2005, the Company stopped issuing stock options under the 1996 United States
Stock Option Plan and 1996 Israel Stock Option Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Companys 2005 equity incentive plans (the 2005 Plans); options are
granted to employees, officers and directors at an exercise price equal to at least the
fair market value at the date of grant and are granted for periods not to exceed seven
years. Options granted under the 2005 Plans generally vest over a period of four to five
years of employment. Any options that are cancelled or forfeited before expiration become
available for future grants. The Company can also issue a variety of other equity
incentives under the 2005 Plans, but no such other equity incentives were outstanding as
of December 31, 2005. In addition to granting stock options, since 2006, the Company
started to routinely grant Restricted Stock Units (RSUs) under the 2005 Plans.
RSUs vest over a four year period of employment and may be subject to performance
criteria. RSUs that are cancelled or forfeited become available for future grants.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 11: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | In
connection with its acquisition of Zone Labs in March 2004, the Company assumed all of the
outstanding Zone Labs stock options under the Zone Labs 1998 Stock Option Plan (the
Zone Labs Plan), which were converted into options to purchase approximately
2.8 million shares of the Companys Ordinary shares. These stock options generally
have terms of between five and ten years and generally vest over a four-year period.
Options that are cancelled or forfeited before expiration do not become available for
future grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with its acquisition of Protect Data in January 2007, the Company assumed all
of the outstanding Protect Data stock options under the Pointsec mobile technologies inc.
2003, 2005 and 2006 Stock Option Plans (the Pointsec Plan), which were
converted into options to purchase approximately 0.8 million shares of the Companys
Ordinary shares. These stock options generally have terms of between one and five years
and generally vest over a four-year period. Options that are cancelled or forfeited before
expiration do not become available for future grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the 2005 Plans, options to purchase 60,000,000 Ordinary shares were reserved
for issuance (increasing by 5,000,000 Ordinary Shares on January 1 of each year beginning
January 1, 2006), out of which as of December 31, 2007, 52,834,056 Ordinary shares were
available for future grant under the 2005 Plans. As of December 31, 2007, 6,696,842
options and RSUs were outstanding under the 2005 Plans, 18,166,849 options were
outstanding under the 1996 United States Stock Option Plan and 1996 Israel Stock Option
Plan, 87,197 were outstanding under the Zone Labs plan and 437,559 were outstanding under
the Pointsec Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the Companys stock option activity and related information, including
options under the Zone Labs and Pointsec Plans, is as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Options (in thousands) | Weighted average exercise price
| | -------------------------------- | ---------------------- | -------------------------------
|
|
|
|
| |                                  |                        |                                
| | Outstanding at beginning of year |                        |                                
| | Granted                          |                        |                                
| | Exercised                        |                        |                                
| | Expired                          |                        |                                
| | Forfeiture                       |                        |                                
| |                                  |                        |                                
| |                                  |                        |                                
| | Outstanding as of December 31,   |                        |                                
| |                                  |                        |                                
| |                                  |                        |                                
| | Exercisable as of December 31,   |                        |                                
| |                                  |                        |                                

| | *) | As of December 31, 2007, approximately 23.2 million options were exercisable and
                    expected to vest. Options expected to vest reflect an estimated forfeiture rate.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 11: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| |                                  | Year ended
December 31, 2007
| | -------------------------------- | ----------------------------
|
|
|
|
| | Outstanding at beginning of year |                             
| | Granted                          |                             
| | Exercised                        |                             
| | Forfeiture                       |                             
| |                                  |                             
| |                                  |                             
| | Outstanding as of December 31,   |                             
| |                                  |                             
| |                                  |                             
| | Exercisable as of December 31,   |                             
| |                                  |                             

| | **) | Represents intrinsic value of 12,188 thousand outstanding options that are
                    in-the-money as of December 31, 2007. The remaining 11,968 thousand outstanding
                    options are out of the money as of December 31, 2007 and their intrinsic value
                    was considered as zero.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ***) | Represents intrinsic value of 8,704 thousand exercisable options that are
                    in-the-money as of December 31, 2007. The remaining 6,370 thousand exercisable
                    options are out of the money as of December 31, 2007 and their intrinsic value
                    was considered as zero.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes information relating to RSUs, as well as changes to such awards
during 2006 and 2007:
| | --------------------------------------------------------------------------------------------------------------------

