---

---

# 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, 2006
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

# 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
0-28584

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

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

|3A Jabotinsky Street, Ramat-Gan 52520, Israel
|---------------------------------------------
|                                             
|(Address of principal executive offices)     

Securities registered or to be registered pursuant to Section 12(b) of the Act: Ordinary shares, NIS 0.01 nominal value

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: 225,689,619 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. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.

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

PART I

|          |                                                                              |   
|--------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|Item 1.   | Identity of Directors, Senior Management and Advisors                        | 3 
|         
|Item 2.   | Offer Statistics and Expected Timetable                                      | 3 
|         
|Item 3.   | Key Information                                                              | 5 
|         
|Item 4.   | Information on Check Point                                                   | 18
|         
|Item 4A.  | Unresolved staff comments                                                    | 38
|         
|Item 5.   | Operating and Financial Review and Prospects                                 | 39
|         
|Item 6.   | Directors, Senior Management and Employees                                   | 55
|         
|Item 7.   | Major Shareholders and Related Party Transactions                            | 66
|         
|Item 8.   | Financial Information                                                        | 67
|         
|Item 9.   | The Offer and Listing                                                        | 69
|         
|Item 10.  | Additional Information                                                       | 69
|         
|Item 11.  | Quantitative and Qualitative Disclosures about Market Risk                   | 85
|         
|Item 12.  | Description of Securities Other than Equity Securities                       | 86
|         
|PART II  
|         
|Item 13.  | Defaults, Dividend Arrearages and Delinquencies                              | 87
|         
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 87
|         
|Item 15.  | Controls and Procedures                                                      | 87
|         
|Item 16.  | Reserved                                                                     | 88
|         
|Item 16A. | Audit Committee Financial Expert                                             | 88
|         
|Item 16B. | Code of Ethics                                                               | 88
|         
|Item 16C. | Principal Accountant Fees and Services                                       | 88
|         
|Item 16D. | Exemption for the Listing Standards for Audit Committee                      | 89
|         
|Item 16E. | Purchase of Equity Securities by the Issuer and Affiliated Purchasers        | 90
|         
|PART III 
|         
|Item 17.  | Financial Statements                                                         | 91
|         
|Item 18.  | Financial Statements                                                         | 91
|         
|Item 19.  | Exhibits                                                                     | 92

2

---

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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.

3

---

---



# 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 its possessions.
References to $ or 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 currently 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.

4

---

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|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 the years 2002 to 2006. The selected income data for the years 2004, 2005
and 2006, and the selected balance sheet data at December 31, 2005 and 2006, have been
derived from our audited consolidated financial statements set forth in Item 18
 Financial Statements. The selected income data for the years 2002 and 2003,
and the selected balance sheet data at December 31, 2002, 2003 and 2004, have 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.

|                                                    | 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 |                        

---

|(1) | Including
the following pre-tax charges related to the acquisition of Zone Labs,
                    Inc.: stock-based compensation of $4.6 million and amortization of
intangible                     assets of $4.2 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Including
the following pre-tax charges related to the acquisition of Zone Labs:
                    stock-based compensation of $3.7 million and amortization of
intangible assets                     of $5.6 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Including
the following pre-tax charges: stock-based compensation of $36.4
                    million as a result of the adoption of SFAS No. 123(R), amortization
of                     intangible assets of $6.0 million related to Zone Labs acquisition
and expenses                     related to acquisitions of $0.9 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

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

# RISK FACTORS

This
Annual Report on Form 20-F contains forward looking statements. The statements contained
in this Annual Report on Form 20-F that are not purely historical facts are forward
looking statements. These statements are based on our current expectations and projections
about future events and are identified by terminology such as may,
will, should, expect, scheduled,
plan, intend, anticipate, believe,
estimate, aim, potential, or continue or
the negative of those terms or other comparable terminology. These forward looking
statements include, but are not limited to, statements regarding our expectations,
beliefs, intentions, goals, plans, investments or strategies regarding the future and any
assumptions that relate to these.

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 and 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.

# 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 over the last decade, 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,
| | - | ------------------------------------------------------------------------------------------------------

6

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

| | n | the
adoption of data security measures as it pertains to disk 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 will be materially adversely affected.
You can see more details 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, SonicWALL Inc. and WatchGuard Technologies 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 offered
by Protect Data AB, which we recently acquired.

Some
of our current and potential competitors have various advantages over us, including
increased competition that will result in pressure on us to reduce prices, longer
operating histories, greater name recognition and brand reputation, access to larger
customer bases and 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, 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.
Although to date none of these companies has materially affected our business, the
cumulative 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.

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 the
functionality of our software as standard features of operating system software or
networking hardware could render our products obsolete and unmarketable, 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.

7

---

---



If
any of the events described above are realized, our business, operating results and
financial condition could be materially adversely affected. You can see more details 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
successfully commercialize these products, the results of our 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.

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 will be materially adversely affected. You can see more details in
Item 4  Information on Check Point and under the caption We may
not be able to successfully compete in this Item 3.

Undetected 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 or the
inability to attract new customers.

8

---

---



# 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,
| | - | -----------------------------------------------------------------

| | 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, and
| | - | ------------------------------------------------------------------------------------

| | 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, for a total cash consideration of approximately $14.6 million and acquisition
related costs of approximately $0.3 million. In addition, we assumed net liabilities of
approximately $4.3 million. We have begun the process of integrating NFR into Check Point.
In November 2006 we announced a tender offer for all outstanding shares and warrants of
Protect Data AB that at the time of the offer was a public company listed on the Stockholm
Stock Exchange. As of March 14, 2007, we had acquired over 98% of all of the shares and
warrants of Protect Data, on a fully diluted basis, and we have begun the integration
process. Protect Data is the owner of 100% of Pointsec Mobile Technologies AB, 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.

The
difficulties of combining NFR and Protect Datas operations with our own include
issues such as coordinating the geographically separate organizations, integrating
personnel with diverse business backgrounds, integrating the products, marketing and
selling a different technology, potential difficulties in retaining employees and the
associated adverse effects on relationships with existing partners and customers. The
integration may interrupt the activities of the combined companies businesses and
may result in the loss of key personnel. This could have an adverse effect on our
business, results of operations, financial condition or prospects.

9

---

---



# Our operating margins
may decline

We
may experience future fluctuations or declines in operating margins from historical levels
due to the following reasons:

| | n | increased
competition that will result 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, and
| | - | ----------------------------------------------------------------------

| | 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
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.

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,
| | - | ---------------------------------------------------------------------------------

| | n | seasonal
trends in customer purchasing,
| | - | ---------------------------------------

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

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

Unfavorable
changes in the factors listed above, most 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.

10

---

---



We
derive our sales primarily through indirect channels, making it difficult for us to
predict revenues. 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
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 combining support from our channel partners with back-end support from us, could
affect the timing and volume of orders.

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 likely 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
significantly.

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 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. 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. Although our management
has determined that we complied with Section 404 in 2006, we may identify material
weaknesses or significant deficiencies in our future 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.

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, including particularly our executive officers who were
involved in the development of our Stateful Inspection technology and all of our principal
products and technologies. None of our key personnel is bound by an employment agreement
requiring service for any defined period of time. Our future performance also depends on
our ability to attract such skilled personnel in the future. Competition for these
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, for their long term contribution,
and we offer some of them career development paths within Check Point. We cannot assure
you 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.

11

---

---



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

Under
current U.S. 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.
For example, Israeli courts have required employers seeking to enforce non-competition
undertakings of a former employee to demonstrate that the competitive activities of the
former employee will harm one of a limited number of material interests of the employer
which have been recognized by the courts, such as the secrecy of a companys
confidential commercial information or its intellectual property. If we cannot demonstrate
that material harm would be caused to us, we may be unable to prevent our competitors from
benefiting from the expertise of our former employees.

We are dependent on a small number
of distributors and on a limited number of product families

We
derive our sales primarily through indirect channels. During 2006, we derived
approximately 26% of our sales from two distributors, with the largest distributor
accounting for approximately 15% of our sales, and the second largest distributor
accounting for approximately 11% of our sales. During 2005, these two distributors
accounted for approximately 24% of our sales, or approximately 12% each. During 2004 we
derived approximately 13% of our sales from a single distributor. 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.

Currently,
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 subscriptions,
support 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 subscription and support
services. 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. You can see
more details in Item 4  Information on Check Point and in 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.

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 but include the General Public License.  This
license and others like it pose a potential risk to products that are integrated with
these technologies.  For example, in the event we integrate into one of our products
a technology covered under the General Public License, we may be required to disclose our
source code for the integrated product.  Disclosing our source code could enable our
competitors to eliminate any technological advantage our products may have over theirs,
and therefore materially adversely affect our competitive advantage and impact our
business results of operations and financial condition.

12

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We are the defendants in various
lawsuits, and litigation is expensive and disruptive

We
are the defendants in various lawsuits, including employment claims and other legal
proceedings in the normal course of our business. In addition, we received several class
action complaints alleging violations of the federal securities laws. These complaints
were later consolidated by the court into one action. In December 2006, we reached an
agreement-in-principle to settle this class action lawsuit for $13 million, which amount
is expected to be paid by our insurance carrier. The settlement is subject to the
completion of appropriate documentation and to court approval. You can see the current
status of this matter in more details in Item 8  Financial Information
under the caption Legal proceedings. Legal proceedings can be expensive,
lengthy and disruptive to normal business operations, and can require extensive management
attention and resources, regardless of their merit. Moreover, 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.

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. 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 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 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 or
Israel. 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 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 not infringing 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 ongoing 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 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.

13

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Litigation
with respect to intellectual property rights in our industry is not uncommon and can often
involve patent holding companies who have little or no product revenues and against whom
our own patents may provide little or no deterrence. We may also be obligated to indemnify
our customers or business partners in connection with any such litigation, which could
further exhaust our resources. Furthermore, as a result of an intellectual property
challenge, we may be required to enter into royalty, license or other agreements. We may
not be able to obtain these agreements at all or on terms acceptable to us. In addition,
disputes regarding our intellectual property rights may deter distributors selling our
products and dissuade potential end customers from purchasing such products. 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.

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 will be materially adversely affected.

Our
international revenues and operations subject us to many 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,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

14

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| | n | variety
of foreign laws and legal standards,
| | - | --------------------------------------------

| | n | expropriation
and confiscation of assets and facilities,
| | - | --------------------------------------------------------

| | n | fluctuations
in currency exchange rates, such as an increase in the value of the U.S. dollar relative
to foreign currencies that would make our products more expensive in local currency and,
therefore, potentially less competitive in those markets,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.

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

As
of December 31, 2006, our directors and executive officers owned approximately 19.3% of
the voting power of our outstanding ordinary shares, or 23.4% of our outstanding ordinary
shares if the percentage includes options currently exercisable or exercisable within 60
days of December 31, 2006 (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 have sufficient voting power to influence all 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 you
of a possible premium for your ordinary shares as part of a sale of our company.

# Indemnification of
directors and officers

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. These agreements provide, subject to Israeli law, for us to 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 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
| | - | --------------------------------------------------------------------------------------------------------

15

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| |  | 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, and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
| | - | ----------------------------------------------------------------------------------

| |  | 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. The recent election of representatives of
the Hamas movement to a majority of seats in the Palestinian Legislative Council has
resulted in an escalation in violence among Israel, the Palestinian Authority and other
groups. In addition, there have recently been extensive hostilities along Israels
northern border with Lebanon and to a lesser extent in 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
under Israeli law require us to meet several conditions, and may be terminated or reduced
in the future, which would increase our taxes

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 recently, the
designation required advance approval from the Investment Center of the Israeli Ministry
of Industry, Trade and Labor. For these programs to be eligible for tax benefits, we must
meet certain conditions, relating principally to adherence to the approved programs and to
periodic reporting obligations. We believe that we are currently in compliance with these
requirements. However, if we fail to meet these requirements, we would be subject to
corporate tax in Israel at the regular statutory rate. We could also be required to refund
tax benefits, with interest and adjustments for inflation based on the Israeli consumer
price index.

16

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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 program as the
undistributed tax exempt income is essentially permanent in duration.

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 amendment does not apply to investment programs approved prior to December
31, 2004. The new tax regime will apply to new investment programs only.

As
a result of the amendment, tax-exempt income generated under the provisions of the amended
law will subject us to taxes upon dividend distribution or complete liquidation.

You
can see more details 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.

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

Many
of our male 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. A disruption 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.

17

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

|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 IT (Information Technology) security, and offer our customers
with 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. 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 are sold, integrated and serviced
by a network of partners around the world.

In November 2006 we announced a tender offer to acquire Protect Data AB that at the time of
the offer was a public company listed on the Stockholm Stock Exchange. The total amount
for the acquisition is approximately SEK 4,338 million (approximately $618 million) in cash. On January 11, 2007, we completed the offer with 87.1% of all of the
shares and warrants of Protect Data, on a fully diluted basis. As of March 14, 2007, we
had acquired over 98% of all of the shares and warrants of Protect Data, on a fully
diluted basis, and have begun the integration process.

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.

In
December 2006, we completed the acquisition of privately held NFR Security, Inc. a U.S.
privately held company, for a total cash consideration of approximately $14.6 million and
acquisition related costs of approximately $0.3 million. In addition, we assumed net
liabilities of approximately $4.3 million.

NFR,
a Rockville, Maryland based company, provides intrusion prevention solutions that secure
business networks in real time, against automated malware (software that acts on computers
without the knowledge of the user), vulnerability windows (the time between when a
vulnerability has been identified and a solution to such vulnerability has been released
and deployed) and unsanctioned network changes. NFRs solutions can be deployed both
at the network perimeter and inside the corporate network to employ effective enforcement
of both perimeter and internal network security policies.

You
can see more details regarding the important events in the development of our business
since the beginning of 2006 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 3A Jabotinsky Street, Ramat-Gan 52520, 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.

18

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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 communications systems (connectivity). Increased connectivity has in turn
expanded the need for technology to safeguard and manage the access to information
available over these networks, which have become increasingly global.

Increase
in connectivity

Over
the past decade global connectivity has increased dramatically. 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 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.

These
developments and the need for secure and managed communications have led to the broad
acceptance 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 adopted, 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.

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The
need for network security

The
growth of connectivity among, and the use of the Internet by, organizations of all sizes
have increased the risk that an organizations information technology (IT) resources
can be attacked via the Internet. Organizations have recognized this risk and are
deploying security solutions in an effort to protect their confidential information from
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 Local Area Network (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 and able to detect and defeat highly sophisticated network and
application-level attacks that are increasingly prevalent on the Internet today.
Increasing numbers of organizations are deploying an additional layer of security by
applying security software to networked endpoint devices such as personal computers.
Endpoint security includes personal firewall, security and policy enforcement features
that have been specifically designed for internal and remote personal computing devices.

In
addition to protecting an organizations IT assets from attack, organizations take
steps to guard their sensitive information traversing untrusted networks, such as the
Internet. Securing organizational information on the Internet is critical as more
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, an increasing number of organizations are deploying
VPNs to encrypt and authenticate their Internet-bound traffic.

Frequently,
firewalls and VPNs are provided in an integrated manner or 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 long focused on securing the network
perimeter. However, organizations are increasingly 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 diverse programming languages and communications protocols that are
used in these environments. Security solutions for both internal and Web security need to
have a deep understanding of the programming languages, applications and protocols that
are common in these environments.

The
need for data security

While
network security offers effective solutions, data can still be lost through common
computer use, intentionally or unintentionally. For example, an employee can disclose
sensitive data to an unauthorized party, by mistakenly using a wrong e-mail address. As
the enterprise workforce seeks enhanced productivity and becomes increasingly mobile, data
is being pushed out from the servers of the local network to mobile endpoints such as
laptops, PDAs, smartphones and removable media. A loss or theft of such a device
could expose sensitive corporate data that resides on it to unauthorized parties, risking
a loss of confidential information and damage to the companys reputation and the
violation of regulations for protecting sensitive information. For example, a growing
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. The relative ease
with which data may be lost makes data security a major concern for organizations. To
mitigate this risk, an increasing number of organizations are looking to extend security
beyond the network infrastructure to the data itself.

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The
primary means of protecting data that resides on mobile computing devices are user
authentication, allowing only authorized parties to access the sensitive data, and
encryption of the hard disk, preventing unauthorized parties from reading it.

# Products and services

Our
products, services and technologies provide protection:

| | n | for
network perimeter - ensuring that only authorized users can access our customers' network
resources and to detect and thwart attacks,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| | n | against
internal threats  protecting our customers networks and endpoints from
the threats that emerge within an organization, such as worms, internal hacking and
misuse of business applications,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | for
Web-based communications  allowing remote and mobile employees to securely
connect to their organizations networks via a Web browser, and defending against
attacks targeting our customers Web-based business applications,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | for
network endpoints  protecting both the endpoints themselves and the networks
the endpoints are connected to, with security solutions that address the risks posed by
hackers, worms, spyware and other threats to the internal and remote computers that
access our customers networks, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | for
data security protecting sensitive corporate information, stored on mobile
computing devices such as laptops, PDAs, smartphones and removable media and controlling
data that traverses through security gateways.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All
of our enterprise 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 ensure 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.

