SECURITIES AND EXCHANGE COMMISSION
                                            Washington, D.C. 20549

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FORM 20-F

(Mark One)

|(  ) | 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, 2002
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

OR

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

For the transition period from _________ to _________

Commission file number 0-28584

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

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(Exact name of Registrant as specified in its charter)

ISRAEL

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(Jurisdiction of incorporation or organization)

3A Jabotinsky Street, Ramat-Gan 52520, Israel

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(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:      None

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

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: 245,908,827ordinary shares, NIS 0.01 nominal
value.

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 _____
|--------- | --------

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

|Item 17 _____ | Item 18 __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                                            | 3 
|Item 4.  | Information on the Company                                 | 10
|Item 5.  | Operating and Financial Review and Prospects               | 20
|Item 6.  | Directors, Senior Management and Employees                 | 26
|Item 7.  | Major Shareholders and Related Party Transactions          | 31
|Item 8.  | Financial Information                                      | 32
|Item 9.  | The Offer and Listing                                      | 33
|Item 10. | Additional Information                                     | 33
|Item 11. | Quantitative and Qualitative Disclosures About Market Risk | 41
|Item 12. | Description of Securities Other than Equity Securities     | 43

PART II

|         |                                                                              |   
|-------- | ---------------------------------------------------------------------------- | --
|Item 13. | Defaults, Dividend Arrearages and Delinquencies                              | 44
|Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 44
|Item 15. | Reserved                                                                     | 44
|Item 16. | Reserved                                                                     | 44

PART III

|         |                      |   
|-------- | -------------------- | --
|Item 17. | Financial Statements | 45
|Item 18. | Financial Statements | 45
|Item 19. | Exhibits             | 45

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

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

The
following selected consolidated statement of income data for the years ended December 31,
2000, 2001 and 2002, and the selected consolidated balance sheet data as of December 31,
2001 and 2002, have been derived from the audited consolidated financial statements of
Check Point Software Technologies Ltd. (together with its subsidiaries, the
Company or Check Point) set forth elsewhere in this Form 20-F.
These financial statements have been prepared in accordance with generally accepted
accounting principles in the United States (U.S. GAAP). The selected
consolidated statement of income data for the years ended December 31, 1998 and 1999 and
the selected consolidated balance sheet data as of December 31, 1998, 1999 and 2000 have
been derived from the Companys audited consolidated financial statements not
included in this Form 20-F and have also been prepared in accordance with U.S. GAAP. The
selected consolidated financial statements set forth below should be read in conjunction
with and are qualified by reference to the Companys consolidated financial
statements and the related notes as well as Item 5  Operating and Financial
Review and Prospects included elsewhere in this Form 20-F.

On
December 20, 1999, the Companys Board of Directors approved a two-for-one stock
split in the form of a stock dividend effective January 23, 2000. On June 29, 2000 the
Companys Board of Directors approved a two-for-one stock split in the form of a
stock dividend effective July 14, 2000. On January 18, 2001, the Companys Board of
Directors approved a three-for-two stock split in the form of a stock dividend effective
February 1, 2001. All share and per share numbers herein reflect adjustments resulting
from these stock splits.

|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|
|Consolidated Statement of Income Data:          |                        
|Revenues                                        |                        
|                                                |                        
|Operating expenses:                             |                        
|Cost of revenues                                |                        
|Research and development, net                   |                        
|Sales and marketing                             |                        
|General and administrative                      |                        
|                                                |                        
|Total operating expenses                        |                        
|                                                |                        
|Operating income                                |                        
|Financial income, net                           |                        
|Capital gain                                    |                        
|                                                |                        
|                                                |                        
|Income before taxes on income                   |                        
|Taxes on income                                 |                        
|                                                |                        
|Net Income                                      |                        
|                                                |                        
|                                                |                        
|                                                |                        
|Basic net earnings per share (1)                |                        
|Shares used in computing basic net earnings per |                        
|share (1)                                       |                        
|                                                |                        
|Diluted net earnings per share (1)              |                        
|Shares used in computing diluted net earnings   |                        
|per share (1)                                   |                        
|                                                |                        

3

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

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|(1) | See
Note 2p of Notes to the Consolidated Financial Statements for an
          explanation of the determination of shares used in computing net earnings per
          share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(*) | Reported
financial results reflect the acquisition in April 1998 of MetaInfo           Inc., which
was accounted for as a pooling-of-interest transaction.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

# RISK FACTORS

This
Form 20-F contains forward-looking statements that involve risks and uncertainties. The
statements contained in this Form 20-F that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act), including, without limitation, statements
regarding the Companys expectations, beliefs, intentions, goals, plans, investments
or strategies regarding the future and any assumptions underlying any of the foregoing.
Forward-looking statements include statements in (i)  Item 4 
Information on the Company regarding the Companys 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 the
Companys relationship with technology partners on its sales goals, the contribution
of the companys network security products to the Companys future revenue and
the development of future products and (ii) Item 5  Operating and
Financial Review and Prospects regarding, among other things, future sources of
revenue, ongoing relationships with current and future end-user customers and resellers,
future costs and expenses, and adequacy of capital resources. Forward-looking statements
involve risks and uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause the Companys actual results to differ materially from
such results discussed in these statements. Many of these risks and uncertainties are
described in the risk factors set forth below in this section and elsewhere in this Form
20-F. All forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements.