| |                                  | Year Ended December 31,
| | -------------------------------- | -----------------------
|
|
|
|
| | Outstanding at beginning of year |                        
| | Granted                          |                        
| | Vested                           |                        
| | Forfeiture                       |                        
| |                                  |                        
| |                                  |                        
| | Outstanding as of December 31,   |                        
| |                                  |                        

| | *) | Includes 441 thousand RSUs granted in exchange for options as described in
                    section f below.
| | -- | ---------------------------------------------------------------------------------------------------------------

| | The
weighted average fair values at grant date of RSUs granted for the years ended December
31, 2006 and 2007 were $ 18.83 and $ 23.79, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---

|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 11: |  | SHAREHOLDERS' EQUITY (Cont.)
|-------- | - | ----------------------------

| | The
options outstanding as of December 31, 2007, have been separated into ranges of exercise
price, as follows:
| | ---------------------------------------------------------------------------------------------------------------

| |  | Outstanding | Exercisable
| |  | ----------- | -----------
|
|
|
|
| |  | 1.66-9.99   |            
| |  | 10.00-13.99 |            
| |  | 14.00-15.99 |            
| |  | 16.00-17.99 |            
| |  | 18.00-19.99 |            
| |  | 20.00-23.99 |            
| |  | 24.00-26.99 |            
| |  | 27.00-40.99 |            
| |  | 41.00-44.99 |            
| |  | 45-79.79    |            
| |  |             |            
|
| |  | 1.66-79.79  |            
| |  |             |            

| | The
weighted average fair values at grant date of options granted for the years ended December
31, 2005, 2006 and 2007 with an exercise price equal to the market value at the date of
grant were $ 11.05, $ 9.71 and $ 11.92, respectively. The weighted average
fair values at grant date of options assumed in the Zone Labs acquisition and
Protect Datas acquisition with an exercise price lower than the market value at the
date of grant was $ 17.89 and $ 12.64 respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, the Company had approximately $ 71,598 of unrecognized
compensation expense related to non-vested stock options and non-vested restricted stock
awards, expected to be recognized over four years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In July 2005, after the Company had completed a repurchase of $ 400,000 of
               its Ordinary shares, the Company announced that its Board of Directors had
               authorized additional repurchases of up to $ 200,000. In May 2006, after
               the Company had completed the repurchase of $ 600,000 of its Ordinary
               shares, the Company announced that its Board of Directors had authorized
               additional repurchases of up to $ 600,000 of its Ordinary shares for a
               total of $ 1,200,000. Under the repurchase programs, share purchases may be
               made from time to time depending on market conditions, share price, trading
               volume and other factors and will be funded from available working capital.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 11: |  | SHAREHOLDERS'
EQUITY (Cont.)
|-------- | - | ----------------------------

| | The
repurchase programs have no time limit and may be suspended from time to time or
discontinued. Under the above programs, the Company repurchased during 2005, 2006 and 2007
approximately 10.6, 23.2 and 9.02 million shares, respectively, at a total cost of
$ 236,929, $ 435,491 and $ 209,757, respectively. The average purchase
price per share during 2005, 2006 and 2007 was $ 22.29, $ 18.71 and
$ 23.26, respectively. Such purchases of Ordinary shares are accounted for as
treasury stock and result in a reduction of shareholders equity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31 2007, the Company reissued 12,207,830 of its purchased Ordinary shares in
consideration for the exercise of stock options and restricted shares by employees and for
shares issued under the ESPP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | In September 2006, the Company offered holders of certain outstanding options
               granted on or after January 1, 2004, under the equity incentive plans, whether
               vested or not, the opportunity to exchange their options for RSUs under the 2005
               Plans. The number of RSUs granted was determined by dividing the option value,
               which was determined on September 12, 2006, by the market value of Check
               Points ordinary share on this date.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
option value on September 12, 2006 was determined using Black-Scholes-Merton option
pricing model, based on a number of factors, including: the market value of the ordinary
shares underlying the option on September 12, 2006, option exercise price, current market
volatility, expected life of the option, and short-term (risk free) interest rate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
completion of the exchange offer in October 2006, the Company issued 441,114 RSUs in
exchange for outstanding options to purchase 1,759,160 of its ordinary shares. The RSUs
vest over a four year period starting on October 23, 2006, as follows: 20% vest in years
one and two, and 30% vest in years three and four.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounted for the offer as a modification in accordance with SFAS No. 123 (R) and
as such calculated the fair value before and after the modification, which resulted in no
incremental compensation cost on the modification date. The unrecognized compensation cost
remaining from the original options, is recognized over the service period of the modified
award (RSUs) using the straight line method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---