Our
management and gateway software products run in a variety of deployment environments and
platforms that include standard workstations and servers and dedicated appliance platforms
such as those produced by Nokia and Crossbeam. Different client products run on different
client operating systems such as Microsoft Windows, Mac OS, Microsoft Windows Mobile,
Symbian and PalmOS.

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The
table below summaries our primary product families and service offering for enterprises:

|Enterprise               
|-------------------------
|
|
|
|
|Firewall and VPN         
|Security Gateways        
|                         
|Firewall and VPN         
|Security Appliances      
|                         
|Dedicated Security       
|Gateways                 
|                         
|Endpoint Security        
|                         
|                         
|Data Security            
|                         
|                         
|                         
|Security Management      
|                         
|                         
|Services and Subscription
|                         
|                         
|                         

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In
addition, we offer specialized product families and services for large enterprises,
service providers and telecommunication operators and for small businesses and consumers,
as shown in the table below:

|Large Enterprises, Service Providers and Telecommunication Operators
|--------------------------------------------------------------------
|
|
|
|
|Firewall and VPN Security                                           
|Gateways                                                            
|                                                                    
|                                                                    
|                                                                    
|Security Management                                                 
|                                                                    
|                                                                    
|Services and Subscription                                           

|Small Businesses and Consumers
|------------------------------
|
|
|
|
|Firewall and VPN Security     
|Appliances                    
|                              
|Endpoint Security             
|                              
|Services and Subscription     

23

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Firewall and VPN security
gateways

Firewall
and VPN security gateways ensure the confidentiality, integrity and availability of
corporate networks by controlling access to all entry and exit points of the network.
Firewalls can also be deployed within an organization to control traffic between different
segments. VPN security gateways are also used to securely connect geographically
distributed offices or sites.

Frequently,
firewalls and VPNs are provided in an integrated manner or as a single product. Unified
Threat Management (UTM) solutions integrate additional security features in a single,
centrally managed security solution. Typical UTM products integrate firewall, VPN,
anti-virus, and intrusion prevention technologies (described below). Integrating multiple
security functionalities delivers greater security for all network traffic and facilitates
the management and enforcement of an organizations security policies.

Enterprise
solutions:

VPN-1
UTM product family

VPN-1
UTM is a line of software-based unified threat management solutions designed for
medium-sized businesses and enterprise regional sites, which have single or multiple
sites. VPN-1 UTM integrates firewall, VPN, anti-virus, intrusion prevention and other
security capabilities with simple and centralized management of all security functions.

VPN-1
Power product family

VPN-1
Power gateways integrate firewall, VPN and intrusion prevention technologies with
performance acceleration technologies. It provides security and remote connectivity to
corporate applications and network resources for enterprises with demanding performance
requirements. VPN-1 Power is available as a gateway or bundled with our centralized
management solutions.

Solutions
for large enterprises, service providers and telecommunication operators:

VPN-1
Power VSX product family

VPN-1
Power VSX is a virtualized security gateway that allows large enterprises and service
providers to create numerous virtual systems on a single hardware platform. This means
that a customer which manages multiple firewalls and VPNs does not need to purchase
separate hardware for each. Rather, the customer can purchase a single hardware gateway,
and then use VPN-1 Power VSX software to create numerous firewalls and VPNs on that single
piece of hardware. This reduces the hardware investment needed to achieve security across
an entire network and eases security administration. VPN-1 Power VSX can be administered
by our centralized management solutions.

FireWall-1
GX product family

FireWall-1
GX security gateways designed to protect GPRS network infrastructure of wireless
operators, enabling them to offer seamless roaming to their data customers without
exposing the network to potential security threats.

24

---

---



VPN-1
MASS product family

VPN-1
MASS security gateways enable mobile network operators to offer the connectivity and
security of Unlicensed Mobile Access (UMA, a technology allowing seamless roaming between
Local Area Networks (LAN) and Wide Area Networks (WAN), while using the same mobile phone)
without exposing the network to potential security threats.

Firewall and VPN security
appliances

Firewall
and VPN security appliances combine both software and hardware into a single
hardware-based device to offer confidentiality, integrity and availability of corporate
networks. Combining hardware and software into a single appliance helps simplify
deployment for customers as all systems are pre-built, configured and hardened at the
factory. The hardware components of the appliance are also carefully selected and
optimized to ensure a consistent level of performance and reliability.

Unified
Threat Management (UTM) solutions are commonly delivered as appliances. UTMs integrate
multiple security features in a single, centrally managed security solution. Typical UTM
products integrate firewall, VPN, anti-virus, and intrusion prevention technologies
(described below).

Enterprise
solutions:

UTM-1
product family

UTM-1
is a line of unified threat management appliances designed for medium-sized businesses and
enterprise regional sites, which have single or multiple sites. UTM-1 integrates firewall,
VPN, anti-virus, intrusion prevention and Web filtering capabilities into a single
appliance with simple and centralized management of all security functions. UTM-1
appliances come in multiple models to meet the needs of a broad range of mid-sized
businesses and branch office locations.

VPN-1
UTM Edge product family

VPN-1
UTM Edge appliances deliver secure connectivity for remote sites such as branch offices,
retail stores and partner sites. VPN-1 UTM Edge integrates firewall, VPN, intrusion
prevention and anti-virus capabilities with high availability and advanced routing
features. Centrally managed, VPN-1 UTM Edge appliances enable the efficient setup of
thousands of gateways. VPN-1 UTM Edge appliances are available in wired and wireless
models.

Solutions
for small businesses and consumers:

Safe@Office
product family

Safe@Office
is a unified threat management appliance for small business. Safe@Office provides
integrated firewall, VPN, intrusion prevention, anti-virus, anti-spam and URL filtering
capabilities. Safe@Office appliances can be managed locally using a Web browser, or
centrally by a Managed Service Provider (MSP) using the Security Management Portal (SMP)
described below. Safe@Office appliances are available in wired and wireless models.

25

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ZoneAlarm
Secure Wireless Router

ZoneAlarm
Secure Wireless Router is a unified threat management appliance for home networks. It
provides integrated firewall, VPN, intrusion prevention, anti-virus, secure remote
control, secure wireless communications and parental control capabilities.

Dedicated security
gateways

Secure
remote access

Distributed
businesses need a flexible remote access solution available to users when and where they
want it. At the same time, the necessary security controls must be provided to ensure
information confidentiality. Secure remote access solutions enable organizations to
provide remote users, or teleworkers, with convenient and secured access to enterprise
information resources.

Connectra
and SSL Network Extender product families

Connectra
and SSL Network Extender allow remote users, such as teleworkers and business partners, to
securely connect to an organizations network resources and applications, through SSL
VPN (Secure Socket Layer VPN) remote access, using any Web browser and without installing
client software. Connectra is available as an appliance or as software for open servers.
SSL Network Extender is sold as an add-on to VPN-1 Power and VPN-1 UTM and is integrated
with the Connectra gateways.

Intrusion
detection and prevention

Intrusion
Detection and Prevention Systems (IDS/IPS) detect and block attacks that are designed to
break into, disrupt or destroy network computer systems. IDS/IPS systems protect computer
systems by monitoring and inspecting network traffic and ensuring that any traffic
identified as suspicious or malicious is blocked or appropriately identified and logged
for future forensic analysis and reporting.

IPS-1
and InterSpect product families

IPS-1
and InterSpect are dedicated intrusion prevention appliances. They monitor network traffic
and apply rules to effectively block malicious activity while enabling normal operations
and legitimate traffic. IPS-1 can be deployed both at the network perimeter and inside the
corporate network to employ effective enforcement of both perimeter and internal network
security policies. InterSpect is commonly deployed inside the corporate network, it
segments the internal network into multiple security zones with varied
security policies and quarantines computers that generate suspicious activity or do not
comply with security policy. Both IPS-1 and InterSpect can be centrally managed.

Endpoint security

Our
endpoint security solutions address the risks that hackers, worms, spyware and other
threats pose to the internal and remote computers that access the network. Our solutions
provide centralized management for easy control of endpoint security, and policy-based
enforcement.

26

---

---



Enterprise
solutions:

Integrity
product family

Our
Integrity products enable enterprises to enforce security policy on desktop and laptop
computers used across the organization. Integrity helps enforce security policies by
enabling administrators to control which computer applications can be used on the network,
screening inbound and outbound traffic for malicious content, detecting and removing
spyware, and securing instant messaging use. Integrity also helps ensure that all
computers in the network are running the latest anti-virus software, or have the latest
security patches installed before they connect to the network. Integrity is controlled
from a centralized management console.

SecureClient
product family

Our
SecureClient products work with our VPN gateways to extend secure remote access to end
users, from laptops and mobile devices, by encrypting and authenticating data to protect
against eavesdropping and data tampering.

Solutions
for small businesses and consumers:

ZoneAlarm
product family

ZoneAlarm
Security Suite is a complete Internet security solution for small businesses and
consumers. It integrates personal firewall, anti-virus and anti-spyware capabilities,
SmartDefense update service, ID and privacy protection, email security, anti-phishing and
anti-spam, instant messaging protection and wireless computer protection.

Many
of the capabilities offered in the ZoneAlarm Security Suite are also offered as standalone
product offerings. We also offer ZoneAlarm, a basic personal firewall, free of charge for
personal and nonprofit use.

Data Security

Recently
acquired Protect Data expands our product offering for data security in three areas:

Pointsec
PC disk encryption product family

Pointsec
PC disk encryption employs user authentication to ensure that only authorized parties can
access data stored on the hard disk of a computing device, and encrypts all information to
ensure that lost or stolen data cannot be used.

Pointsec
for mobile devices product family

Pointsec
for mobile devices provides disk encryption for mobile devices with Microsoft Windows
Mobile, Symbian or PalmOS operating systems.

Pointsec
removable media product family

Pointsec
removable media solutions include port protection that controls the use of all
communication ports (interfaces for connecting external devices to a computer) to prevent
sensitive data transfer to USB or other memory devices, or unauthorized distribution of
data. It is also include encryption of removable storage media, such as external hard
drives, memory cards, rewriteable CDs, DVDs and flash drives, files and folders and e-mail
in transit (including e-mail attachments).

27

---

---



Security management

We
offer a variety of products based on our Security Management Architecture (SMART), which
enables centralized policy configuration, monitoring, logging and reporting.

Enterprise
solutions:

SmartCenter
product family

SmartCenter
is our flagship security management solution, providing a single console for centrally
managing security, VPN and network policies and end-user activity. SmartCenter also
provides centralized management and distribution of new defenses, software updates and
licenses.

Eventia
product family

Our
Eventia product family is a set of comprehensive security event management solutions that
provides centralized, real-time correlation of security information from multi-vendor
devices in order to help security administrators respond more quickly and decisively to
security events. Eventia also provides centralized reporting tools on network utilization,
security events and user activity, and consolidates the data into predefined reports with
customizable filters.

Solutions
for large enterprises, service providers and telecommunication operators:

Provider-1

Provider-1
is a security management product designed for service providers and large enterprises. It
centralizes and simplifies the management of security policies for thousands of users.
With Provider-1 security policies can be applied globally to all gateways or tailored to
meet the needs of individual customers.

Security
Management Portal (SMP)

SMP
is a security management product that is designed for service providers who provide
managed security services for small businesses, and for enterprise IT departments that
remotely manage security for their remote or branch locations. SMP enables management of
tens of thousands of Safe@Office gateways through a simple, Web-based user interface.

28

---

---



Services and Subscription

Enterprise
programs:

Enterprise
Based Support (EBS)

Our
EBS program offers our customers software subscription and support for their entire
installed base of Check Point products.  Our EBS program provides software updates,
major software upgrades, and the latest product enhancements, that enable our customers to
keep pace with evolving threats and take advantage of new technologies.  In addition,
the program entitles our customers for online self-service support tools.

Collaborative
Enterprise Support (CES)

Our
CES program offers our customers software subscription and a collaborative support
provided by our local certified partners, with the in-depth expertise and resources of
Check Point.  The local partner provides first-line support in the customers
language with an intimate understanding of the customers environment and support
needs.  If additional support is required, a collaborative second line support is
provided by the local certified partner and Check Point, with a variety of support
levels.  In addition, the program entitles our customers with advanced access to our
online self-service support tools.

SmartDefense
Services

SmartDefense
is a subscription-based service that provides real-time security defense updates,
advisories and recommendations for security administrators. SmartDefense updates add new
capabilities to our products, such as updating anti-virus signature files or providing
protection against newly discovered software vulnerability.

Programs
for large enterprises, service providers and telecommunication operators:

Diamond
Support

Our
Diamond Support is a high level and personalized support program designed for
customers with a large installed base of Check Point products. Under this program, we
assign an experienced, senior technical support engineer, who is committed to each
customer and managing all of its support aspects.  In addition, we offer our Diamond
Support customers with a dedicated support stuff for shorten response and resolution time,
on-site assistance and consulting and a periodical proactive support, analysis and
recommendation to identify and avoid potential problems.

29

---

---



Programs
for small businesses and consumers:

ZoneAlarm
Update and Support Subscription

ZoneAlarm
Update and Support Subscription provides real-time recommendations to end users on which
programs should be allowed to run on an endpoint computer, based on a knowledgebase of
hundreds of thousands of programs that have been classified as either good or bad.

# 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. Stateful Inspection extracts and maintains extensive state
information (data that provides context for future screening decisions) from all
relevant communication layers, to provide accurate and highly efficient traffic
inspection.

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, that traffic is managed according to
priority and that 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
our products respond efficiently to larger volumes of data as network traffic increases.
Our Stateful Inspection technology can be adapted to new protocols, software applications
and security threats, can be upgraded and can be run on a wide range of operating systems.

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

Our
INSPECT engine, based on our Stateful Inspection technology, 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:

| | n | drop
it when the security policy has been violated,
| | - | ---------------------------------------------------

| | n | encrypt
it to create a secured Virtual Private Network (VPN) that enables the transfer of private
data over public networks such as the Internet,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| | n | prioritize
it for Quality of Service (QoS), that is, the ability of a network to provide better
service for selected traffic, and
| | - | ---------------------------------------------------------------------------------------------------------------------------------

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

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---



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 OPSEC (Open
Platform for Security) framework, which is described below.

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, UTM-1, VPN-1 UTM Edge, VPN-1 UTM,
Safe@Office, InterSpect, Connectra, Integrity and VPN-1 Power VSX products, which are
described below.

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.

SecurePlatform

SecurePlatform
bundles the Check Point security solutions together with a pre-hardened operating system
in a single package that is easy to deploy. It optimizes the performance of security and
operating systems 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 (systems whose key interfaces
are based on widely supported standards).

ClusterXL
and SecureXL

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. 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. Integration with our
management and enforcement points enables simple deployment.

31

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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, standalone 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 Integrity and ZoneAlarm lines of
endpoint security products (described above under Products).

Pointsec
Secure Pre-Boot Environment

Pointsec
Secure Pre-Boot Environment (PPBE) is a secure, proprietary operating system
that along with Pointsecs Multi-Factor Authentication Engine (MFAE,
Pointsecs access control and authentication architecture), encrypts all information
stored on a PCs hard disk (full disk encryption), and provides a graphical user
interface for the Pre-Boot Authentication process.  The full disk encryption protects
a PCs operating system from being attacked by exploiting its inherent
vulnerabilities.  The graphical user interface is designed like a common login screen
to ensure straightforward operation by the end user.

Hybrid
Detection Engine

The
IPS-1 engine (described above under Products) utilizes multiple detection and
analysis techniques to detect hostile or suspicious traffic. These techniques include
signature-based methods to detect known patterns of attacks targeted at the network and at
vulnerabilities within the network, protocol analysis to validate the traffic construct
meets the expected standards, anomaly detection to identify instances where network
traffic exhibits abnormal characteristics, Operating System fingerprinting to determine
the Operating System type of the traffic destination, to assure a proper receipt and
processing, multi-element correlation to detect widespread illicit activity launched from
the same source address and 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 engine (described
above under Products) 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%, whereas purely anomalous traffic would derive a confidence level
possibly in the range of 70%.  This function enables granular prevention policy, such
as block everything with a confidence greater than 90%, 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.

32

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# Revenues by category of
activity and geographic area

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

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|
|
|
|
|Category of activity:      |                        
|Products and licenses      |                        
|Software subscriptions     |                        
|Support and other 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 (we rarely sell directly to end users). Most of our sales to
the consumer market are either directly 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 and telemarketing
campaigns. In addition, we provide current and prospective customers with 30 day software
evaluation licenses to try our products.