# Competition

The
market for Internet security and virtual private networking (VPN) products and services is
intensely competitive and the Company expects competition to increase in the future. The
Companys principal network security competitors include Cisco Systems, Inc. and
NetScreen Technologies Inc., Nortel Networks Limited Other competitors include Lucent
Technologies Inc., Microsoft Corporation, SonicWALL Inc., Symantec Inc., WatchGuard
Technologies Inc., and Secure Computing Corporation. The Company expects additional
competition from other emerging and established companies. There can be no assurance that
the Companys current and potential competitors, including its current technology
partners, will not develop Internet security products that may be more effective than the
Companys current or future products or that the Companys technologies and
products will not be rendered obsolete by such developments. In particular, the Internet
security market has historically been characterized by low financial entry barriers.

Some
of the Companys current and potential competitors have longer operating histories,
greater name recognition, access to larger customer bases and significantly greater
financial, technical and marketing resources than the Company. As a result, they may be
able to adapt more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the promotion and sale of their products
than the Company. In addition, certain of the Companys competitors may determine to
consolidate, to substantially lower the price of their Network security products or to
bundle their products with other products, such as hardware products or other software
products. The Company believes that there may be increasing consolidation in the Internet
security market and there can be no assurance that such consolidation will not materially
adversely impact the Companys competitive position. In addition, current and
potential competitors have established or may establish financial or strategic
relationships among themselves, with existing or potential customers, resellers or other
third parties. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. There can be no
assurance that the Company will be able to compete successfully against 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 the Companys
business, operating results and financial condition.

4

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In
the future, vendors of operating system software or networking hardware may enhance their
products to include functionality that is currently provided by the Companys
products. The widespread inclusion of the functionality of the Companys software as
standard features of operating system software or networking hardware could render the
Companys products obsolete and unmarketable, particularly if the quality of such
functionality were comparable to that of the Companys products. Furthermore, even if
the network security functionality provided as standard features by operating systems
software or networking hardware is more limited than that of the Companys
VPN-1/FireWall-1 software, there can be no assurance that a significant number of
customers would not elect to accept more limited functionality in lieu of purchasing
additional software. In the event of any of the foregoing, the Companys business,
operating results and financial condition will be materially and adversely affected. See
Item 4  Information on the Company.

# Rapid Technological
Change

The
Internet security and VPN 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. As a result, the
Company must continually change and improve its products in response to changes in
operating systems, application software, computer and communications hardware, networking
software, programming tools and computer language technology. The introduction of products
embodying new technologies and the emergence of new industry standards may render existing
products obsolete or unmarketable. In particular, the market for Internet and intranet
applications is relatively new and is rapidly evolving. The Companys future
operating results will depend upon the Companys ability to enhance its current
products and to develop and introduce new products on a timely basis that address the
increasingly sophisticated needs of its end-users and that keep pace with technological
developments, new competitive product offerings and emerging industry standards. While the
Company has been successful in developing and marketing new products or product
enhancements that respond to technological change and evolving industry standards, there
can be no assurance that the Company will continue to do so, or that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that any new products and product
enhancements will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company does 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, the Companys business,
operating results and financial condition will be materially adversely affected. See
Item 4  Information on the Company.

# Potential Fluctuations
in Future Operating Results; Potential Decline in Margins

The
quarterly operating results of the Company can vary significantly due to several factors,
any of which could have a material adverse effect on the Companys operating results,
and there can be no assurance that the Company will continue to be profitable on a
quarterly or annual basis. The factors which can cause fluctuations in operating results
include seasonal trends in customer purchasing, the volume and timing of orders and the
ability to fulfill orders, the level of product and price competition, the Companys
ability to develop new and enhanced products and control costs, the mix of products and
goods sold, the mix of distribution channels through which products are sold, the
Companys ability to integrate the technology and operations of acquired businesses
with those of the Company, changes in customer capital spending budgets, fluctuations in
foreign currency exchange rates and general economic factors.

The
Companys sales to Asia and the Pacific Rim (including Japan) were $70 million in
2000, $93 million in 2001 and $69 million in 2002, representing 16%, 17% and 16% of the
Companys revenues for 2000, 2001 and 2002, respectively. The economy in this region
is still unstable and therefore the Company cannot predict if similar levels of sales in
the region are sustainable.

Since
2000 there has been a global recession and a resulting decline in economic conditions. If
general economic and industry conditions fail to improve or continue to deteriorate,
demand for the Companys products could be adversely affected, as could the financial
health of the Companys suppliers and resellers. In addition, the September 11, 2001
terrorist attacks on the United States and the subsequent military response, as well as
the current war in Iraq, have had, and may continue to have, a negative effect on the
global economy and the business of the Company and its customers. Any similar acts of
violence or war may further negatively affect the Companys business environment,
revenues and profitability and could also result in a disruption of the Companys
business or the businesses of the Companys customers.