|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 12: |  | EARNINGS
PER SHARE
|-------- | - | ------------------

| | The
Following Table Sets Forth the Computation of Basic and Diluted Earnings per Share:
| | ---------------------------------------------------------------------------------------

| |                                              | Years ended December 31,
| | -------------------------------------------- | ------------------------
|
|
|
|
| | Net income                                   |                         
| |                                              |                         
|
| | Weighted average Ordinary shares outstanding |                         
| | (in thousands)                               |                         
| |                                              |                         
|
| | Dilutive effect:                             |                         
| | Employee stock options (in thousands)        |                         
| |                                              |                         
|
| | Diluted weighted average Ordinary shares     |                         
| | outstanding (in thousands)                   |                         
| |                                              |                         
|
| | Basic earnings per Ordinary share            |                         
| |                                              |                         
|
| | Diluted earnings per Ordinary share          |                         
| |                                              |                         

|NOTE 13: |  | GEOGRAPHIC
INFORMATION AND SELECTED STATEMENTS OF INCOME DATA
|-------- | - | -------------------------------------------------------------

| | a. | Summary
Information About Geographical Areas:
| | -- | ---------------------------------------------

| | The
Company operates in one reportable segment (see Note 1 for a brief description of the
Companys business). The total revenues are attributed to geographic areas based on
the location of the Companys channel partners which are considered as end customers,
as well as direct customers of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following present total revenues for the years ended December 31, 2005, 2006 and 2007 and
long-lived assets as of December 31, 2006 and 2007 by geographic area:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Revenues
based on the channel partners location:
| | -- | -------------------------------------------------

| |                                | Year ended December 31,
| | ------------------------------ | -----------------------
|
|
|
|
| | Americas, principally U.S.     |                        
| | Europe, Middle East and Africa |                        
| | Asia Pacific and Japan         |                        
| |                                |                        
|
| |                                |                        
| |                                |                        

F - 47

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|                                                              
|--------------------------------------------------------------
|CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|                                                              
|U.S. Dollars in Thousands (except share and per share amounts)

|NOTE 13: |  | GEOGRAPHIC
INFORMATION AND SELECTED STATEMENTS OF INCOME DATA (Cont.)
|-------- | - | ---------------------------------------------------------------------

| | Revenue
from data security products and associated software updates, maintenance and support
services amounted to $ 82,746 of the Companys revenue in 2007. For other product
lines it is impracticable to provide revenues information for the years ended December 31,
2005, 2006 and 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Long-lived
assets:
| | -- | ------------------

| |                   | December 31
| | ----------------- | -----------
|
|
|
|
| | U.S.              |            
| | Israel            |            
| | Sweden            |            
| | Rest of the world |            
| |                   |            
|
| |                   |            
| |                   |            

| | b. | Financial
Income, Net:
| | -- | ----------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Financial income:                               |                        
| | Interest income                                 |                        
| | Amortization of marketable securities premium   |                        
| | and accretion of discount, net                  |                        
| | Realized gain on sale of marketable securities  |                        
| | Foreign currency re-measurement gain and others |                        
| |                                                 |                        
|
| |                                                 |                        
| |                                                 |                        
| | Financial expense:                              |                        
| | Amortization of marketable securities premium   |                        
| | and accretion of discount, net                  |                        
| | Foreign currency re-measurement loss            |                        
| | Realized loss on sale of marketable securities  |                        
| | Others                                          |                        
| |                                                 |                        
|
| |                                                 |                        
| |                                                 |                        
|
| |                                                 |                        
| |                                                 |                        

F - 48

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# SIGNATURES

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

| |  | CHECK POINT SOFTWARE TECHNOLOGIES LTD.By: /s/ Gil Shwed
Gil ShwedChief Executive Officer and Chairman of the Board
| |  | --------------------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ Eyal Desheh
Eyal DeshehExecutive Vice President and Chief Financial Officer
| |  | -------------------------------------------------------------------------------------------------

Date: March 3, 2008

100

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