We
have strategic relationships with various hardware partners that include server,
workstation, appliance and networking vendors. These include Crossbeam Systems Inc., Dell
Inc., Hewlett-Packard Co., International Business Machines Corporation (IBM), Nokia
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 Computer
Associates International, Inc., RSA Security, Inc., Trend Micro, Inc. and VeriSign, Inc.
At December 31, 2006 we had 580 employees dedicated to sales and marketing. Following the
acquisition of Protect Data in 2007, approximately 128 employees dedicated to sales and
marketing joined the company.

33

---

---



# Customer service and
support

We
operate a worldwide technical services organization, providing a wide range of technical,
customer, educational and professional services. Our technical assistance centers in the
United States and Israel 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. At December 31, 2006 we had 163 employees dedicated to customer
service and support. Following the acquisition of Protect Data in 2007, approximately 29
employees dedicated to customer service and support joined the company.

Our
channel partners generally provide their customers with installation, training,
maintenance and support, while we provide a high-level technical backline 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.

Until
the end of 2003, we generally offered a separate subscription and support program for each
license. Since that time, we have begun offering more comprehensive programs that cover
all of our products in a customers installed base. These new programs offer lower
cost to our customers and achieve greater account coverage. In addition, 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
subscription 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. 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 and security management needs. 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 $44.5
million in 2004, $50.5 million in 2005 and $62.2 million in 2006. These amounts include
stock based compensation related to the Zone Labs acquisition in the amount of $1.3
million per year in 2004 and in 2005. In 2006, these amounts include stock-based
compensation as a result of the adoption of Statement of Financial Accounting Standard
(SFAS) No. 123(R), in the amount of $9.4 million. At December 31, 2006 we had 573
employees dedicated to research and development activities and quality assurance.
Following the acquisition of Protect Data in 2007, approximately 64 employees dedicated to
research and development activities and quality assurance joined the company.

# Competition

You
can see more details 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.

34

---

---



# 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 we consider proprietary.

We
have five U.S. patents, over 25 U.S. patents pending and additional 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.

# Effect of government
regulation on our business

You
can see more details 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.

35

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---



# 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 (3)                          | Sweden                               
|                                                        
|Protect Data AB (4)                                      | Sweden                               
|                                                        
|SofaWare Technologies Ltd. (5)                           | Israel                               
|                                                        
|NFR Technologies, Inc. (6)                               | United States of America (Delaware)  
|                                                        
|NFR Security, Inc (7)                                    | United States of America (Delaware)  
|                                                        
|Zone Labs LLC (7)                                        | United States of America (California)

---

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

(2)
          Branch of Check Point Software Technologies Ltd.

(3)
          Wholly owned by Check Point Holding (Singapore) PTE Ltd.

(4)
          In November 2006 we announced a tender offer to acquire Protect Data AB that at
          the time of the offer was a public company listed on the Stockholm Stock
          Exchange. The total amount for the acquisition is approximately SEK 4,338
          million (approximately $618 million) in cash. On January 11, 2007, we completed
          the offer with 87.1% of all of the shares and warrants of Protect Data, on a
          fully diluted basis. As of March 14, 2007, we had acquired over 98% of all of
          the shares and warrants of Protect Data, on a fully diluted basis, and have
          begun the integration process. Protect Data wholly owns the following
          subsidiaries: Pointsec Sweden AB (Sweden), Pointsec Mobile Technologies AB
          (Sweden), Pointsec Wireless Solutions AB (Sweden), Pointsec Mobile Technologies
          (Hong Kong), Protect Data Internet Solutions AB (Sweden), Pointsec Mobile
          Technologies, Inc. (United States of America ,California), Pointsec Mobile
          Technologies B.V. (Holland), Pointsec Mobile Technologies Ltd. (United Kingdom),
          Pointsec Mobile Technologies Pte. Ltd. (Singapore), Pointsec Mobile Technologies
          GmbH (Germany), Pointsec Mobile Technologies S.r.l. (Italy), Pointsec Mobile
          Technologies SAS (France), Pointsec Mobile Technologies Pty Ltd (Australia), Oy
          Pointsec Finland Ab (Finland), Pointsec Norway AS (Norway), Pointsec Denmark A/S
          (Denmark), Pointsec K.K. (Japan), Reflex Software Ltd. (Jersey), Reflex
          Magnetics Ltd. (United Kingdom) and Reflex Software Luxembourg SARL (Luxemburg).

(5)
          We own 64% of the outstanding equity of SofaWare (62% on a fully diluted basis).
          We also own warrants to acquire shares of SofaWare that allow us to increase our
          holdings to 69% of the outstanding equity of SofaWare (assuming the exercise of
          all of our warrants to acquire shares of SofaWare, but not assuming exercise by
          any other shareholder of Sofaware). Accordingly, we consolidate the financial
          results of SofaWare into our financial statements.

(6)
          Incorporated as Seyfert Acquisition Corporation

(7)
          Wholly owned by Check Point Software Technologies, Inc.

36

---

---



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. (1)                                | 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 (2)) | 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 (3)                        | 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. (1)                          | 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. (4)                      | Turkey                  
|                                                                         
|Check Point Software Technologies (UK) Ltd.                               | United Kingdom          

---

(1)
          Under formation.

(2)
          Representative Office of Check Point Software Technologies (Hong Kong) Ltd.
          Under formation.

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

(4)
          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.

37

---

---



# Property, plants and
equipment

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



| | Location                  | Primary Usage                                        | Space (square feet)
| | ------------------------- | ---------------------------------------------------- | -------------------
|
|
|
|
| | Ramat Gan, Israel         | International Headquarters, research and development | 105,712            
| | Redwood City, California  | U.S. Headquarters                                    | 48,384             
| | San Francisco, California | Research and development                             | 29,884             
| | Irving, Texas             | Technical support, education, professional services  | 26,725             
| | Rockville, Maryland       | Research and development                             | 12,793             

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

| | Location               | Primary Usage                   | Space (square feet)
| | ---------------------- | ------------------------------- | -------------------
|
|
|
|
| | Europe                 | Sales, research and development | 33,519             
| | Americas               | Sales                           | 23,832             
| | Asia Pacific and Japan | Sales                           | 12,572             

In order
to establish a new corporate headquarters, in March 2006 we purchased a building in
Tel-Aviv, Israel, 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.
Renovation continues in 2007. The building contains approximately 170,000 square feet of
office space and approximately 280,000 square feet below-ground for parking and other
purposes. We also acquired rights for an additional building with approximately 97,000
square feet. We expect to relocate to the new building during the second quarter of 2007.
Our lease for our international headquarters and research and development center in Ramat
Gan, Israel expires by December 31, 2007.

Protect
Datas headquarters and principal research and development facilities are located in
Stockholm, Sweden, where the company leases approximately 15,000 square feet of office
space.  This lease will expire in September 2010. Protect Data also leases
approximately 7,500 square feet of research and development facilities at other
locations in Sweden. In addition, Protect Data leases a total of approximately 9,500
square feet of sales office space in the United States, approximately 16,500 square feet
of sales and research and development office space in Europe and approximately 1,000
square feet of sales office space in Asia.

# 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.

38

---

---



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

# Overview

We
develop, market and support a wide range of software and combined hardware and software
products and services for IT (Information Technology) security, and offer our customers
with 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. 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 are sold, integrated and serviced
by a network of partners around the world.

In
November 2006 we announced a tender offer to acquire Protect Data AB that at the time of
the offer was a public company listed on the Stockholm Stock Exchange. The total amount
for the acquisition is approximately SEK 4,338 million (approximately $618 million) in
cash. On January 11, 2007, we completed the offer with 87.1% of all of the shares and
warrants of Protect Data, on a fully diluted basis. As of March 14, 2007, we had acquired
over 98% of all of the shares and warrants of Protect Data, on a fully diluted basis, and
have begun the integration process.

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.

In
December 2006, we completed the acquisition of privately held NFR Security, Inc. a U.S.
privately held company, for a total cash consideration of approximately $14.6 million and
acquisition related costs of approximately $0.3 million. In addition, we assumed net
liabilities of approximately $4.3 million.

NFR,
a Rockville, Maryland based company, provides intrusion prevention solutions that secure
business networks in real time, against automated malware (software that acts on computers
without the knowledge of the user), vulnerability windows (the time between when a
vulnerability has been identified and a solution to such vulnerability has been released
and deployed) and unsanctioned network changes. NFRs solutions can be deployed both
at the network perimeter and inside the corporate network to employ effective enforcement
of both perimeter and internal network security policies.

Our
business is subject to the effects of general global economic conditions and, in
particular, market conditions in the information technology (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.

39

---

---



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 subscriptions, support
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 subscription and support services.

We
derive our sales primarily through indirect channels. During 2006 we derived approximately
26% of our sales from two distributors, with the largest distributor accounting for
approximately 15% of our sales, and the second largest distributor accounting for
approximately 11% of our sales. During 2005 these two distributors accounted for
approximately 24% of our sales, or approximately 12% each. During 2004 we derived
approximately 13% of our sales from a single distributor.

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,
|------------------------------ | -----------------------
|
|
|
|
|Region:                        |                        
|Americas                       |                        
|Europe, Middle East and Africa |                        
|Japan                          |                        
|Asia Pacific other than 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

We
prepare our consolidated financial statements in accordance with generally accepted
accounting principles in the United States (U.S. GAAP). U.S. GAAP requires that we make
estimates and assumptions in certain circumstances that affect the amounts reported in our
consolidated financial statements and related footnotes. We base our estimates on our
experience and various assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates. We believe that the
estimates and assumptions involved in the accounting policies described below have the
greatest potential impact on our financial statements, thus we consider these to be our
critical accounting policies. 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 three primary sources:

| | n | new
software products and licenses,
| | - | -----------------------------------

| | n | software
subscriptions, and
| | - | ---------------------------

| | n | support
services.
| | - | -----------------

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. We recognize software license
revenue when a customer enters into a license agreement, 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. As required by SOP 98-9, we determine the value
of the software component of our multiple-element arrangements using the residual method
based on vendor specific objective evidence (VSOE) of fair value exists for the
undelivered elements of the support and maintenance agreements. The residual method
requires revenue to be allocated to the undelivered elements based on the fair value of
such elements, as indicated by VSOE. VSOE is based on the price charged when an element is
sold separately or renewed.

40

---

---



Our
software subscription provides customers with rights to unspecified software product
upgrades released during the term of the subscription period. Our support services grant
our customers telephone access to technical support personnel during the term of the
service. We recognize revenues from software subscription and support 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 subscription and support services which equal to support services when they
sold separately. 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 subscription and support services for the different products offered which equal
to support services when sold separately. The renewal prices are based on our list price.

Allowance
for doubtful accounts and sales returns

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. We also record a
provision for estimated sales returns in the same period as we record the related
revenues. We base this estimate on historical sales returns and other factors. If the
historical data used to calculate these estimates do not properly reflect future returns,
we may need to increase the provision for sales returns.

Legal
contingencies

We
are the defendants in various lawsuits, including employment claims and other legal
proceedings in the normal course of our business. In determining whether provisions should
be recorded for pending litigation claims, we assess the allegations made and the
likelihood that we will successfully defend ourselves. When we believe that it is probable
that we will not prevail in a particular matter, we then estimate the amount of the
provision required based in part on our legal counsels advice.

You
can see more details in Item 8  Financial Information under the caption
Legal proceedings.

41

---

---



Income
taxes and valuation allowance

As
part of the process of preparing our consolidated financial statements, we are required to
estimate our income tax expense in each of the jurisdictions in which we operate. In the
ordinary course of a global business, there are many transactions and calculations where
the ultimate tax outcome is uncertain. This process involves us estimating our actual
current tax exposure, which is accrued as tax accrual, together with assessing temporary
differences resulting from differing treatment of items and for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We may record a valuation allowance to
reduce our deferred tax assets to the amount of future tax benefit that is more likely
than not to be realized.

Although
we believe that our estimates are reasonable and that we have considered future taxable
income and ongoing prudent and feasible tax strategies in estimating our tax outcome and
in assessing the need for the valuation allowance, there is no assurance that the final
tax outcome and the valuation allowance will not be different than those which are
reflected in our historical income tax provisions and accruals.

We
have filed or are in the process of filing federal, state and foreign tax returns that are
subject to audit by the respective tax authorities. Although the ultimate outcome is
unknown, we believe that adequate amounts have been provided for and any adjustments that
may result from tax return audits are not likely to materially adversely affect our
consolidated results of operations, financial condition or cash flows.

Realizability
of long-lived assets

We
are required to assess the impairment of long-lived assets, tangible and intangible, 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.

Upon
determination that the carrying value of a long-lived 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.

Business
combinations

Our
current acquisitions and future acquisitions of businesses that we will control will be
accounted for under the purchase method of accounting. The amounts assigned to the
identifiable assets acquired and liabilities assumed in connection with acquisitions will
be based on estimated fair values as of the date of the acquisition, with the remainder,
if any, to be recorded as goodwill. The fair values will be determined by our management,
taking into consideration information supplied by independent appraisal experts (in case
of significant business combinations) and by the management of acquired entities and other
relevant information. The valuations will generally be based upon future cash flow
projections for the acquired assets or settlement amounts for assumed liabilities,
discounted to present value using current market rates. The determination of fair values
requires significant judgment both by management and by outside experts engaged to assist
in this process.

42

---

---



Goodwill
and other intangible assets

We
follow SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142,
goodwill and intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with the statement or between annual
tests if impairment indicators exist. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value.

We
perform an annual impairment test during the fourth quarter of each fiscal year, or more
frequently if impairment indicators are present. We operate in one operating segment, and
this segment comprises our only reporting unit. In calculating the 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 and intangible assets
with an indefinite life. As of December 31, 2006, no impairment charges were required.

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, share-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 share-based awards at the grant date requires the exercise
of judgment, including the amount of share-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. Please see further discussion below under the
caption Adoption of new accounting standard.

43

---

---



# Results of operations

The
following table presents information concerning our results of operations in 2004, 2005
and 2006:

|                              | Year Ended December 31,
|----------------------------- | -----------------------
|
|
|
|Revenues:                     |                        
|Products and licenses         |                        
|Software subscriptions        |                        
|Support and other services    |                        
|                              |                        
|Total 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                    |                        
|                              |                        

---

|*
Including pre-tax charges for amortization of intangible assets related to Zone Labs
acquisition, stock-based compensation (related to Zone Labs acquisition in 2004 and 2005
and adoption of SFAS No. 123(R) in 2006) and acquisition related expenses in the
following items:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization  of  intangible  assets and  acquisition |  |  |   |       |  |   |       |  |   |        | 
| | ----------------------------------------------------- |  |  | - | ----- |  | - | ----- |  | - | ------ | 
| | related expenses                                      |  | 
| | Cost of revenues                                      |  |  | $ | 4,061 |  | $ | 5,414 |  | $ | 5,414  | 
| | Selling and marketing                                 |  |  |   | 171   |  |   | 228   |  |   | 604    | 
| | General and administrative                            |  |  |   | -     |  |   | -     |  |   | 927    | 
| |                                                       |  |  |   |       |  |  
| | Total                                                 |  |  | $ | 4,232 |  | $ | 5,642 |  | $ | 6,945  | 
| |                                                       |  |  |   |       |  |  
| |                                                       |  | 
| | Stock-based compensation                              |  | 
| | Cost of revenues                                      |  |  | $ | 137   |  | $ | 408   |  | $ | 509    | 
| | Research and development                              |  |  |   | 1,297 |  |   | 1,252 |  |   | 9,371  | 
| | Selling and marketing                                 |  |  |   | 2,745 |  |   | 1,825 |  |   | 7,997  | 
| | General and administrative                            |  |  |   | 441   |  |   | 260   |  |   | 18,515 | 
| |                                                       |  |  |   |       |  |  
| | Total                                                 |  |  | $ | 4,620 |  | $ | 3,745 |  | $ | 36,392 | 
| |                                                       |  |  |   |       |  |  

44

---

---



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 subscriptions        |                        
|Support and other services    |                        
|                              |                        
|Total 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                    |                        
|                              |                        

Revenues

We
derive our revenues mainly from the sale of products and licenses, and related software
subscriptions, support and other services. Our revenues were $515.4 million in 2004,
$579.4 million in 2005 and $575.1 million in 2006. Our revenues in 2005 increased,
compared to 2004, due to continued strengthening of our SmartDefense service and our
enterprise support and subscription programs, both accounted for approximately $44
million. In addition, the inclusion of Zone Labs operations for a full year compared
to 9 month is 2004, contributed approximately $14 million. Finally, in 2005, we had a sale
of technology licensing agreement with Sygate (now owned by Symantec) in the amount of
$18.5 million. At the same time we experienced a decline in product revenues. Total
revenues in 2006 remained flat compared to 2005. A decrease of $39.4 million in product
revenues was offset by an increase of $35.2 million in software subscription and in
support and other service revenues. In 2006 we experienced strength in our subscription
and support sales, attributed primarily to greater account coverage of our new
subscription and support programs, mainly in Europe, where we experienced a growth of
approximately 22%. In addition, sales of our SmartDefense service grew by 43% and we also
experienced growth of subscription sales in the consumer business. Over the last three
years, product revenues as a percentage of revenues decreased from 54% in 2004 to 49% in
2005 and to 42% in 2006. This is as a result of the broad coverage of our installed base
with our subscription and support programs, and the maturity of our enterprise perimeter
security business. We anticipate that revenues in 2007 will increase due to organic growth
and the inclusion of NFR and Protect Datas operations in our results. However, we
cannot guarantee that revenues will grow in 2007 due to several factors, as described
above in Item 3  Key Information under the caption Risk
Factors, any of which could materially adversely affect our revenues.