5

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The
Companys revenues are subject to seasonal fluctuations related to the slowdown in
spending activities for the quarter ending September 30 and the increased activity
related to the year-end purchasing cycles of many end-users of the Companys
products. The Company believes that, in the absence of exceptional factors such as new
product introductions, it will continue to encounter quarter-to-quarter seasonality that
could result in proportionately lower sales in the quarters ending September 30 and
March 31 relative to sales in the quarters ending June 30 and December 31.

The
Company operates with virtually no backlog and, therefore, the timing and volume of orders
within a given period and the ability to fulfill such orders determines the amount of
revenues within a given period. The Companys sales are principally derived through
indirect channels, which make revenues from such sales difficult to predict. Furthermore,
the Companys expense levels are based, in part, on expectations as to future
revenues. If revenue levels are below expectations, operating results are likely to be
adversely affected. Net income may be disproportionately affected by a reduction in
revenues due to the relatively small amount of the Companys expenses, which vary
with its revenues. As a result, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. If the Companys operating results were below the
expectations of public market analysts and investors, the price of the Companys
ordinary shares would likely be materially adversely affected. See Item 5- Operating
and Financial Review and Prospects.

The
Company may experience a decline in operating margins as it expands its customer and
technical services organization. The Company may also experience increasing competition
and pricing pressure, which may result in lower operating margins. In 2003, the Company
plans to continue to make investments in the development and expansion of its sales and
marketing organization, including the expansion of its field organization both in the
United States and additional countries in Europe, Asia, and Latin America. In addition,
the Company expects to further expand its research and development organization and make
additional investments in its general and administrative infrastructure. As a result,
operating margins may decrease from historical levels. The amount and timing of these
additional expenditures are likely to result in fluctuations in operating margins. See
Item 5  Operating and Financial Review and Prospects.

# Risks Associated With
Emerging Network Security, Internet and Intranet Markets

The
markets for the Companys products are rapidly evolving. There can be no assurance
that the market for Internet security systems will continue to expand. Continued growth of
this market will depend, in large part, upon the continued expansion of Internet usage and
the number of organizations adopting or expanding intranets, upon the ability of their
respective infrastructures to support an increasing number of users and services, and upon
the continued development of new and improved services for implementation across the
Internet, and between the Internet and intranets. If the necessary infrastructure or
complementary products and services are not developed in a timely manner and,
consequently, the enterprise security, Internet and intranet markets fail to grow or grow
more slowly than the Company currently anticipates, the Companys business, operating
results and financial condition will be materially adversely affected. See Item 4
 Information on the Company.

# Dependence upon Limited
Number of Key Resellers; Product Concentration; Impact of New Product Introductions

The
Company expects that it will continue to be dependent upon a limited number of resellers
for a significant portion of its revenues. If anticipated orders from these resellers fail
to materialize, the Companys business, operating results and financial condition
will be materially adversely affected.

The
Company has derived substantially all of its revenues, and expects to continue to derive
the vast majority of its revenues in the foreseeable future, from sales of its network
security products, packaged and marketed mostly under the VPN-1 and FireWall-1 brands,
including related software subscriptions, support and technical services and training
programs. The Companys future financial performance will depend in significant part
on the successful development, introduction, marketing and customer acceptance of new
products and enhancements and new features for its existing product lines. See Item
5  Operating and Financial Review and Prospects and Item 4 
Information on the Company.

# Dependence Upon Key
Personnel

The
Companys future performance depends, in significant part, upon the continued service
of its key technical, sales and management personnel, including Gil Shwed, Marius Nacht
and Jerry Ungerman. The loss of the services of one or more of the Companys key
personnel could have a material adverse effect on the Companys business, operating
results and financial condition. The Companys future success also depends on its
continuing ability to attract and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is significant, and there can be no assurance
that the Company can retain its key technical, sales and managerial employees or that it
can attract, motivate or retain other highly qualified technical, sales and managerial
personnel in the future. If the Company cannot retain or is unable to hire such key
personnel, the Companys business, operating results and financial condition will be
materially adversely affected. See Item 4  Information on the
Company.

6

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# Risk of Litigation

The
Company has been a party to various lawsuits and other legal proceedings in the normal
course of its business. Legal proceedings can be expensive, lengthy and disruptive to
normal business operations, regardless of their merit. Moreover, the results of complex
legal proceedings are difficult to predict and an unfavorable resolution of a lawsuit or
proceeding could have a material adverse effect on the Companys business, results of
operations or financial condition.

# Principal Operations in
Israel

The
Company is incorporated under the laws of the State of Israel, and its principal offices
and research and development facilities are located in Israel. Although most of the
Companys sales are currently made to resellers outside Israel, the Company is
nonetheless directly influenced by the political, economic and military conditions
affecting Israel. Major hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could have a material adverse effect
on the Companys business, operating results and financial condition. Furthermore,
several countries restrict business with Israeli companies. In addition, all nonexempt
male adult citizens of Israel, including some of the Companys officers and
employees, are obligated to perform military reserve duty and are subject to being called
for active duty under emergency circumstances. While the Company has operated effectively
under these requirements since its incorporation, the Company cannot predict the full
impact of such conditions on the Company in the future, particularly if emergency
circumstances occur. If many of the Companys employees are called for active duty,
the Company operations in Israel and its business may be adversely affected.