45

---

---



Cost
of revenues

Our
cost of revenues is comprised of the cost of software and hardware production, manuals,
packaging and license fees paid to third parties. It also includes the cost of post-sale
customer support, training and consulting. Cost of revenues was $27.8 million in 2004,
$30.5 million in 2005 and $36.4 million in 2006, and represented 5% of revenues in 2004
and in 2005 and 6% of revenues in 2006. These amounts include amortization of intangible
assets and stock-based compensation related to the acquisition of Zone Labs in the amount
of $4.2 million in 2004 and $5.8 million in 2005. In 2006, these amounts include
amortization of intangible assets of $5.4 million, related to the acquisition of Zone
Labs, and stock-based compensation of $0.5 million, resulted from the adoption of SFAS No.
123(R). The intangible assets acquired in connection with the acquisition of Zone Labs are
amortized over their useful lives on a straight-line basis, which best represents the
expected pattern of usage. The increase in cost of revenues in 2005 was attributable
mainly to the inclusion of Zone Labs operations for a full year compared to 9 months
in 2004 (approximately $2 million). The increase in cost of revenues in 2006 was mainly
due to increased sales of hardware-based products and due to an increase in licensing
expenses (both accounted for approximately $3 million). In addition we experienced an
increase in cost of 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 expense of approximately $1.8 million, in order to support the growth in
service revenues. We anticipate that cost of revenues will increase in 2007, in order to
support an expected growth in revenues and as a result of the inclusion of NFR and Protect
Datas operations, as well as the amortization of intangible assets related to these
acquisitions, in our results of operations.

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 $44.5 million in 2004, $50.5
million in 2005 and $62.2 million in 2006. These amounts include stock-based compensation
related to the acquisition of Zone Labs in the amount of $1.3 million in each of 2004 and
2005. In 2006, these amounts include stock-based compensation of $9.4 million, resulted
from the adoption of SFAS No. 123(R). Research and development expenses represented 9% of
revenues in 2004 and in 2005 and 11% of revenues in 2006. In addition to the above
mentioned expenses, in 2005 the increase in research and development expenses was mainly
attributable to compensation related expenses which increased by approximately $6.1
million, of which $3.3 million is due to the inclusion of Zone Labs research and
development expenses for a full year compared to 9 months in 2004, while the remainder is
attributed to organic growth in headcount. 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 expense
of approximately $3.3 million. In addition, in 2006 strengthening of the Israeli Shekel
compared to the U.S. dollar contributed approximately $0.5 million to expenses. The
majority of our developers are located in Israel, where compensation related expenses are
paid in Israeli Shekels, while our expenses are reported in U.S. dollars. Therefore,
changes to the exchange rate between the Israeli Shekel and the U.S. dollar have affected
and may in the future affect our expense level. We anticipate that research and
development expenses in 2007 will increase due to an expected increase in research and
development personnel related to the acquisitions of NFR and Protect Data and 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 $135.7 million in 2004, $142.3 million in 2005 and $157.1 million
in 2006. These amounts include amortization of intangible assets and stock-based
compensation related to the acquisition of Zone Labs in the amount of $2.9 million in 2004
and $2.1 million in 2005. In 2006 the amount includes amortization of intangible assets of
$0.6 million, related to the acquisition of Zone Labs, and stock-based compensation of
$8.0 million, resulted from the adoption of SFAS No. 123(R). Selling and marketing
expenses represented 26% of revenues in 2004, 25% of revenues in 2005 and 27% of revenues
in 2006. In 2005, these expenses increased mainly due to an increase in marketing programs
related activities (approximately $5.5 million) and due to the inclusion of Zone
Labs operations for a full year compared to 9 month is 2004 (approximately $1.9
million), partially offset by the improved efficiency of our sales force. In 2006 the
increase in selling and marketing expenses was primarily due to an increase our sales and
marketing headcount from 536 at the end of 2005 to 580 at the end of 2006, resulting in an
expense of approximately $5.6 million. In addition, in 2006 strengthening of the Euro
compared to the U.S. dollar contributed approximately $0.6 million to compensation
expenses. Our expenses in Europe 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 2007 due to an expected increase in marketing activities, headcount,
payroll and related expenses, and due to an expected increase in our expenses resulting
from the acquisitions of NFR and Protect Data.

46

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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. General and administrative expenses were
$24.1 million in 2004, $24.2 million in 2005 and $43.5 million in 2006. In 2006, these
amounts include acquisition related expenses and stock-based compensation, as a result of
the adoption of SFAS No. 123(R), in the amount of $19.4 million. General and
administrative expenses represented 5% of revenues in 2004, 4% of revenues in 2005 and 8%
of revenues in 2006. The general and administrative expenses remained flat in 2005
compared to 2004. The inclusion of Zone Labs operations for a full year compared to
9 months in 2004, which contributed approximately $0.8 million, was offset mostly by a
reduction of insurance cost (approximately $0.6 million). The increase in general and
administrative expenses in 2006 compared to 2005, and 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 $19.4 million. We anticipate that general
and administrative expenses will increase in 2007 due to an expected increase in headcount
and related expenses, and due to an expected increase in our expenses resulting from the
acquisitions of NFR and Protect Data.

In-process
research and development

Upon
the acquisition of NFR in December 2006, we recorded a $1.1 million charge for acquired
in-process research and development (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.

Upon
the acquisition date of Zone Labs in 2004 we recorded a $23.1 million charge for acquired
in-process research and development (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
25%. At the time of the acquisition of Zone Labs we estimated that these IPR&D
projects were 32% complete and would be completed over the following three years.

47

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Stock-based
compensation

In
conjunction with the acquisition of Zone Labs we recorded deferred stock-based
compensation in the amount of $16.6 million. This amount represents the intrinsic value of
approximately 2.8 million options to purchase our ordinary shares that we issued in
exchange for Zone Labs unvested stock options. This amount is included in the total
fair value of Zone Labs options assumed of $50.4 million. Deferred stock-based
compensation was recognized over the remaining vesting period of the related options.
Stock-based compensation associated with these options amounted to $4.6 million in 2004
and $3.7 million in 2005. 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 of stock-based
compensation expense as a result of the adoption of SFAS No. 123(R). We anticipate that in
2007 stock-based compensation expense will be at the same level or higher than in 2006, as
a result of stock-based compensation to employees and the acquisition of Protect Data.

Operating
margin

We
had operating margins of 50% in 2004, 57% in 2005 and 48% in 2006. 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 $44.8 million in 2004, $54.2 million in 2005 and
$63.6 million in 2006. 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. Increase in net
financial income in 2005 is attributable to an increase in our portfolio size from $1,573
million in 2004 to $1,725 million in 2005, primarily due to cash flow generated from
operations, and to a rise in interest rate. In 2006, increase is attributable mainly to a
rise in interest rate. In 2007 we will use approximately $618 million in cash to acquire
Protect Data. As a result, we expect net financial income in 2007 to decline.

Taxes
on income

Our
effective tax rate was 18.6% in 2004, 17.2% in 2005 and 17.9% in 2006. These relatively
low tax rates were mainly achieved as a result of the Approved Enterprise status granted
to our production facilities in Israel. Our effective tax rate may increase in 2007, as a
result of the acquisition of Protect Data which is subject to a tax rate that is higher
than our current tax rate.

We
have elected the alternative package of tax exemptions and reduced tax rates for our
production facilities that have received Approved Enterprise status. Accordingly, income
derived from these facilities is generally entitled to a tax-exemption period of two years
and a reduced corporate tax rate of 20% to 25% for an additional period of five to eight
years, based on our percentage of foreign investment. The tax benefits for our six
existing Approved Enterprise programs are scheduled to gradually expire by 2013. The
period of tax benefits for each capital investment plan expires upon the earlier of: (1)
twelve years from completion of the investment or commencement of production, or (2)
fourteen years from receipt of approval.

Out
of our retained earnings of $2,024 million, as of December 31, 2006, approximately $714
million are tax-exempt attributable to the Approved Enterprise programs. If we were to
distribute this tax-exempt income in a manner other than upon complete liquidation, it
would be taxed at the reduced corporate tax rate applicable to these profits (20% to 25%),
and a total income tax liability of up to approximately $166 million would be incurred.

48

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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 programs as the
undistributed tax exempt income is essentially permanent in duration.

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 will apply to new investment
programs only. Therefore, our six existing Approved Enterprises will not be subject to the
provisions of the amendment.

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.

As
a result of the amendment, tax-exempt income generated under the provisions of the amended
Investment Law will subject us to taxes upon dividend distribution or complete
liquidation. As of December 31, 2006, none of our income was generated under the provision
of the amendment.

You
can see more details 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 2005 and 2006, 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.

49

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|                               | Year Ended December 31, 2005 | Year Ended December 31, 2006
|------------------------------ | ---------------------------- | ----------------------------
|
|
|
|
|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 related to the
acquisition of Zone Labs, stock-based compensation (related to the acquisition of Zone
Labs in 2004 and 2005 and adoption of SFAS No. 123(R) in 2006) and acquisition related
expenses in the following items:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | Year Ended December 31, 2005 | Year Ended December 31, 2006
|-------------------------- | ---------------------------- | ----------------------------
|
|
|
|
|Amortization of intangible |                              |                             
|assets and acquisition     |                              |                             
|related expenses           |                              |                             
|Cost of revenues           |                              |                             
|Selling and marketing      |                              |                             
|General and administrative |                              |                             
|                           |                              |                             
|Total                      |                              |                             
|                           |                              |                             
|                           |                              |                             
|Stock-based compensation   |                              |                             
|Cost of revenues           |                              |                             
|Research and development   |                              |                             
|Selling and marketing      |                              |                             
|General and administrative |                              |                             
|                           |                              |                             
|Total                      |                              |                             
|                           |                              |                             

50

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As
a percentage of revenues:

|                                | Year Ended December 31, 2005 | Year Ended December 31, 2006
|------------------------------- | ---------------------------- | ----------------------------
|
|
|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                      |                              |                             
|                                |                              |                             

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 standard

Accounting
for equity-based compensation

Effective
January 1, 2006, we adopted FASB Statement No. 123(R), Share-Based Payment,
(SFAS 123(R)). SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25) and related
interpretations, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all equity-based payments to employees, including grants of
employee stock options, to be recognized in the statement of income based on their fair
values. Pro-forma disclosure is no longer an alternative. In 2006, we recognized
equity-based compensation expense under SFAS 123(R) in the amount of $36.4 million.

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As
of December 31, 2006, we had $43.7 million of unrecognized compensation expense related to
non-vested stock options and non-vested restricted stock awards. For options granted
before January 1, 2006, and which had graded vesting, we recognized compensation expenses,
based on the accelerated attribution method over the requisite service period of each of
the awards. Forfeitures were accounted for as they occurred, but have been estimated with
the adoption of SFAS 123(R) for those awards not yet vested. For options granted after
January 1, 2006, we recognize compensation costs using the straight-line method over the
requisite service period of each of the awards, net of estimated forfeitures, and for
stock options granted before adoption of FAS 123(R) we use the accelerated method. SFAS
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.

We
adopted SFAS 123(R) using the modified prospective method. Under this transition method,
compensation costs recognized in 2006 include (a) compensation costs for all stock-based
payments granted prior to, but that had not yet vested as of, January 1, 2006, based on
the grant date fair value estimated in accordance with the pro-forma provisions of SFAS
123, adjusted for the effect of estimating forfeitures, and (b) compensation costs for the
equity-based payments granted subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with SFAS 123(R). Our consolidated financial statements for
prior periods have not been restated to reflect, and do not include, the impact of SFAS
123(R). We selected the Black-Scholes option pricing model as the most appropriate fair
value method for our stock-options awards and value restricted stock based on the market
value of the underlying shares at the date of grant.

As
a result of adopting SFAS 123(R) on January 1, 2006, our income before income taxes for
2006 is $35.1 million lower than if we had continued to account for equity-based
compensation under APB No. 25. Basic and diluted earning per share for 2006 is $0.15 lower
than if we had continued to account for equity-based compensation under APB No. 25.

Prior
to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from
the exercise of stock options as operating cash flows in our statements of cash flow. SFAS
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 $5.5 million excess tax benefit classified as financing cash inflows would have
been classified as an operating cash inflow if we had not adopted SFAS 123(R).

# Recently issued
accounting standards

In
June 2006, the Financial Accounting Standard Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109, Accounting for Income Taxes. The Interpretation
addresses the determination of whether tax benefits claimed or expected to be claimed on a
tax return should be recorded in the financial statements. Under FIN 48, we may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the tax authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased disclosures. The provisions of
FIN 48 are effective beginning January 1, 2007. We are currently assessing the impact FIN
48 will have on our consolidated financial statements.

52

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# Liquidity and capital
resources

In
2006, 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 $1,725.3 million as of December 31, 2005 and $1,649.9 million as of
December 31, 2006. Our cash and cash equivalents and short-term investments were $1,342.8
million as of December 31, 2005 and $1,091.1 million as of December 31, 2006. Our
long-term interest bearing investments were $382.5 million as of December 31, 2005 and
$558.9 million as of December 31, 2006. 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 $302.0 million in 2004, $358.0
million in 2005 and $367.5 million in 2006. Net cash from operations for 2004 consisted
primarily of net income adjusted for non cash activity including acquired in-process
research and development, plus an increase in deferred revenue, employees and payroll
accruals, offset by a decrease in accrued expenses and other liabilities, and an increase
in trade receivables. 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, 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
cash provided by (used in) investing activities was ($256.7) million in 2004, ($39.9)
million in 2005 and $236.5 million in 2006. In 2004 net cash used in investing activities
consisted primarily of investments in marketable securities of varying maturities offset
by proceeds from marketable securities and bank deposits, and from net cash paid in
conjunction with the acquisition of Zone Labs in the amount of $95.3 million. 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, purchase of office building in Israel and net cash
paid in conjunction with the acquisition of NFR. In 2007 we will use approximately $618
million in cash to acquire Protect Data. Our capital expenditures amounted to $4.5 million
in 2004, $4.9 million in 2005 and $44.9 million in 2006. Our capital expenditures for 2004
and 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 we expect will be occupied
by our Israeli employees during the second quarter of 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. Renovation continues in 2007.

Net
cash used in financing activities was approximately $210.1 million in 2004, $182.0 million
in 2005 and $383.1 million in 2006. In 2004, 2005 and 2006 net cash used in financing
activities was attributed primarily to the purchase of treasury shares. Our board of
directors approved 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. Under our repurchase programs
described above, during 2004 we purchased a total of 12.0 million shares at a total cost
of $244.6 million, at an average price of $20.4 per share. In 2005 we purchased a total of
10.6 million shares at a total cost of $236.9 million, at an average purchase 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 purchase price of $18.7 per share. Since the first
repurchase program was implemented through the end of 2006, we purchased a total of 45.8
million shares for a total cost of $917.0 million, at an average purchase price of $20.0
per share.

53

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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 $1,649.9 million as of December 31, 2006), 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 $618 million, from our cash and
cash equivalents balances as well as our marketable securities portfolio. We funded
roughly 65% of the acquisition price with our money markets funds balances, and the
remainder by selling a small portion of our marketable securities portfolio.

# Research and
development, patents and licenses, etc.

You
can see more details in this Item 5, under the caption Results of operations.

# Trend information

You can
see more details in this Item 5, under the caption Results of operations.

# Off-balance sheet
arrangements

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

# Disclosure of
contractual obligations

The
following table summarizes our material contractual obligations as of December 31, 2006:

|                            | Payments due by period
|--------------------------- | ----------------------
|
|
|
|Operating Lease Obligations |                       
|Severance pay*              |                       
|                            |                       
|Total                       |                       
|                            |                       

---

| | *
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 if the employee
voluntarily resigns. Of this amount, only $4.6 million is unfunded.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Directors and senior
management

Our
directors and executive officers as of December 31, 2006 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        | Senior Vice President   |                          |                      |                           |                                  |                               
|                    | and 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 has also been our Senior Vice President since 1999. Mr. Nacht has served as one
of our directors since we were incorporated in 1993. 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. Mr.
Nacht is currently on an extended leave of absence.

55

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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 he 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.

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 business 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. Mr. Desheh also serves as a
director of ECI Telecommunications Ltd.

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., a London Stock Exchange listed company, and is a
member of the board 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 (NASDAQ: EFII).  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.

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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.

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. degree in
engineering from Queen Mary College, University of London, and an M.S. degree 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, 2006. You can see more details 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. Currently, we do not see an existing conflict of interest.

The
term of each director other than our outside directors (as described below) will expire in
2007.

Compensation
of directors and officers

The
total direct cash compensation that we accrued for our directors and executive officers as
a group was approximately $3.2 million for the year ended December 31, 2005 and
approximately $2.8 million for the year ended December 31, 2006. 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.

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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, 2006, our executive officers and directors held options to purchase an
aggregate of approximately 19.6 million shares and held 30,000 restricted stock units
under our stock option and equity incentive plans. The exercise prices of these options
range between $9.83 and $79.79, and their expiration dates range between April 2007 and
July 2013. 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 or until notice is given of the cancellation of the appointment. To our knowledge,
no director intends to appoint any other person as an alternate director.

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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 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. Yoav Chelouche, Irwin Federman, Guy Gecht and Ray Rothrock are our
outside directors under the Israeli Companies Law. Irwin Federman and Ray Rothrocks
third term of office will expire in 2008. Yoav Chelouche 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,
require 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. 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. Yoav Chelouche, Irwin Federman, Guy Gecht, Ray Rothrock and David
Rubner serve as members of our audit committee. In 2003 the audit committee 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 audit efforts of 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.

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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. In 2004 the compensation committee 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. In 2005 the
nominating committee adopted a nominating committee charter.

# Employees

As
of December 31, 2006, we had 1,568 employees.

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

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

From
time to time, we also engage a limited number of consultants, subcontractors and temporary
help. As of December 31, 2006, we had 104 people of this nature.

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

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

Following
the acquisition of Protect Data in 2007, approximately 246 employees joined the company,
approximately 64 employees engaged in research, development, and quality assurance,
approximately 128 employees engaged in marketing, sales and business development,
approximately 29 employees engaged in customer support and approximately 25 employees
engaged in information systems, administration and finance.

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 believe that we have sufficient provisions in respect of these obligations. We are
subject to the labor laws and regulations of other jurisdictions in the world where we
have employees.

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# Share ownership

The
following table shows information regarding beneficial ownership by our directors and
executive officers as of December 31, 2006. 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 225,689,619 shares outstanding as
of December 31, 2006.

|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                  |                                         |                          |                                            | 31,707,476            |                |                   
|Marius Nacht  (4)          |                                         |                          |                                            | 20,851,795            |                |                   
|All directors and officers |                                         |                         
|as a group (11 persons     |                                         |                         
|including Messrs.          |                                         |                         
|Shwed and Nacht) (5)       |                                         |                          |                                            | 55,493,640            |                |                   

---

|(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, 2006 (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, 2006. The exercise price of some of these options is
greater than                     our current share market price.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In
addition to the position stated in the table, Mr. Nacht is the beneficiary
                    of: (a) a trust that 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 is                     scheduled to expire 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; (b) 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# Equity incentive plans

The
following table summarizes our equity incentive plans as of December 31, 2006:

|Plan                      | Share
reserved | Option and
RSUs
granted | Outstanding
options and RSUs | Options
outstanding
exercise price | Date of expiration | Options and
RSUs
exercisable
|------------------------- | -------------- | ----------------------- | ---------------------------- | ---------------------------------- | ------------------ | ----------------------------
|
|2005 United States Equity |                |                         |                              |                                    |                    |                             
|Incentive Plan            |                |                         |                              | 22,000,000                         |                    |                             
|2005 Israel Equity        |                |                        
|Incentive Plan            |                |                         |                              | 33,000,000                         |                    |                             
|1996 United States Stock  |                |                        
|Option Plan               |                |                         |                              | 42,266,981                         |                    |                             
|1996 Israel Stock Option  |                |                        
|Plan                      |                |                         |                              | 40,148,623                         |                    |                             
|Zone Labs 1998 Stock      |                |                        
|Option Plan               |                |                         |                              | 2,847,365                          |                    |                             
|Employee Stock Purchase   |                |                        
|Plan                      |                |                         |                              | 6,000,000                          |                    |                             

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 (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
and our Employee Stock Purchase Plan, 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 with respect to Restricted Stock, RSUs or Performance
Shares is forfeited to or repurchased by us at its original price due to its failure to
vest, the shares that were subject to the award become available for future grant or sale
under that plan.

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As
of December 31, 2006 we had issued options for an aggregate of 4,493,690 ordinary shares
under the 2005 U.S. Plan and the 2005 Israel plan combined, of which options for 3,571,294
ordinary shares were outstanding on that date. The option exercise prices range between
$16.8 and $23.19 per share. As of December 31, 2006 we had granted an aggregate of
1,037,451 RSUs under the 2005 U.S. Plan and the 2005 Israel Plan combined, of which
980,622 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 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.

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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 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.

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

As
of December 31, 2006 we had outstanding options to acquire an aggregate of 20,894,324
ordinary shares under our 1996 United States Stock Option Plan and 1996 Israel Stock
Option Plan combined. The option exercise prices range between $9.83 and $86.54 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, 2006 2,325,523 ordinary shares had been issued under the Zone Labs 1998 Stock
Option Plan, and options to purchase 139,928 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.

Protect
Data Stock Option Plans

In
connection with our acquisition of Protect Data in 2007, we are assuming and converting
all outstanding options to purchase shares of Protect Data issued under the Pointsec
Mobile Technologies 2003 Stock Option Plan, the Pointsec Mobile Technologies 2005 Stock
Option Plan and the Pointsec Mobile Technologies 2006 Stock Option Plan. The options
generally have terms of between five and ten years and they are generally vest over a
four-year period.  The option exercise prices of the converted options range between
$1.82 and $19.45 per share.  No further stock options can be granted under the
above-referenced stock option plans.

64

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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. 6,000,000 ordinary shares were
authorized for issuance under the ESPP. As of February 1, 2007, 2,335,989 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, and (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.

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.

Exchange
offer

In
September 2006, we offered holders of certain outstanding options, granted on or after
January 1, 2004 under our equity incentive plans, whether vested or not, the opportunity
to exchange their options for RSUs under our 2005 plans. The number of RSUs granted was
determined by dividing the option value on September 12, 2006, by the market value of our
ordinary share on this date.

On
September 12, 2006, we determined the option value by using Black-Scholes option pricing
model, based on a number of factors, including: the market value of the ordinary share
underlying the option, 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, we issued 441,114 RSUs in exchange for
outstanding options to purchase 1,759,160 of our ordinary shares. The RSUs vest over a
four year period starting on October 23, 2006, as follows: 20% vest on years one and two,
and 30% vest on years three and four.

The
fair value of the RSUs granted under the offer have not resulted in incremental
compensation cost for Check Point, in accordance with SFAS No. 123(R).

65

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

The
following table shows information as of December 31, 2004, 2005 and 2006 for each person
who, as far as we know, beneficially owned more than 5% of our outstanding ordinary shares
as of December 31, 2006:

|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)       |                                     |                          |                                     | 26,321,503               |                                     |                         
|Gil Shwed                         |                                     |                          |                                     | 31,102,744               |                                     |                         
|Marius Nacht (4)                  |                                     |                          |                                     | 27,981,794               |                                     |                         
|Genesis Fund Managers, LLP (5)    |                                     |                          |                                     |                          |                                     |                         
|Barclays Global Investors, NA (6) |                                     |                          |                                     |                          |                                     |                         

---

|(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 31, 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 31, 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, 2004, 2005 and 2006, based on information contained in a
                    Schedule 13G filed with the Securities and Exchange Commission. In
the Schedule                     13G filed on February 14, 2005, 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.,                     Franklin
Advisers, Inc., Templeton Asset Management, Ltd. and Fiduciary Trust
                    Company International disclaim any pecuniary interest in any of the
securities.                     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. The address for
Franklin Resources,                     Inc. is One Franklin Parkway, San Mateo,
California 94403.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In
addition to the position stated in the table, Mr. Nacht is the beneficiary
                    of: (a) a trust that 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 is                     scheduled to expire 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; (b) 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) | As
of December 31, 2006, based on information contained in a Schedule 13G filed
                    with the Securities and Exchange Commission on February 14, 2007. In
the                     Schedule 13G, 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 it has the                     power to dispose or direct the disposition
of. Based on information available to                     us, as of December 31, 2004 and
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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

66

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|(6) | As
of December 31, 2006, based on information contained in a Schedule 13G filed
                    with the Securities and Exchange Commission on January 23, 2007.
Based on                     information available to us, as of December 31, 2004 and
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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2006, there were 253 holders of record of our
ordinary shares in the United States, representing approximately 82% 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, 2005, we had employee and payroll accrual for related parties, for the
years 1999 till 2005, in a total amount of $8.5 million. As of December 31, 2006, this
accrual grew to a total of $9.7 million, for the years 1999 till 2006.

|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 $2,024 million as of December 31, 2006, approximately $714
million are tax-exempt because they are attributable to our facilities status as
Approved Enterprise under the Investment Law. Our board of directors has resolved not to
distribute any dividend from our undistributed tax-exempt income. The undistributed
tax-exempt income is 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. The complaint generally alleges that we and certain of our senior officers made
misrepresentations and omissions regarding, among other things, our sales and future
prospects. We retained counsel and filed a motion to dismiss the complaint. On March 7,
2005 the District Court granted our motion to dismiss but permitted the lead plaintiffs to
file an amended complaint to attempt to cure the defects in the dismissed complaint. On
September 2, 2005, we filed a motion to dismiss this complaint. On April 25, 2006, the
court denied our motion to dismiss. On December 20, 2006, we reached an
agreement-in-principle with the lead plaintiffs to settle this matter. We expect that the
settlement of $13 million will be paid by our insurance carrier. The settlement is subject
to the completion of appropriate documentation and to court approval. Also on December 20,
2006, the lead plaintiffs dismissed without prejudice the senior officers named as
defendants in the lawsuit. We continue to deny committing any violation of law or
wrongdoing in connection with the litigation and the settlement.

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On
November 16, 2004, Etay Bogner, a shareholder 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 in the amount of approximately NIS 22.7 million
($5.1 million as of the date of the filing), not including linkage and interest. The suit
relates to discounts, sales commissions and royalties that the plaintiff alleges we owe to
SofaWare, with respect to products that we sold or that were sold through us. On April 20,
2006, the court authorized Bogner to conduct a shareholders derivative suit against us on
behalf of SofaWare, and we filed our response to the claim. Testimony in the case is
scheduled for March 2007, prior to which the parties are required to submit affidavits. On
December 14, 2006, Adi Ruppin filed a motion to join this claim with the claim he
originally filed against us on December 14, 2004, as described below. This motion was
denied. We believe that the claim is without merit and intend to contest the claim
vigorously.

On
November 22, 2005, Etay Bogner also filed an initiating motion against us 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. Bogner
also filed a motion to obtain injunctive relief that would prevent SofaWare and us from
taking certain actions with respect to the issuance of SofaWares securities to its
employees and the determination of SofaWares auditors compensation. 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 to reject the initiating motion.
The appeal is at a very preliminary stage, but we believe that the appeal is without merit
and intend to contest it vigorously.

On
December 14, 2004, Adi Ruppin, a shareholder and director of SofaWare, filed an initiating
motion in the Tel-Aviv District Court against us. The motion alleges that we are
oppressing Ruppin, who is a minority shareholder of SofaWare. Therefore, 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 our business plans and those of SofaWare, and to the inter-company
balances between the two companies. We have submitted a motion to dismiss the initiating
motion or to convert it to a regular claim that is not subject to
the expedited review procedures of an initiating motion, and a motion to
stay the proceedings as long as Bogners first suit is pending. During pre-trial
hearings on November 26, 2006, Ruppin agreed to convert the initiating motion into a
regular claim. On December 4, 2006, Ruppin refiled the claim and we filed our response on
February 28, 2007. As we noted above, on December 14, 2006 Ruppin filed a motion to join
this claim with the shareholders derivative suit filed by Etay Bogner and the motion was
denied. We believe that the claim is without merit and intend to contest the claim
vigorously.

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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 for the periods
indicated:

|                       | High | Low
|---------------------- | ---- | ---
|
|2002                   |      |    
|2003                   |      |    
|2004                   |      |    
|2005                   |      |    
|2006                   |      |    
|                       |      |    
|2005                   |      |    
|First quarter          |      |    
|Second quarter         |      |    
|Third quarter          |      |    
|Fourth quarter         |      |    
|                       |      |    
|2006                   |      |    
|First quarter          |      |    
|Second quarter         |      |    
|Third quarter          |      |    
|Fourth quarter         |      |    
|                       |      |    
|Most recent six months |      |    
|September 2006         |      |    
|October 2006           |      |    
|November 2006          |      |    
|December 2006          |      |    
|January 2007           |      |    
|February 2007          |      |    

On
March 13, 2007, the last reported sale price of our ordinary shares on the NASDAQ Global
Select Market was $21.51 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 (Information Technology) security, and
offer our customers with 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.

69

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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. At December 31, 2006 we had 225,689,619 ordinary shares outstanding and on January
1, 2006 we had 244,309,929 ordinary shares outstanding. During 2006 we issued 4,630,614
ordinary shares from our treasury account, all pursuant to equity incentive plans. On
December 31, 2006 we held 35,534,351 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 authorized
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 authorized 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. 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. Such transactions, actions and arrangements include:

| | n | arrangements
with a director as to the terms of office or compensation,
| | - | -----------------------------------------------------------------------

| | n | certain
extraordinary transactions (as defined in the Israeli Companies Law), and
| | - | ---------------------------------------------------------------------------------

| | n | any
action or extraordinary transaction involving a director or officer in which a majority
of the Board has a               personal interest.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

You
can see more details in this Item 10, 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  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  have to be approved by
a                majority in 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

71

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| | (5) | Extraordinary
transactions with a controlling shareholder (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) 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:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | the
majority of shares includes at least two-thirds 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, and
| | - | -----------------------------------------

| | 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.

72

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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 our articles of association, a
merger 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s 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 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, 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 make the disclosure of his or her personal interest 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 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 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,
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.

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.

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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, and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 for taxes related to the purchase and for the
building renovation totaled $3.58 million. Renovation continues in 2007. The building will
serve as our corporate headquarters. For more information, please see Item 3 
Information on Check Point  Property, plants and equipment. A translation of
the agreement is filed as Exhibit 4.11 to this 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, of the Israeli
Government programs from which we benefit, and of Israeli foreign exchange regulations.
This section also contains a discussion of material Israeli tax consequences to our
shareholders who are 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 are subject to corporate tax at the rate of 31% in 2006. 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 29% in 2007, 27% in 2008, and 26% in 2009.

As
discussed below, however, the rate is effectively reduced for income derived from an
Approved 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 recently, 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. A company in
which more than 25% of the shareholders are non-residents of Israel, defined in the
Investment Law as a Foreign Investors Company, may be eligible for benefits for an
extended period of up to ten years.

The
tax benefits derived from any certificate of approval relate only to taxable income
attributable to the specific Approved Enterprise. To the extent we have more than one
approval or only a portion of our capital investments are approved, our effective tax rate
will be the result of a weighted combination of the applicable rates.

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|Percent of
Foreign Ownership | Rate of
Reduced Tax | Reduced Tax Period | Tax Exemption Period
|---------------------------- | ------------------- | ------------------ | --------------------
|
|0-25%                        | 25%                 | 5 years            | 2 years             
|25-49%                       | 25%                 | 8 years            | 2 years             
|49-74%                       | 20%                 | 8 years            | 2 years             
|74-90%                       | 15%                 | 8 years            | 2 years             
|90-100%                      | 10%                 | 8 years            | 2 years             

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 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).

Currently,
we have six Approved Enterprise programs under the Alternative Track of the Investment
Law. We have derived, and expect to continue to derive, a substantial portion of our
operating income from our Approved Enterprise facilities. We are therefore eligible for a
tax exemption for a limited period on undistributed Approved Enterprise income, and an
additional subsequent period of reduced corporate tax rates ranging between 20% and 25%,
depending on the level of foreign ownership of our shares. The tax benefits attributable
to our current Approved Enterprises are scheduled to expire in phases by 2013.

The
benefits available to an Approved Enterprise are conditioned upon terms stipulated in the
Investment Law and the related regulations (which include making specified investments in
property and equipment, and financing a percentage of these investments with share
capital), and the criteria set forth in the applicable certificate of approval. 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 programs currently operate in
compliance with all applicable conditions and criteria, but we cannot assure you that they
will continue to do so.