# International Operations

The
Company intends to continue to expand its international operations, which will require
significant management attention and financial resources. In order to continue to expand
worldwide sales, the Company need to establish additional marketing and sales operations,
hire additional personnel and recruit additional resellers internationally. To the extent
that the Company is unable to do so effectively, the Companys growth is likely to be
limited and the Companys business, operating results and financial condition will be
materially adversely affected. In addition, as the Company expands its international
operations, a portion of revenues generated in international jurisdictions may be subject
to taxation by such jurisdictions at rates higher than those to which the Company is
subject in Israel. Most of the Companys worldwide sales are currently denominated in
United States dollars. An increase in the value of the United States dollar relative to
foreign currencies would make the Companys products more expensive and, therefore,
potentially less competitive in those markets. Additional risks inherent in the
Companys worldwide business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, costs of localizing products
for foreign countries, lack of acceptance of localized products in foreign countries,
longer accounts receivable payment cycles, difficulties in operations management,
potentially adverse tax consequences, including restrictions on the repatriation of
earnings, and the burdens of complying with a wide variety of foreign laws. There can be
no assurance that such factors will not have a material adverse effect on the
Companys future international sales and, consequently, the Companys business,
operating results and financial condition. See Item 4  Information on the
Company and Item 5  Operating and Financial Review and
Prospects.

# Product Liability; Risk
of Product Defects

The
Companys sales agreements typically contain provisions designed to limit the
Companys exposure to potential product liability or related claims. In selling its
products, the Company relies primarily on shrink wrap licenses that are not
signed by the end-user, and, for this and other reasons, such licenses may be
unenforceable under the laws of certain jurisdictions. As a result, the limitation of the
liability provisions contained in the Companys agreements may not be effective. The
Companys products are used to manage network security, which may be critical to
organizations, and, as a result, the sale and support of products by the Company may
entail the risk of product liability and related claims. A product liability claim brought
against the Company could have a material adverse effect upon the Companys business,
operating results and financial condition. Software products as complex as those offered
by the Company may contain undetected errors or failures when first 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. Despite
testing by the Company and by current and potential resellers, there can be no assurance
that errors will not be found in new products or releases after commencement of commercial
shipments. The occurrence of these errors could result in adverse publicity, loss of or
delay in market acceptance or claims by resellers against the Company, any of which could
have a material adverse effect upon the Companys business, operating results and
financial condition. See Item 4  Information on the Company.

7

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# Dependence on
Proprietary Technology; Risks of Infringement

The
Company relies primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary rights as
set forth below in the section entitled Proprietary Rights in Item 4
 Information on the Company. The Company has certain patent applications
pending and there can be no assurance that the Companys patent applications will be
issued either at all or within the scope of the claims sought by the Company. Furthermore,
there can be no assurance that any issued patent will not be challenged, and if such
challenges are brought, that such patents will not be invalidated. In addition, there can
be no assurance that others will not develop technologies that are similar or superior to
the Companys technology or design around any patents issued to the Company. Despite
the Companys efforts to protect its proprietary rights, unauthorized parties may
copy aspects of the Companys products or obtain and use information that the Company
regards as proprietary. Policing any of such unauthorized uses of the Companys
products is difficult, and although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the Companys
proprietary rights as fully as do the laws of the United States or Israel. There can be no
assurance that the Companys efforts to protect its proprietary rights will be
adequate or that the Companys competitors will not independently develop similar
technology.

# Approved Enterprise
Status

The
Company receives significant tax benefits in Israel, particularly as a result of the
Approved Enterprise status of the Companys facilities and programs. To
be eligible for tax benefits, the Company must meet certain conditions, relating
principally to adherence to the investment program filed with the Investment Center of
the Israeli Ministry of Industry and Trade and to periodic reporting obligations.
Although the Company believes that it will be able to meet such conditions in the future,
if the Company fails to meet such conditions it would be subject to corporate tax in
Israel at the statutory rate of 36%, and could be required to refund a portion of the tax
benefits already received. The law and regulations prescribing the benefits provide for
an expiration date for the grant of new benefits. The expiration date has been extended
several times in the past. The expiration date currently in effect is May 2003, and no
new benefits will be granted after that date unless the expiration date is again
extended. There is a committee that is reviewing the benefits program under the law.
There can be no assurance that new benefits will be available after May 2003, however
benefits already granted will stay in effect throughout the plan period. A termination or
reduction of certain programs and tax benefits (particularly benefits available to the
Company as a result of the Approved Enterprise status of the Companys
facilities and programs) or a requirement to refund a portion of the tax benefits already
received, would have a material adverse effect on the Companys business, operating
results and financial condition. See Item 4  Information on the Companyand
Israeli Taxation, Foreign Exchange Regulation and Investment Programs in
Item 10  Additional Information.

# Anti-Takeover Effects Of
Israeli Laws

Under
the Israeli Companies Law, a merger is generally required to be approved by the
shareholders and board of directors of each of the merging companies. Shares held by a
party to the merger and certain of its affiliates are not counted toward the required
approval. If the share capital of the company that will not be the surviving company is
divided into different classes of shares, the approval of each class is also required. A
merger may not be approved if the surviving company will not be able to satisfy its
obligations. At the request of a creditor, a court may block a merger on this ground. In
addition, a merger can be completed only after all approvals have been submitted to the
Israeli Registrar of Companies and 70 days have passed from the time that a proposal for
approval of the merger was filed with the Registrar.