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 will apply to new investment
programs only. Therefore, our six existing Approved Enterprises will not be subject to the
provisions of the amendment.

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.

As
a result of the amendment, tax-exempt income generated under the provisions of the amended
law, will subject us to taxes upon dividend distribution or complete liquidation. As of
December 31, 2006, none of our income was generated under the provision of the amendment.

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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 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, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | 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.

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 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.

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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.
dollar 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.

# United States federal
income tax considerations

The
following discussion describes the material United States 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 United States 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, United States 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, or
| | - | ----------------------------------------------------------------------

| | n | any
aspect of state, local or non-United States tax law.
| | - | --------------------------------------------------------

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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-united states tax laws and possible changes in the tax laws.

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,
2009, 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 United States Department of the Treasury. The United States
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 United
States 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. Information returns reporting 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 Shekel 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 United States 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 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.

82

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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, 2009. 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

| | 1. | 75%
or more of our gross income in the taxable year is passive income, or
| | -- | -------------------------------------------------------------------------

| | 2. | 50%
or more of the average value of our gross assets in the taxable year,
               calculated quarterly by value, 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.

83

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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% (increased to 31% for taxable years beginning in
2011 or later). Backup withholding will not apply, however, 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 3A Jabotinsky Street, Ramat-Gan 52520, Israel.

84

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|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.

In
our investments, we use two kinds of derivative financial instruments: forward exchange
currency contracts and forward rate agreements, as described below.  We use these
instruments to hedge our cash flow from unfavorable changes in interest rates, or
exchange rates in transactions not denominated in U.S. dollar.

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 49.6% of the
portfolio are rated as AAA, securities representing 27.6% of the portfolio are rated as
AA and Securities representing 22.8% of the portfolio are rated as A.

The
table below provides information regarding our investments in cash, cash equivalents,
deposits and marketable securities as of December 31, 2006.

|                                    |  | Maturity | Total          | Fair
Value at
Dec. 31,
2006
|----------------------------------- |  | -------- | -------------- | ---------------------------
|
|
|
|Government and corporate            |  |          | Amortized cost |                            
|debentures - fixed interest rates   |  |          | WAIR*          |                            
|Structured products***              |  |          | 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 fund  & cash           |  |          | Book value     |                            
|                                    |  |          | WAIR*          |                            
|                                    |  |          |                |                            
|Total                               |  |          |                |                            
|                                    |  |          | WAIR*          |                            
|                                    |  |          |                |                            

---

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

|** | Based
upon LIBOR as of December 31, 2006
|-- | ----------------------------------------

|*** | Composed
mainly of range accrual bonds and inverse floating interest rate bonds (see also Note 3
of the financial statements) which bear interest rate related to the LIBOR. There is no
assurance that this WAIR will be maintained in the future due to the nature of these
instruments
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

85

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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 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,
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, 2006, we had outstanding forward contracts in the amount of $8.3 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 operations. In managing our foreign exchange risk, we enter from time to time
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. Neither a 10% increase nor decrease from current exchange rates would have a
material effect on our consolidated financial statements.

As
Protect Datas functional currency is Swedish Krona and our functional currency is
U.S. dollar we expect greater exposure to foreign currency risk.

# 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 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,
2006.

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

Not
applicable.

86

---

---



# 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, 2006, 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, 2006, 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 material 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 public
accounting 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 controls
over financial reporting have occurred that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

87

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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 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
table below summarizes the audit fees that we paid during 2005 and 2006.

|                       | Year Ended December 31, 2005 | Year Ended December 31, 2006
|---------------------- | ---------------------------- | ----------------------------
|
|
|
|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 (for 2006,
                    including audit in accordance with section 404 of the Sarbanes-Oxley
Act) and                     reviews of our quarterly financial results submitted on Form
6-K, consultations                     on various accounting issues and performance of
local statutory audits.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 advice on actual or contemplated
transactions, tax                     consulting associated with international transfer
prices and employee benefits.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Audit committees
pre-approval policies and procedures

Our
audit committee chooses and engages the 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 2005 and 2006, and may receive during 2007 for non-audit
services in certain categories.

88

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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 COMMITTEE
|--------- |  | --------------------------------------------------------

Not
applicable.

89

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|ITEM 16E. |  | PURCHASE 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 is in effect as of March 14,
2007 and authorizes the repurchase of up to $600 million of our ordinary shares.

During
2006 we spent $435.5 million to repurchase 23.2 million ordinary shares under the third
and fourth repurchase programs. 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     |                                              |                                      |                                                                                               | N/A                                                                               
|February 1 - February 28   |                                              |                                      |                                                                                               | 2,550,000                                                                         
|March 1 - March 31         |                                              |                                      |                                                                                               | 450,000                                                                           
|April 1 - April 30         |                                              |                                      |                                                                                               | 250,000                                                                           
|May 1 - May 31             |                                              |                                      |                                                                                               | 3,508,338                                                                         
|June 1 - June 30           |                                              |                                      |                                                                                               | 3,943,377                                                                         
|July 1 - July 31           |                                              |                                      |                                                                                               | 4,894,092                                                                         
|August 1 - August 31       |                                              |                                      |                                                                                               | 4,598,400                                                                         
|September 1 - September 30 |                                              |                                      |                                                                                               | 1,664,517                                                                         
|October 1 - October 31     |                                              |                                      |                                                                                               | N/A                                                                               
|November 1 - November 30   |                                              |                                      |                                                                                               | 492,200                                                                           
|December 1 - December 31   |                                              |                                      |                                                                                               | 900,000                                                                           
|                           |                                              |                                      |                                                                                               |                                                                                   
|Total                      |                                              |                                      |                                                                                               | 23,250,924                                                                        
|                           |                                              |                                      |                                                                                               |                                                                                   

90

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# PART III

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

Check
Point has responded to Item 18.

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

See
pages F-1 to F-35 below.

91

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

|1 |  | Articles
of  Association  (incorporated  by reference to exhibit 1 of Check Point's Annual Report
on Form 20-F              for the year ended December 31, 2005)
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Form
of  Indemnification  Agreement  between  Check Point and its  officers  and  directors
 (incorporated  by              reference to exhibit 4.1 of Check Point's Annual Report
on Form 20-F for the year ended December 31, 2005)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Agreement
 and Plan of Merger by and among Check  Point  Software  Technologies  Ltd.,  Check
 Point  Software          Technologies,  Inc.,  Zanzibar  Acquisition,  L.L.C.,  and Zone
Labs,  Inc.,  dated as of  December  15,  2003              (incorporated  by  reference
 to exhibit 4.2 of Check  Point's  Annual  Report on Form 20-F for the year ended
             December 31, 2003)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | The
1996 Israel  Stock Option  Plan,  adopted by our board of directors on April 12, 1996,
 and as restated in           May 2004  (incorporated  by reference to exhibit 4.5 of
Check Point's  Annual Report on Form 20-F for the year              ended December 31,
2004)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | The
Restated and Amended 1996  Section 102 Share Option Plan,  effective as of January 2000
 (incorporated  by              reference to exhibit 4.6 of Check Point's Annual Report
on Form 20-F for the year ended December 31, 2004)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Addendum
to the  Restated and Amended  1996  Section 102 Share  Option  Plan,  effective  as of
February  2003           (incorporated  by  reference  to exhibit 4.7 of Check  Point's
 Annual  Report on Form 20-F for the year ended              December 31, 2004)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | The
1996 United  Stated Stock Option Plan,  adopted by the Board of Directors on April 12,
1996  (incorporated              by reference to exhibit 4.8 of Check Point's Annual
Report on Form 20-F for the year ended December 31, 2004)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | 2005
Israel Equity  Incentive Plan,  adopted by our board of directors on September 27, 2005
 (incorporated by              reference to exhibit 4.7 of Check Point's Annual Report on
Form 20-F for the year ended December 31, 2005)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | 2005
 United  States  Equity  Incentive  Plan,  adopted  by our  board of  directors  on
 September  27,  2005         (incorporated  by  reference  to exhibit 4.8 of Check
 Point's  Annual  Report on Form 20-F for the year ended              December 31, 2005)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Zone
Labs, Inc. 1998 Stock Option Plan, as amended August 26, 2003  (incorporated  by
reference to exhibit 4.1           of Check  Point's  Registration  Statement on Form S-8
filed with the  Securities  and Exchange  Commission on              April 15, 2004)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Employee
 Stock  Purchase  Plan,  adopted by our board of  directors  on November  24, 1996
 (incorporated  by              reference to exhibit 4.10 of Check Point's Annual Report
on Form 20-F for the year ended December 31, 2005)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | 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
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

92

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---



|8 |  | List
of  subsidiaries  (incorporated  by reference to "Item 4 -  Information  on Check Point -
 Organizational              Structure" in this Annual Report on Form 20-F)
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|12.2 |  | Certification
of the Chief Financial Officer pursuant to ss.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
|-- |  | -------------------------------------------------------------------------------------------------------

93

---

---



# CHECK POINT SOFTWARE
TECHNOLOGIES LTD.

# AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2006

# 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-44



---

---



# 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, and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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, 2006.  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.)  In conducting such assessment, our
management has excluded from its assessment the effectiveness of internal control over
financial reporting of NFR Security, Inc. (NFR), as NFR was acquired by us in
December 2006, and because we have not integrated NFRs internal control over
financial reporting and related processes by December 31, 2006.  NFR is now a
wholly-owned subsidiary of Check Point, is included in our 2006 consolidated financial
statements, and constituted approximately $19 million, or 0.9% of our total assets,
including goodwill of approximately $7.8 million as of December 31, 2006, and $75 thousand
of our revenues in 2006.  Refer to Note 3a to our consolidated financial statements
for further discussion of this acquisition and its impact on our consolidated financial
statements.  Our management has concluded, based on its assessment, that our internal
control over financial reporting was effective as of December 31, 2006, based on the
framework in Internal Control  Integrated Framework issued by COSO.

Our
managements assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2006, has been audited by Kost, Forer, Gabbay & Kasierer
(A Member of Ernst & Young Global), an independent registered public accounting firm.
 Kost, Forer, Gabbay & Kasierers attestation report with respect to our
managements assessment of our internal control over financial reporting is set forth
on page F-4 herein.

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 its subsidiaries as of December 31, 2005
and 2006, 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,
2006. 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 its subsidiaries at
December 31, 2005 and 2006, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.

As
discussed in Note 2(s) 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 effectiveness of the Company and its
subsidiaries internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 14, 2007 expressed an unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|March 14, 2007   | A Member of Ernst & Young Global

F - 3

---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM ON MANAGEMENTS ASSESSMENT OF INTERNAL CONTROL
OVER FINANCIAL REPORTING

# To the Shareholders
and Board of Directors ofCHECK POINT SOFTWARE
TECHNOLOGIES LTD.

We
have audited managements assessment, included in the accompanying Managements
Report on Internal Control Over Financial Reporting, that Check Point Software
Technologies Ltd. (Check Point or the Company) maintained
effective internal control over financial reporting as of December 31, 2006, 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 managements
assessment and an opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, 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

---

---



As
indicated in the accompanying Managements Report on Internal Control Over Financial
Reporting, managements assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal control over financial
reporting of NFR Security, Inc. (NFR), which is included in the 2006
consolidated financial statements of Check Point and constituted $ 19 million, of total
assets as of December 31, 2006 and $ 75 thousand of revenues for the year then ended. Our
audit of internal control over financial reporting of Check Point also did not include an
evaluation of the internal control over financial reporting of NFR.

In
our opinion, managements assessment that Check Point maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, Check Point
maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2006, 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 its
subsidiaries as of December 31, 2005 and 2006, 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, 2006 and our report dated March 14, 2007 expressed an
unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|March 14, 2007   | 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 |             
|$ 5,597and $ 5,746 as of December 31, 2005 and 2006, respectively)                |             
|Other current assets                                                              |             
|                                                                                  |             
|                                                                                  |             
|Total current assets                                                              |             
|                                                                                  |             
|                                                                                  |             
|LONG-TERM ASSETS:                                                                 |             
|Marketable securities                                                             |             
|Property and equipment, net                                                       |             
|Severance pay fund                                                                |             
|Deferred tax asset, net                                                           |             
|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                                                       |             
|                                                                                |             
|                                                                                |             
|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, 2005 and 2006; 244,309,929 and 225,689,619     |             
|shares outstanding as of December 31, 2005 and 2006, respectively               |             
|Additional paid-in capital                                                      |             
|Deferred stock-based compensation                                               |             
|Treasury shares at cost - 16,914,041 and 35,534,351 Ordinary shares as of       |             
|December 31, 2005 and 2006, respectively                                        |             
|Accumulated other comprehensive 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:                                                                        |                        
|Licenses                                                                         |                        
|Software subscriptions                                                           |                        
|Support and other services                                                       |                        
|                                                                                 |                        
|                                                                                 |                        
|Total revenues                                                                   |                        
|                                                                                 |                        
|                                                                                 |                        
|Operating expenses: *)                                                           |                        
|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 revenues                                                                 |                        
|Research and development                                                         |                        
|Selling and marketing                                                            |                        
|General and administrative                                                       |                        
|                                                                                 |                        
|                                                                                 |                        
|Total stock-based compensation expenses                                          |                        
|                                                                                 |                        

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, 2004                             |               |                            | $                                 | 747                     |                                               | $                 | 193,504                    |                           
|                                                          |               |                           
|Tax benefit related to exercise of stock options          |               |                            |                                   | -                       |                                               |                   | 1,160                      |                           
|Issuance of shares under stock purchase plan and upon     |               |                           
|exercise of options (5,577,172 Ordinary shares), net      |               |                            |                                   | 12                      |                                               |                   | 34,469                     |                           
|Issuance of shares in conjunction with the acquisition of |               |                           
|Zone Labs, net (5,338,368 Ordinary shares)                |               |                            |                                   | 12                      |                                               |                   | 91,352                     |                           
|Stock options assumed in conjunction with the acquisition |               |                           
|of Zone Labs (2,847,365 options for Ordinary shares)      |               |                            |                                   | -                       |                                               |                   | 50,393                     |                           
|Reversal of deferred stock-based compensation upon        |               |                           
|forfeiture of options issued to employees in              |               |                           
|conjunction with the acquisition of Zone Labs             |               |                            |                                   | -                       |                                               |                   | (1,632                     | )                         
|Treasury shares at cost (11,973,800 Ordinary shares)      |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Amortization of deferred stock-based compensation in      |               |                           
|conjunction with the acquisition of Zone Labs             |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Comprehensive income -                                    |               |                           
|Realized losses on hedging derivative instruments         |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Unrealized gain on hedging derivative instruments         |               |                            |                                   | -                       |                                               |                   | -                          |                           
|Net income                                                |               |                            |                                   | -                       |                                               |                   | -                          |                           
|                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|Total comprehensive income                                |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                          |               |                            |                                   |                         |                                               |                   |                            |                           
|                                                          |               |                           
|Balance as of December 31, 2004                           |               |                            |                                   | 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, net |               |                           
|of tax                                       |               |                            |                                   | -                       |                                               |                   | -                          |                           
|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                            |               |                            |                                   |                         |                                               |                   |                            |                           
|                                             |               |                            |                                   |                         |                                               |                   |                            |                           

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                          |                        
|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                                  |                        
|Other                                                                   |                        
|                                                                        |                        
|                                                                        |                        
|Net cash provided by operating activities                               |                        
|                                                                        |                        
|                                                                        |                        
|Cash flows from investing activities:                                   |                        
|Cash paid in conjunction with the acquisition of Zone Labs, net of      |                        
|acquired cash                                                           |                        
|Cash paid in conjunction with the acquisition of NFR, net of acquired   |                        
|cash                                                                    |                        
|Proceeds from short-term bank deposits                                  |                        
|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 Ordinary shares and options issued in connection with     |                        
|Zone Labs' acquisition                                                  |                        

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 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 security products including licenses, related software subscription,
support and other services The Company sells its products worldwide 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 management is performed by the subsidiarys U.S. branch.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On November 20, 2006, the Company announced a cash tender offer to acquire
               Protect Data AB (Protect Data) that at the time of the offer was a
               public company listed on the Stockholm Stock Exchange. 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
January 2007, Check Point 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through March 14, 2007, Check Point has obtained over 98% of the shares of Protect Data for
approximately $ 618,000 (approximately SEK 4,338,000), in cash and $ 1,944
of acquisition related costs. The purchase price will also include the value of vested
option exchanged in connection with the acquisition which the company is currently
evaluating.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition will be accounted for using the purchase method of accounting and accordingly
the operating results of Protect Data will be included in the Companys consolidated
financial statements from the date of acquisition, January 17, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is still in the process of completing the allocation of the total purchase price
to the assets acquired and the liabilities assumed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