The
Israeli Companies Law provides that an acquisition of shares in a public 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. This rule does not apply if there is already
another 25% shareholder of the company. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender offer if,
as a result of the acquisition, the purchaser would become a 45% shareholder of the
company, unless someone else already holds a majority of the voting power of the company.
These rules do not apply if the acquisition is made by way of a merger.

8

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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, including the rules
and regulations of the stock exchange on which the shares are traded, either:

| |  | There
is a limitation on acquisition of any level of control of the company; or
| | - | -------------------------------------------------------------------------------

| |  | The
acquisition of any level of control requires the purchaser to do so by means of 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.

These
laws may have the effect of delaying or deterring a change in control of the Company,
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 the
Companys securities.

# Provisions Affecting a
Potential Change of Control; Potential Rights of Unissued Preferred Shares

The
Companys Board of Directors has the authority to issue up to 5,000,000 preferred
shares and to determine the price, rights (including voting rights), preferences,
privileges and restrictions of such preferred shares, without any vote or actions by the
Companys shareholders. The rights and preferences of such preferred shares could
include a preference over the ordinary shares on the distribution of the Companys
assets upon a liquidation or sale of the Company, preferential dividends, redemption
rights, and the right to elect one or more directors and other voting rights. The rights
of the holders of the ordinary shares will be subject to, and may be adversely affected
by, the rights of the holders of any preferred shares that may be issued in the future.
The Company has no current plans to issue preferred shares. The issuance of preferred
shares, while providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting shares of the Company. Furthermore,
certain provisions of the Companys Articles of Association could delay or make more
difficult a merger, tender offer or proxy contest involving the Company. These provisions
stipulate that the Company cannot engage in a business combination with an interested
shareholder (defined generally as the beneficial owner of 15% of the outstanding shares
and its affiliates) for a period of three years following the date that such shareholder
became an interested shareholder, unless certain conditions are met. These provisions may
have the effect of delaying or deterring a change in control of the Company, 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 the Companys
securities.

# Concentration of Share
Ownership

As
of February 13, 2003, the directors, executive officers and principal shareholders of the
Company and their affiliates beneficially owned approximately 27.8% of the outstanding
ordinary shares. The percentage of ownership is calculated based on number of ordinary
shares owned, directly or indirectly, and the number of options immediately
exercisable or that are exercisable within 60 days from December 31, 2002. As a result,
these shareholders are able to exercise significant influence over all matters requiring
shareholder approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company. See Item 7  Major
Shareholders and Related Party Transactions.

# Indemnification of
Directors and Officers

The
Company has agreements with its directors and senior officers which provide, subject to
Israeli law, for the Company to indemnify these directors and senior officers for
(a) any monetary obligation imposed upon them for the benefit of a third party by a
judgment, including a settlement agreed to in writing by the Company, or an arbitration
decision certified by the court, as a result of an act or omission of such person in his
capacity as a director or officer of the Company, and (b) reasonable litigation
expenses, including legal fees, incurred by such a director or officer for which he is
obligated to pay by a court order, in a proceeding brought against him by or on behalf of
the Company or by others, or in connection with a criminal proceeding in which he was
acquitted, in each case relating to acts or omissions of such person in his capacity as a
director or officer of the Company.

9

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# Exchange Controls and
Other Limitations Affecting Security Holders

In
1998, the Israeli currency control regulations were liberalized significantly, and there
are currently no control restrictions on remittances of dividends on securities of Israeli
companies or the proceeds from the sale of Israeli securities. Legislation remains in
effect, however, pursuant to which currency controls can be imposed by administrative
action at any time.

Neither
the Memorandum and Articles of Association of the Company nor the laws of Israel restrict
in any way the ownership or voting of ordinary shares by non-residents of Israel, except
with respect to citizens of countries which are in a state of war with Israel.

|ITEM 4. | INFORMATION ON THE COMPANY
|------- | --------------------------

# General

Check
Point develops markets and supports Internet security and Virtual Private Network (VPN)
solutions for enterprise and high-end networks, small and medium businesses, and service
providers (Telcos, ISPs, ASPs and MSPs). The Company delivers solutions that enable
secure, reliable and manageable communications over Internet Protocol (IP)
networks including the Internet, intranets and extranets. Check Point product offerings
also include Quality of Service (QoS) and Security Management solutions. Check Point
products are fully integrated as a part of the Companys Secure Virtual Network (SVN)
architecture and provide centralized management, distributed deployment, and comprehensive
policy administration. The capabilities of Check Point products can be extended with the
Open Platform for Security (OPSEC), enabling integration with leading hardware appliances
and third-party security software applications.

Check
Point was incorporated in 1993 and its address is 3A Jabotinsky Street, Ramat-Gan 52520,
Israel. The telephone number is 972-3-753-4555. Copies of this Form 20-F and other
documents incorporated herein by reference can be obtained on the Companys website,
www.checkpoint.com or upon request from the Companys investor relations
department, 800 Bridge Parkway, Redwood City, California 94065 (telephone no.
650-628-2000).

# Industry Background

Information,
and the ability to access and distribute it, is a key strategic asset in todays
competitive business environment. This 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 is in turn increasing the
need for technology to safeguard and manage the access to information available over these
increasingly global networks.

Increase
in Connectivity

The
network computing market has undergone three major transitions over the past decade, which
have contributed to the increase in global connectivity. The first of these transitions
was the migration of corporate computing environments from centralized mainframe systems
to distributed client/server environments. The ability to access and share information
through client/server technology has expanded the need for connectivity beyond workgroup
LANs (local area networks) to enterprise-wide networks spanning multiple LANs and WANs
(wide area networks). The second major transition has been the widespread adoption of the
Internet for business-to-business communications. Internet-based business applications
have rapidly expanded beyond e-mail to a broad range of business applications and services
including electronic publishing, direct to customer transactions, product marketing,
advertising and customer support. The emergence of eBusiness increases the need for and
associated challenges in providing secure access to information and applications. 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 receive more and better information from a growing spectrum of
devices, including laptops, personal digital assistants (PDAs), and cell phones. The
expansion of network access to mobile workers is driving demand to secure all devices with
Internet access, as well as those connecting to the corporate network. These transitions
and the need for secure, managed communications, have led to the broad acceptance of
virtual private networks through the use of the public Internet infrastructure and
associated protocols and applications, sharing information and utilizing services both
within the enterprise and with business partners and customers are now widely adopted. 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 inexpensively link into their enterprise
information systems. As Internet protocols and infrastructure gain increasingly widespread
acceptance for global communication, new wide-area connectivity services continue to
emerge at a rapid rate, such as 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 Internet connectivity among organizations of all sizes has increased the risk
that corporate Information Technology (IT) resources can be attacked via the
Internet. Firms have recognized this risk and are deploying proper security solutions
that protect company confidential information from unauthorized access. The primary means
of controlling access to corporate networks and protecting against attacks is the
deployment of Internet firewalls. Firewalls are typically deployed at the demarcation of
the corporate local area network (LAN) and the Internet, they are used to strictly
control traffic into and out of the company network, and guard against internal attacks.
Firewall technology is currently undergoing an evolution, enabling to detect and defeat
highly sophisticated attacks that are increasingly prevalent on the Internet today

In
addition to protecting corporate IT assets from attack, corporations should take steps to
guard sensitive company information traversing untrusted networks, such as the Internet.
Securing company information on the Internet is critical as more organizations are
utilizing the Internet as their corporate network backbone to link company offices and
employees. Putting sensitive information on the Internet without adequate security exposes
confidential data to the public. To mitigate this risk, increasing number of firms is
deploying virtual private networks (VPNs) to encrypt and authenticate their Internet-bound
traffic. Leveraging standards-based VPN technology enables organizations to connect
offices and remote employees via the Internet, while maintaining the privacy and integrity
of communications.

Frequently,
firewalls and VPNs are deployed together on the same platform. Integrating firewall and
VPN functionality delivers greater security for all traffic and eases the management
burden on security and network administrators.

# The Check Point Solution

Check
Point network security products include various technologies that enable our customers to
define their network security policies, enforce these policies across their networks,
collect information and monitor the security and traffic flow, and analyze and update
those configurations to reflect changes in the network and in the security policies. The
Companys products address those tasks in various environments and a variety of price
points. The technologies are packaged and marketed under different product names, mostly
under the VPN-1 and FireWall-1 brands.

In
addition, the Companys Open Platform for Security (OPSEC) framework provides a
platform that enables integration with multiple third-party security applications,
computer hardware, internetworking hardware, appliances and enterprise applications from
within Check Points open, extensible management framework. The following are the key
factors that differentiate Check Points solution from earlier network security
approaches:

Stateful
Inspection Technology. Check Points VPN-1 and FireWall-1 product offerings are
based upon Stateful Inspection technology that enables the screening of all communications
attempting to pass through a gateway in a secure but efficient manner. By extracting and
maintaining extensive state information from all relevant communication
layers, the system can verify data for full compliance with the security and traffic
policy and make intelligent security and traffic prioritization decisions. By extracting
and analyzing data in place without making a copy, Stateful Inspection results in
virtually no performance degradation, enabling VPN-1 and FireWall-1 to scale effectively
with increasing network bandwidth. In addition, Check Points proprietary
implementation of Stateful Inspection in a virtual machine design provides
in-place upgradeability and is designed to enable the Companys products to be easily
ported to a wide range of platforms. In addition, because Check Points products
reside at network access points, which are the critical convergence points for network
security and traffic management, the Company is able to apply this same architectural
foundation and inspect traffic only once for both critical network decisions and traffic
management, resulting in increased network performance.