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 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | c. | During 2004, approximately 13% of revenues were derived from a single channel
               partner. 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 one. Trade receivable balance
               from the two largest channel partners was $ 28,516 as of December 31, 2005 and $
               37,140 as of December 31, 2006.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 and assumptions that 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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. | 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 - 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.)
|------- | - | ---------------------------------------

| | e. | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | f. | 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                                  
| | Leasehold improvements             | The shorter of term of the lease or
| |                                    | the useful life of the asset       

| | g. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys long-lived assets are reviewed for impairment in accordance with SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of an asset to be held and used is measured by a comparison
of the carrying amount of an asset to the future undiscounted cash flows expected to be
generated by the asset. If such asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset exceeds its
fair value. During 2004, 2005 and 2006, no impairment 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.)
|------- | - | ---------------------------------------

| | h. | Goodwill
and other intangible assets:
| | -- | -------------------------------------

| | Goodwill
and certain other purchased intangible assets have been recorded as a result of
acquisitions. Goodwill is not amortized, but rather is subject to an annual impairment
test. Other intangible assets are amortized using the straight-line basis over their
estimated useful lives.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 142 requires goodwill to be tested for impairment at least annually or between
annual tests if certain events or indicators of impairment occur. The impairment test
consists of a comparison of the fair value of goodwill with its carrying amount. If the
carrying amount of goodwill exceeds its fair value, an impairment loss is recognized in
an amount equal to that excess. Goodwill is tested for impairment at the reporting unit
level by a comparison of the fair value of a reporting unit with its carrying amount. The
Company has elected to perform its analysis of goodwill during the fourth quarter of the
year. During 2004, 2005 and 2006, no impairment losses were identified.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 have been insignificant. Therefore, allresearch and development
costs have been expensed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Revenue
recognition:
| | -- | --------------------

| | The
Company derives its revenues mainly from licenses, software subscriptions, 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 through its web site.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for software sales in accordance with Statement of Position No. 97-2,
Software Revenue Recognition (SOP No. 97-2), as amended. In addition,
the Company has adopted Statement of Position No. 98-9, Modification of SOP No.
97-2, Software Revenue Recognition with Respect to Certain Transactions(SOP
No. 98-9). SOP No. 98-9 requires that revenue be recognized under the residual
method when Vendor Specific Objective Evidence (VSOE) of Fair Value
exists for all undelivered elements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from license fees is recognized when persuasive evidence of an arrangement exists,
delivery of the license has occurred, the fee is fixed or determinable, and
collectability is probable. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Software
subscription and support revenues included in multiple-element arrangements are deferred
and recognized on a straight-line basis over the term of the software subscription and
support agreement. Revenues earned on software arrangements involving multiple-elements
are allocated to each undelivered element based on VSOE of fair value. The VSOE of fair
value of the undelivered elements (software subscription and support services) is
determined based on the price charged for the undelivered element when sold separately or
renewed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company maintains certain provisions for product returns, in accordance with SFAS No. 48,
Revenue Recognition When Right of Return Exists, based on its experience with
historical sales returns, analysis of credit memo data and other known factors. Such
provisions amounted to $ 1,051 and $ 1,868 as of December 31, 2005 and 2006,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenues represent mainly the unrecognized fees billed for subscription and support
agreements.
| | --------------------------------------------------------------------------------------------------------

| | k. | Cost
of revenues:
| | -- | -----------------

| | Cost
of revenues is comprised of cost of software and hardware production, manuals, packaging
and license fees paid to third party. It also includes the cost of post sale customer
support, training and consulting.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 net
increase in its funded or unfunded severance liability. Employees are entitled to one
months salary for each year of employment, or a portion thereof. 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 reserve established by
the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | The
deposited funds include 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. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial profits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2004, 2005 and 2006, were $ 2,240, $ 2,570
and $ 3,169, 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. In December 2005, the Company amended its 401(K) contribution plan to include
a fixed matching contribution program. 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 the Company matched contributions in the amount of $ 571. From
January 1, 1996 (inception) to December 31, 2005, 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 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 their estimated realizable value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
costs are expensed as incurred. Advertising expenses for the years ended December 31,
2004, 2005 and 2006, were $ 3,670, $ 2,692 and $ 3,145, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | 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, 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
for specific debts that are doubtful of collection. Allowance for doubtful accounts
amounted to $ 4,546 and $ 3,878 as of December 31, 2005 and 2006, respectively.
The Company charges off receivables when they are deemed uncollectible. If market
declines actual collection experience may not meet expectations and may result in
decreased cash flow and increased bad debt expense. Bad debt expense amounted to $ 940,
$ 648 and $ 490 in 2004, 2005 and 2006, respectively. Total write offs during 2004,
2005 and 2006 amounted to $ 241, $ 1,072 and $ 1,208, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Derivatives
and hedging:
| | -- | ------------------------

| | The
Company accounts for derivatives and hedging based on SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. If the derivatives meet the
definition of a hedge and are so designated, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings, or
recognized in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in fair value is recognized in
earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company entered into forward exchange contracts to hedge the fair value of certain
foreign currency denominated partner balances and accrued liabilities. The net gains
(losses) recognized in earnings during 2004, 2005 and 2006, were $ (144), $ 113 and
$ (46), respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | r. | 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 7,277,352, 10,879,154 and 15,474,949 for 2004, 2005 and 2006, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | s. | 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 share-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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | The
Company adopted SFAS No. 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006, the
first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the year ended December 31, 2006, includes: (a)
compensation cost for all share-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 share-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. During the years ended December 31, 2005 and 2004, the
Company recognized stock-based compensation expense related to the acquisition of Zone
Labs in the amount of $ 3,745 and $ 4,620, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys income before
taxes on income and operating income for year ended December 31, 2006, were $ 35,071
(including restricted stock and ESPP expense) lower than if the Company had continued to
account for stock-based compensation under APB No. 25. Net income for year ended December
31, 2006, was $ 31,966 (including restricted stock and ESPP expense) lower than if the
Company had continued to account for stock-based compensation under APB No. 25. Basic and
diluted net earnings per share for the year ended December 31, 2006 were $ 0.15 lower
than if the Company had continued to account for stock-based compensation under APB No.
25.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 $ 2,291 excess tax benefit classified as financing cash inflows
would have been classified as an operating cash flow if the Company had not adopted SFAS
No. 123(R).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
Company estimates the fair value of stock options granted using the Black-Scholes- option
pricing 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value for options granted in 2004, 2005 and 2006 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                               |                        
| | Dividend yield                                   |                        
| | Expected life after the option is vested (years) |                        

| | Employee Stock Purchase Plan |  |  | 
| | ---------------------------- |  |  | 
|
|
|
|
| | Expected volatility          |  |  | 
| | Risk-free interest           |  |  | 
| | Dividend yield               |  |  | 
| | Expected life (years)        |  |  | 

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.)
|------- | - | ---------------------------------------

| | The
following table illustrates the effect on 2004 and 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,
| | -------------------------------------------------------------- | -----------------------
|
|
|
|
| | 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                  |                        
| |                                                                |                        

| | t. | 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 (see Note 4).
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | 3. | The
fair value of marketable securities, with no available quoted market           prices, is
calculated based on the present value of the estimated future cash           flows (see
Note 4).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
fair value of derivative instruments is estimated by obtaining quotes from
          brokers.
| | -- | -------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | u. | 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 comprehensive
income relate to gain and loss on hedging derivative instruments and unrealized gains and
losses on available for sale securities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | 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 may reissue 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

| | In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Financial
Statements  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108
requires companies to quantify the impact of all correcting misstatements, including both
the carryover and reversing effects of prior year misstatements, on the current year
financial statements. SAB 108 is effective for fiscal years ending after November 15,
2006. The adoption of SAB 108 did not have an impact on the consolidated financial
statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS No. 155) in February 2006. SFAS No. 155
amends SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities and SFAS No. 140 Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities and addresses the
application of SFAS No. 133 to beneficial interests in securitized financial
assets. SFAS No. 155 establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain an embedded derivative requiring
bifurcation. Additionally, SFAS No. 155 permits fair value measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise would
require bifurcation. SFAS No. 155 is effective for fiscal years beginning after
September 15, 2006. The Company is currently assessing the impact SFAS No. 155
will have on its consolidated financial statements but does not anticipate it will be
material.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB
Statement No. 109, Accounting for Income Taxes. The Interpretation addresses
the determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, the Company may
recognize the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the tax authorities, based
on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit that has
a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN
48 also provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures. FIN 48
applies to all tax positions related to income taxes subject to SFAS No. 109. This
includes tax positions considered to be routine as well as those with a high
degree of uncertainty. FIN 48 specifically prohibits the use of a valuation allowance as
a substitute for de-recognition of tax positions. The provisions of FIN 48 are effective
beginning January 1, 2007. The Company is currently assessing the impact FIN 48 will have
on its consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
Management believes this Standard will not have a material effect 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. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years, although earlier adoption is
permitted. The Company is currently evaluating the impact that SFAS No. 159 will
have on its consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
|------- | - | ------------

| | a. | 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. 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 goodwill related
to the Minor Acquisition is nondeductible for tax purposes.                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
Company recorded a deferred tax asset of $ 4,300 relating to acquired net operating loss.
In addition, a deferred tax liability of $ 2,880 was recorded for the difference between
the assigned values and the tax bases of the core technology acquired.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition does not have a material effect on pro forma financial data.
| | ----------------------------------------------------------------------------

| | b. | On
March 26, 2004, the Company acquired all of the outstanding shares of Zone
               Labs Inc. (Zone Labs), a leading provider of endpoint security
               solutions for enterprises, small businesses and consumers. The acquisition
of                Zone Labs enables the Company to deliver a comprehensive end-to-end
Internet                security to all types of customers. The transaction was accounted
for using the                purchase method of accounting and, accordingly the operating
results of Zone                Labs have been included in the Companys accompanying
consolidated                statements of income from the date of acquisition.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total purchase price of Zone Labs was composed as follows:
| | --------------------------------------------------------------

| |                                      | 
| | ------------------------------------ | 
|
|
|
|
| | Cash paid                            | 
| | Fair value of Ordinary shares issued | 
| | Fair value of options assumed        | 
| | Acquisition related costs            | 
| |                                      | 
| |                                      | 
| | Total purchase price                 | 
| |                                      | 

| | 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, $ 175,536 was
allocated to goodwill and $30,089 was allocated to an amortizable intangible asset
(technology, contracts and trademarks) that are being amortized over their estimated
useful life of four to twenty years. At the acquisition date, the Company recorded a $
23,098 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | --------------------

| | The
Company recorded a deferred tax asset of $ 15,566 primarily relating to net operating
loss and tax credit carryforwards, as well as reserves and accruals acquired as part of
the acquisition. In addition, a deferred tax liability of $ 12,036 was recorded for the
difference between the assigned values and the tax bases of the core technology,
trademarks and contracts acquired in the acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following unaudited condensed combined pro forma information for the year ended December
31, 2004 give effect to the acquisition of Zone Labs as if the acquisition had occurred
on January 1, 2004. 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 $ 23,098 and includes amortization of intangible assets related to the acquisition of
$ 1,410 per quarter and amortization of deferred stock-based compensation of $ 1,540 per
quarter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            | Year ended
December 31,
2004
| | -------------------------- | ----------------------------
|
|
|
|
| | Revenues                   |                             
| |                            |                             
| |                            |                             
| | Net income                 |                             
| |                            |                             
| |                            |                             
| | Basic earnings per share   |                             
| |                            |                             
| |                            |                             
| | Diluted earnings per share |                             
| |                            |                             

|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 products (*)  |             
| | Government and           |             
| | corporate debentures -   |             
| | floating interest rate   |             
| | Mortgage and asset       |             
| | backed securities (**)   |             
| | Auction rate  securities |             
| |                          |             
| |                          |             
| |                          |             
| |                          |             

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 4: |  | MARKETABLE SECURITIES (Cont.)
|------- | - | -----------------------------

| | Marketable
securities with contractual maturities of after 1 year through 5 years are as follows:
| | -------------------------------------------------------------------------------------------------

| |                         | December 31,
| | ----------------------- | ------------
|
|
|
|
| | Government and          |             
| | corporate debentures    |             
| | - fixed interest rate   |             
| | Structured products (*) |             
| | Government and          |             
| | corporate debentures -  |             
| | floating interest       |             
| | rate                    |             
| | Mortgage and asset      |             
| | backed securities (**)  |             
| |                         |             
| |                         |             
| |                         |             
| |                         |             

| | The
unrealized losses on the Companys investments in all types of securities are due to
interest rate increases. Out of the unrealized loss as of December 31, 2006, $ 11,641 of
losses are outstanding over than 12 months 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, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (*) | 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 actual maturity dates may differ from
the contractual                maturities because debtors have the right to call the
obligations without                penalties. Debtor will likely exercise its call option
when forward markets                rates are below the interest rate range of the
structured note. In light of the                forward interest rate environment in
2005, the entire structured notes balance                was classified as short term, as
it was likely that the debtors will exercise                their call right. In 2006,
forward interest rates increased and therefore the                structured notes
balance was classified according, to its contractual maturity                dates.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (**) | The
actual maturity may differ from the contractual maturities, because debtors
               may have the right to call or prepay obligations without penalties.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 5: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| |                                           | December 31,
| | ----------------------------------------- | ------------
|
|
| | Cost:                                     |             
| | Computers and peripheral equipment        |             
| | Office furniture and equipment            |             
| | Building                                  |             
| | Leasehold improvement                     |             
| |                                           |             
| |                                           |             
| |                                           |             
| | Accumulated depreciation and amortization |             
| |                                           |             
| |                                           |             
| | Property and equipment, net               |             
| |                                           |             

| | In
March 2006, the Company purchased 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. The Company expects to move into the new building during the second
quarter of 2007. As of December 31, 2006 the Company did not record any depreciation in
relation to the building, since it is not ready for use.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2005 and 2006, the U.S. subsidiary of the Company recorded a reduction of $ 1,278
and $ 218, respectively, to the cost and accumulated depreciation of fully
depreciated equipment no longer in use.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 6: |  | GOODWILL AND INTANGIBLE ASSETS, NET
|------- | - | -----------------------------------

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

| | Changes
in Goodwill for the years ended December 31, 2005 and 2006 is as follows:
| | ---------------------------------------------------------------------------------

| |                             | Year ended December 31,
| | --------------------------- | -----------------------
|
|
| | Goodwill, beginning of year |                        
| | Acquisition of NFR          |                        
| | Other                       |                        
| |                             |                        
| |                             |                        
| | Goodwill, end of year       |                        
| |                             |                        