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Open
Platform for Security. The Companys OPSEC Alliance program is focused on
delivering integration and interoperability with complimentary products and developing
marketing relationships with partners to promote best-of-breed security
frameworks. OPSECs wide range of integration interfaces addresses all areas of a
complete Internet security architecture. Products that carry the OPSEC
Certified and Secured by Check Point seals have been tested to enable
integration and interoperability. OPSEC partners include appliance companies like Nokia
Corporation, Sun Microsystems, Inc. and Nortel Networks Limited and application companies
like Computer Associates International Inc., Trend Micro, Inc., RSA Security Inc. and
VeriSign, Inc.

Broad,
Integrated Internet Security Solution. The VPN-1 and FireWall-1 product offerings
extend across virtually all major market segments, from small businesses to high-end
networks. Most products support a broad range of platforms, including Sun Microsystems
(Solaris), Nokia IPSO, Microsoft (Windows), and Linux. Check Points Internet
security solutions provide a broad range of features and functionality including the
following:

Integration
of Third-Party Security Applications. Through OPSEC, end-users of VPN-1and FireWall-1
are able to integrate the product into various network management systems and add new
features and functionality, such as public key infrastructure, authentication, encryption,
URL categorization, content security, anti-virus protection, intrusion detection, auditing
and reporting controls and enterprise directory integration.

Implementation
of Virtual Private Networks. The VPN-1 architecture supports multiple authentication
methods, including digital certificates, password-based techniques, biometrics and
authentication tokens. In addition, VPN-1 provides data encryption capabilities to shield
communications over public networks from unauthorized monitoring or alteration, enabling
companies to set up virtual private networks offering a level of privacy
comparable to private communication lines. The VPN-1 product family supports multiple
encryption and key management methods including IPSec, AES, and 3DES. The Company extends
the VPN to mobile desktop users with its SecuRemote and SecureClient software. In
addition, the multi-vendor interoperability offered by VPN-1 enables the deployment of
secure and reliable intranet and extranet VPNs for business communications.

Extensive,
Scaleable Application Support. VPN-1 and FireWall-1 support over 150 pre-defined
applications, including database and enterprise applications, such as Oracle SQL*Net,
network management protocols such as SNMP, multimedia applications such as RealAudio,
Microsofts NetMeeting and NetShow, and Internet applications such as Secure HTTP.

Centralized
Management. Check Points solutions are based on its SMART management
architecture, which allows configuration and management of security policies from a
single, centralized administrative workstation. Security policies can be defined and
deployed for a single security gateway protecting a small business, for multiple gateways
in an enterprise network environment, or for multiple security domains allowing a service
provider to deliver security to a large number of customers, or subscribers. The
Companys products contain extensive monitoring and reporting capabilities designed
to improve the manageability of the system.

# Products

Check
Points product lines offer a broad and integrated range of policy-based solutions
for connecting and protecting networks. The Companys Security product line includes
the VPN-1 family of virtual private networking solutions FireWall-1 family of products,
SmartDefense, SofaWare Safe@ product line, SMART management solutions, Web Access
solutions and some associated products.

VPN-1

The
Companys VPN-1 product family is designed to meet the need of organizations to
protect the privacy and integrity of network communications by establishing confidential
communication channels for site-to-site, remote access and extranets.

VPN
solutions support all leading industry standards, including IPSec, AES, and 3DES, thus
enabling multi-vendor interoperability. In addition, multiple Check Point solutions are
available to accelerate VPN communications and facilitate broad deployment.

Check
Point VPN solutions are managed via Check Points VPN Manager, part of the
Companys Smart Center management line. For remote access VPN deployments, Check
Point offers different client solutions  VPN-1 SecuRemote and VPN1
SecureClient. These software applications provide secure VPN connectivity from laptops and
other mobile devices. VPN-1 SecureClient also provides client-side security with a
centrally managed personal firewall. In addition, Check Point offers clientless VPN
solutions, integrated with legacy Windows clients or browsers using SSL.

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FireWall-1

Check
Point FireWall-1 is a comprehensive security solution that integrates access control,
authentication, network address translation, content security, logging and alerting
capabilities. FireWall-1 is based on Check Points patented Stateful Inspection
technology, and delivers high performance security, application support and scalability.
The most widely used firewall on the market today, FireWall-1 achieved significant
industry and government security certifications and is available on a variety of platforms
including Linux, UNIX and Windows servers, and leading appliance platforms.

In
addition, FireWall-1 supports OPSEC, allowing customers to build a complete security
platform with integration of multiple third-party security applications. FireWall-1
management solutions are available for all size deployments, from a single gateway to
installations with hundreds or thousands of enforcement points.

SmartDefense

Check
Point SmartDefense is an Active Defense solution that is included with FireWall-1.
SmartDefense utilizes Stateful Inspection technology to actively protect organizations
against network attacks by using intelligent security technology which blocks attacks by
type and class. SmartDefense provides a centralized console for real-time information on
attacks, as well as attack detection, blocking, logging, auditing and alerting. Check
Point is offering a real time update subscription service to SmartDefense users, allowing
security administrators to mitigate new vulnerabilities in a simple and convenient way.