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 6: |  | GOODWILL AND INTANGIBLE ASSETS, NET (Cont.)
|------- | - | -------------------------------------------

| | b. | Intangible
assets, net
| | -- | ----------------------

| | Net
intangible assets consisted of the following:
| | -------------------------------------------------

| |                           | December 31,
| | ------------------------- | ------------
|
|
| | Original amount:          |             
| | Core technology           |             
| | Trademarks                |             
| | Customer relationship     |             
| | Contracts                 |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Accumulated amortization: |             
| | Core technology           |             
| | Trademarks                |             
| | Customer relationship     |             
| | Contracts                 |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Intangible assets, net:   |             
| | Core technology           |             
| | Trademarks                |             
| | Customer relationship     |             
| | Contracts                 |             
| |                           |             
| |                           |             
| |                           |             

| | The
estimated future amortization expense of purchased intangible assets as of December 31,
2006 is as follows:
| | ---------------------------------------------------------------------------------------------------------------

| | 2007                |  |  | $ | 8,354  | 
| | ------------------- |  |  | - | ------ | 
| | 2008                |  |  |   | 3,981  | 
| | 2009                |  |  |   | 2,571  | 
| | 2010                |  |  |   | 2,571  | 
| | 2011 and thereafter |  |  |   | 5,640  | 
| |                     |  | 
| |                     |  |  | $ | 23,117 | 
| |                     |  | 

|NOTE 7: |  | EMPLOYEE AND PAYROLL ACCRUALS
|------- | - | -----------------------------

| | As
of December 31, 2006 and 2005, employee and payroll accruals include a total amount of $
9,698 and $ 8,512, respectively, related to payroll accrued for the benefit of certain
related parties since 1999.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 8: |  | ACCRUED EXPENSES AND OTHER LIABILITIES
|------- | - | --------------------------------------

| |                            | December 31,
| | -------------------------- | ------------
|
|
| | Income taxes payable       |             
| | Income tax accrual         |             
| | Marketing expenses payable |             
| | Other                      |             
| |                            |             
| |                            |             
| |                            |             
| |                            |             

|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,
2006, were as follows:
| | -------------------------------------------------------------------------------------------------------------------

| | 2007                |  |  | $ | 4,042 | 
| | ------------------- |  |  | - | ----- | 
| | 2008                |  |  |   | 1,683 | 
| | 2009                |  |  |   | 769   | 
| | 2010                |  |  |   | 582   | 
| | 2011 and thereafter |  |  |   | 355   | 
| |                     |  | 
| |                     |  | 
| |                     |  |  | $ | 7,431 | 
| |                     |  | 

| | Rent
expenses for the years ended December 31, 2004, 2005 and 2006, were $ 6,901, $ 7,385 and
$ 7,752, 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 November 20, 2003, the court           consolidated
all of the complaints into one action and appointed lead           plaintiffs. On January
14, 2004, the lead plaintiff 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. The complaint generally alleges that           Check Point and certain
of its senior officers made misrepresentations and           omissions regarding, among
other things, Check Points sales and future           prospects. Check Point
retained counsels and filed a motion to dismiss the           complaint.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 9: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | On
March 7, 2005 Check Points motion to dismiss was granted by the District Court. The
issued Order permitted the lead plaintiffs to file an amended complaint to attempt to
cure the defects in the dismissed complaint. On April 22, 2005, the lead plaintiffs filed
their Consolidated Second Amended Complaint. On September 2, 2005, Check Point filed a
motion to dismiss this complaint. On April 25, 2006, the court denied Check Points
motion to dismiss. On December 20, 2006, Check Point reached an agreement-in-principle
with the lead plaintiffs to settle this matter.  The settlement of $13 million is
expected to be paid by Check Points insurance carrier and will have no financial
impact.  The settlement is subject to the completion of appropriate documentation
and to court approval.  Also on December 20, 2006, the lead plaintiffs dismissed
without prejudice the senior officers named as defendants in the lawsuit. Check Point
continues to deny committing any violation of law or wrongdoing in connection with the
litigation and the settlement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 in the amount of $ 5,149, not including
linkage and           interest. 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 April 20, 2006, the
court           authorized the plaintiff to conduct a shareholders derivative suit
against Check           Point on behalf of SofaWare, and Check Point filed its response
to the           claim.   Testimony in the case is scheduled for March 2007,
prior to           which the parties are required to submit affidavits.  On December
14, 2006,           another shareholder and director of SofaWare, filed a motion to join
this claim           on the bases he originally filed against the Company on December 14,
2004, as           described below. This motion was denied .The Companys management
believes           that the claim is without merit and intends to contest the claim
vigorously.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 with respect to the issuance of           SofaWares
securities to its employees and the determination of           SofaWares auditors compensation.
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 to           reject the initiating motion. The appeal is at a
very preliminary stage, but the           Companys management believes that the
appeal is without merit and intends           to contest the claim vigorously.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 (Cont.)
|------- | - | ----------------------------------------------

| | 4. | On
December 14, 2004, another shareholder and director 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. The Company has submitted a motion to dismiss the initiating
          motion or to convert it to a regular claim that is not subject to           the expedited review
procedures of an initiating motion, and a           motion to stay the proceedings
as long as the other shareholder suit is pending.           During pre-trial hearings on
November 26, 2006, the plaintiff agreed to convert           the initiating motion into a
regular claim.  On December 4, 2006, the           plaintiff filed a new regular
claim and the Company filed its response to the           claim on February 28, 2007. As
noted above, on December 14, 2006 the plaintiff           filed a motion to join this
claim with the shareholders derivative suit filed by           the other shareholder of
SofaWare and the motion was denied. The matter is at a           very preliminary stage
and the Companys management believes that the claim           is without merit and
intends to contest the claim vigorously.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 10: |  | TAXES ON INCOME
|-------- | - | ---------------

| | a. | 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):
| | -- | ----------------------------------------------------------------------------------------------------

| | The
Investment Law empowers the Israeli Investment Center to grant Approved Enterprise status
to capital investments in production facilities that meet certain relevant criteria (Approved
Enterprise). In general, such capital investments will receive Approved Enterprise
status if the enterprise is expected to contribute to the development of the productive
capacity of the economy, absorption of immigrants, creation of employment opportunities,
or improvement in the balance of payments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 10: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
tax benefits derived from any such Approved Enterprise relate only to taxable income
attributable to the specific program of investment to which the status was granted. To
the extent that Check Point Ltd. has been granted Approved Enterprise status and operates
under more than one approval, or that its capital investments are only partly approved,
its effective corporate tax rate will be the result of a weighted combination of the
various rates applicable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Practically
all of Check Point Ltd.s production facilities have been granted the status of
Approved Enterprises, under the Law, in six investment programs (the Programs).
For all of such Approved Enterprises, the Company elected to apply for alternative tax
benefits (Alternative Package).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
Check Point Ltd.s income attributed to the Approved 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 Check Point Ltd. The abovementioned tax
benefits are scheduled to gradually expire by 2013.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of distribution of dividends from the said tax-exempt income, the amount
distributed will be subject to corporate tax at the rate ordinarily applicable to the
Approved Enterprises income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
duration of tax benefits, for each of the Programs is subject to limitations of the
earlier of 12 years from completion of the investment or commencement of production, or
14 years from receipt of approval, as an Approved Enterprise under the Law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the Companys fulfilling the
conditions stipulated by the Law and regulations published thereunder.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Should
Check Point Ltd. fail to meet such requirements in the future, income attributable to its
Approved 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Investment Law came into effect (the Amendment)
and has significantly changed the provisions of the Investment Law. The Amendment limits
the scope of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Privileged Enterprise(rather
than the previous terminology of Approved Enterprise), such as a provision requiring that
at least 25% of the Privileged Enterprises income will be derived from
export. Additionally, the Amendment enacted major changes in the manner in which tax
benefits are awarded under the Investment Law so that companies are no longer required
for Investment Center approval in order to qualify for tax benefits. 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) 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").
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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)

|NOTE 10: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Investment Law provides that terms and benefits included in any certificate
of approval already granted will remain subject to the provisions of the law as they were
on the date of such approval. Therefore, the six existing Approved Enterprises will not
be subject to the provisions of the Amendment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the amendment, tax-exempt income generated under the provisions of the
amended law, will subject the Company to taxes upon dividend distribution or complete
liquidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Dividend
distributed by an Approved Enterprise and Privileged Enterprise will be
subject to withholding tax of 15%.
| | ---------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, none of Check Point Ltd.s income was generated under the
provision of the amendment.
| | --------------------------------------------------------------------------------------------------------------

| | Out
of the Companys retained earnings as of December 31, 2006 approximately $ 714,000
are tax-exempt attributable to its Approve Enterprise programs. If such tax-exempt income
is distributed in a manner other than upon the 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 approximately $ 166,000 would be
incurred as of December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys board of directors has determined that the Company 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 programs as the undistributed tax exempt income is
essentially permanent in duration.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved Enterprise is subject to tax at regular Israeli
corporate tax rate.
| | ---------------------------------------------------------------------------------------------------------------

| | 3. | Check
Point Ltd. has final tax assessments through the year 2001. The Company
               has recorded a tax accrual in respect of potential exposures related to
tax                years for which final assessment has not been received.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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)

|NOTE 10: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | b. | 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 its 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Deferred
tax assets and liabilities:
| | -- | ------------------------------------

| | Deferred
tax assets 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, 2005 and 2006, the Companys deferred
taxes were in respect of the following:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                      | December 31,
| | ---------------------------------------------------- | ------------
|
|
| | U.S. carryforward tax losses                         |             
| | Deferred revenues                                    |             
| | Employee stock based compensation                    |             
| | Accrued employees costs                              |             
| | Reserves and allowances                              |             
| | Unrealized losses on marketable securities, net      |             
| | Research and development tax credit                  |             
| |                                                      |             
| |                                                      |             
| | Deferred tax assets before valuation allowance       |             
| | Valuation allowance                                  |             
| |                                                      |             
| |                                                      |             
| | Deferred tax asset                                   |             
| |                                                      |             
| |                                                      |             
| | Deferred tax liability, related to intangible assets |             
| |                                                      |             
| |                                                      |             
| | Deferred tax asset, net                              |             
| |                                                      |             

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.)
|-------- | - | -----------------------

| |                                     | December 31,
| | ----------------------------------- | ------------
|
|
| | Domestic:                           |             
| | Current deferred tax asset          |             
| | Non current deferred tax asset      |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             
| | Foreign:                            |             
| | Current deferred tax asset, net     |             
| | Current deferred tax liability, net |             
| | Non current deferred tax asset      |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             
| |                                     |             

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
subsidiaries in the U.S. have provided valuation allowances in respect of deferred tax
assets resulting from net operating loss carryforwards and research and development tax
credit. Management currently believes that it is more likely than not that those deferred
tax losses will not be realized in the foreseeable future.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2006, the U.S. subsidiaries had a U.S. federal loss carry forward of
approximately $ 726,000 resulting from tax benefits related to employees stock
option exercises that can be carried forward and offset against taxable income for 14 to
20 years, expiring between 2012 -2025. Excess tax benefits related to employee stock
option exercises will be credited to additional paid-in capital when realized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Utilization
of U.S. loss carryforwards may be subject to substantial annual limitation due to the
change in ownership provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitations may result in the expiration of losses
before utilization.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Income
before taxes on income is comprised as follows:
| | -- | ------------------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | *) | Including
write off of acquired in-process research and development of $ 23,098           in 2004
and $ 1,060 in 2006.
| | -- | ----------------------------------------------------------------------------------------------------------------------

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.)
|-------- | - | -----------------------

| | e. | Taxes
on income are comprised as follows:
| | -- | -----------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
| | Current  |                        
| | Deferred |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | f. | 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 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        |                        
| | Enterprise" status                          |                        
| |                                             |                        
| |                                             |                        
| | Diluted earnings per share amounts of the   |                        
| | benefit resulting from the "Approved        |                        
| | Enterprise" status                          |                        
| |                                             |                        

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 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
2004, 2005 and 2006 employees purchased 261,008, 331,170 and 360,289 ordinary shares at
average prices of $ 15.80, $ 17.89, $ 16.08 per share, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, 3,881,060 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 year ended December 31, 2006, the Company
recognized $1,481 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 11: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | 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 during 2006, the Company
started to routinely grant Restricted Stock Units (RSUs) under the 2005 Plans. RSUs are
vested over a four year period of employment and may be subject to performance criteria.
Upon vesting, the Company will issue shares that are worth the market value on that date.
RSUs that are cancelled or forfeited become available for future grants.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the 2005 Plans, options to purchase 55,000,000 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, 2006, 49,469,830 Ordinary shares were
available for future grant under the 2005 Plans. As of December 31, 2006, 4,551,916
options and RSUs were outstanding under the 2005 Plans and 20,894,324 options were
outstanding under the 1996 United States Stock Option Plan and 1996 Israel Stock Option
Plan and 139,928 were outstanding under the Zone Labs plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the Companys stock option activity and related information, including
options under the Zone Labs Plan, is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Options (in thousands) | Weighted average exercise price
| | -------------------------------- | ---------------------- | -------------------------------
|
| |                                  |                        |                                
| | Outstanding at beginning of year |                        |                                
| | Granted                          |                        |                                
| | Exercised                        |                        |                                
| | Forfeiture (*)                   |                        |                                
| |                                  |                        |                                
| |                                  |                        |                                
| | Outstanding as of December 31,   |                        |                                
| |                                  |                        |                                
| |                                  |                        |                                
| | Exercisable as of December 31,   |                        |                                
| |                                  |                        |                                

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 11: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| |                                     | Year ended
December 31, 2006
| | ----------------------------------- | ----------------------------
|
|
| | Outstanding at beginning of year    |                             
| | Granted                             |                             
| | Exercised                           |                             
| | Forfeiture *)                       |                             
| |                                     |                             
| |                                     |                             
| | Outstanding as of December 31, 2006 |                             
| |                                     |                             
| |                                     |                             
| | Exercisable as of December 31, 2006 |                             
| |                                     |                             

| | *) | Includes
1,759 thousand options forfeited in exchange for RSUs as described in           section f
below.
| | -- | ---------------------------------------------------------------------------------------------------------

| | **) | Represents
intrinsic value of 13,202 thousand outstanding options that are           in-the-money as
of December 31, 2006. The remaining 11,404 thousand outstanding           options are out
of the money as of December 31, 2006 and their intrinsic value           was considered
as zero.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ***) | Represents
intrinsic value of 7,309 thousand exercisable options that are           in-the-money as
of December 31, 2006. The remaining 6,645 thousand exercisable           options are out
of the money as of December 31, 2006 and their intrinsic value           was considered
as zero.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes information relating to RSUa, as well as changes to such
awards during 2006:
| | -----------------------------------------------------------------------------------------------------------

| |                                      | Year Ended
December 31, 2006
| | ------------------------------------ | ----------------------------
|
|
| | Outstanding at beginning of year     |                             
| | Granted *)                           |                             
| | Vested                               |                             
| | Forfeiture                           |                             
| |                                      |                             
| |                                      |                             
| | Outstanding as of  December 31, 2006 |                             
| |                                      |                             

| | *) | Includes
441 thousand RSUs granted in exchange for options as described in           section f
below
| | -- | ----------------------------------------------------------------------------------------------------

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 11: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | The
options outstanding as of December 31, 2006, 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 |             |            
| | 45.00-86.54 |             |            
| |             |             |            
| |             |             |            
| | 1.66-86.54  |             |            
| |             |             |            

| | The
weighted average fair values at grant date of options granted for the years ended
December 31, 2004, 2005 and 2006 with an exercise price equal to the market value at the
date of grant were $ 9.50, $ 11.05 and $ 9.71, respectively. The weighted average fair
values at grant date of options assumed in the Zone Labs acquisition with an
exercise price lower than the market value at the date of grant was $ 17.89.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, the Company had approximately $ 43,700 of unrecognized
compensation expense related to non-vested stock options and non-vested restricted stock
awards, expected to be recognized over six years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
October 2003, the Company announced that its Board of Directors has
               authorized the repurchase of up to $ 200,000 of its outstanding Ordinary
shares                in the open market or through privately negotiated transactions. In
October                2004, after the Company had completed the repurchase of $ 200,000
of its                Ordinary shares, the Company announced that its Board of Directors
had                authorized additional repurchases of up to $ 200,000 of its
outstanding Ordinary                shares in the open market or through privately
negotiated transactions. In July                2005, after the Company had completed the
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 - 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.)
|-------- | - | ----------------------------

| | The
repurchase programs have no time limit and may be suspended from time to time or
discontinued. Under the above programs, the Company purchased during 2004, 2005 and 2006
approximately 12, 10.6 and 23.2 million shares, respectively, at a total cost of $
244,586, $ 236,929 and $ 435,491, respectively. The average purchase price per share
was $ 20.40 $ 22.29 and $ 18.71, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31 2006, the Company reissued 10,305,873 of its purchased Ordinary shares in
consideration for the exercise of stock options by employees and for shares issued under
the ESPP. Such purchases of Ordinary shares are accounted for as treasury stock and
result in a reduction of shareholders equity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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 our ordinary shares. The RSUs
vest over a four year period starting on October 23, 2006, as follows: 20% vest years one
and two, and 30% vest years three and four.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounted for the offer as 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 - 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 12: |  | EARNINGS PER SHARE
|-------- | - | ------------------

| | The
following table sets forth the computation of historical basic and diluted earnings per
share:
| | --------------------------------------------------------------------------------------------------

| |                                              | Year 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following present total revenues for the years ended December 31, 2004, 2005 and 2006 and
long-lived assets as of December 31, 2005 and 2006 by geographic area:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Revenues
based on the channel partners location:
| | -- | -------------------------------------------------

| |                                | Year ended December 31,
| | ------------------------------ | -----------------------
|
|
| | Americas                       |                        
| | Europe, Middle East and Africa |                        
| | Japan                          |                        
| | Asia Pacific                   |                        
| |                                |                        
| |                                |                        
| |                                |                        
| |                                |                        

| | It
is impracticable to provide revenues by product lines for the years ended December 31,
2004, 2005 and 2006.
| | --------------------------------------------------------------------------------------------------------------

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 13: |  | GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA (Cont.)
|-------- | - | ---------------------------------------------------------------------

| | 2. | Long-lived
assets:
| | -- | ------------------

| |          | December 31
| | -------- | -----------
|
|
| | Americas |            
| | Israel   |            
| | Other    |            
| |          |            
| |          |            
| |          |            
| |          |            

| | b. | Financial
income, net:
| | -- | ----------------------

| |                                          | Year ended December 31,
| | ---------------------------------------- | -----------------------
|
|
| | Financial income:                        |                        
| | Interest income                          |                        
| | Foreign currency remeasurement gain and  |                        
| | others, net                              |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| | Financial expense:                       |                        
| | Amortization of marketable securities    |                        
| | premium and accretion of discount, net   |                        
| | Foreign currency remeasurement loss, net |                        
| | Realized loss on sale of marketable      |                        
| | securities                               |                        
| | Others                                   |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        
| |                                          |                        

F - 44

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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 14, 2007

95

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