FireWall-1/VPN-1
VSX

VPN-1®/FireWall-1®
VSX is a high-speed, multi-policy security solution designed for VLAN-enabled corporate
networks, data centers and service provider POPs. It uses the same, patented Stateful
Inspection technology used in market leading FireWall-1. By aggregating up to 250
individual security domains on a single platform, VPN-1/ FireWall-1 VSX minimizes hardware
investment. VPN-1/FireWall-1 VSX can be run on multiple gigabit platforms to deliver the
required performance in high-bandwidth environments. It is managed using Check
Points SmartCenter solutions and Provider-1, delivering a unified management
architecture that service providers and enterprises can also use to manage all their other
Check Point enforcement points centrally.

FireWall-1
GX

FireWall-1
GX delivers Check Points market-leading security to GPRS- (2.5G) and UMTS- (3G)
enabled wireless networks. FireWall-1 GX is the first product to protect these wireless
infrastructures from the threats of untrusted networks. With FireWall-1 GX, wireless
network operators can offer seamless roaming to their data customers without exposing
their network to potential security threats.

SofaWare
Safe@ Products

Check
Points SofaWare Safe@ products, which are based on the Stateful Inspection
technology found in VPN-1 and FireWall-1, deliver VPN and firewall solutions to remote
branch offices, small businesses, consumers, and the MSPs which provide managed security
services to them. SofaWare Safe@ products can be managed individually or as part of Check
Points SMART Management solutions.

SMART
Management Solutions

Check
Points SMART (Security Management Architecture) Management Solutions, a family of
related products, enables organizations of different sizes to define, deploy and enforce
security policies consistently across multiple enforcement points. SMART Management
Solutions are comprised of the following product offerings:

SmartCenter

SmartCenter
is Check Points comprehensive management solution, comprised of an intuitive Dashboard that
enables administrators to centrally define the VPN, firewall and QoS policies of a
network, and a management server that stores and distributes these different elements of
the security policy. This solution provides administrators with enhanced understanding of
distributed security deployments, and is combined with automatic policy distribution to
deliver greater control, improved security and enhanced ease of use. It also includes the
elements to collect, record and manage the network and security events as well as the
SmartView Tracker to view and analyze those events.

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Provider-1

Provider-1
is a security management solution designed to meet the unique challenges of service
providers and large enterprises. For service providers, Provider-1 consolidates customer
security policies into a centralized policy management architecture that scales to
support thousands of customers while minimizing investment in hardware and labor. For
large enterprises, Provider-1 simplifies a complex security policy by segmenting it into
more manageable sub-policies to match geographic, functional, or other logical groupings.

Security
Management Portal

The
Security Management Portal (SMP) is a management solution for service providers, which
delivers Internet security to consumers and small businesses. Developed by SofaWare
Technologies, a Check Point company, the SMP enables service providers to create flexible
service categories and to centrally manage tens of thousands of subscribers.

SmartLSM

Check
Points SmartLSM is an extension of SmartCenter and is designed to support
large-scale VPN and security installations. Using SmartLSM, administrators can
efficiently provide security for hundreds of gateways using templates. In addition,
automated processes for policy installation and updates enable rapid deployment and
minimize management requirements.

SmartView
Family

The
SmartView family of products include the SmartView Tracker for viewing, searching and
analyzing of network and security events recorded by the Companys products and
integrated through OPSEC. SmartView Monitor enables real-time viewing of network and
security traffic graphs by various criteria. SmartView Reporter enables the automatic
creation of high-level reports including regarding the network and security operations.

SmartCenter
Pro

SmartCenter
Pro is a extension of our SmartCenter management solutions that bundles a additional set
of management tools to provide a unique enterprise security management solution. Included
in SmartCenter Pro is the SmartLSM large scale management tool, SmartUpdate for
distributed software version management and updates, SmartMap topological network view,
Management High Availability, User Account Management Extensions and the SmartView
Monitor.

FloodGate-1

FloodGate-1
is an add-on module to VPN-1 and FireWall-1 products that provides a policy-based QoS
solution that alleviates traffic congestion on oversubscribed Internet and Intranet links.
With FloodGate-1, companies can prioritize Internet traffic to meet business needs for
both security and VPN installations.

ClusterXL

ClusterXL
is an add-on module to VPN-1 and FireWall-1 that is used in a mission critical
environment, allowing security administrators to run different modules in high
availability or load sharing modes, in a way that eliminates single point of failure.

SecurePlatform

The
SecurePlatform package enables easy deployment of the Company products on a variety of
open systems. SecurePlatform bundles certain Company products with a hardened and
optimized version of the Linux operating system, with a set of tools in order to ease the
setup and network configuration. SecurePlatform allows improved cost/performance and
reduced TCO for security open servers.

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User
Authority WebAccess

Check
Points UserAuthority provides centralized administration and distributed enforcement
of authorization access policies for Web applications, taking into account the full
security context of the connection: user identity, profile information, encryption
parameters (scheme and key-strength used), authentication parameters (password,
certificate, etc.), networking information (the connections source, etc.) and
desktop security parameters. Security and Web administrators define and enforce Web Access
Policies externally to applications, with an easy-to-use GUI that is completely integrated
with Check Point VPN-1/FireWall-1 and UserAuthority. Check Point UserAuthority centralizes
the administration and enforcement of user authentication in enterprise networks,
uniformly implementing best-of-breed authentication solutions (PKI, tokens, LDAP, etc.)
across enterprise networks.

# Technology

VPN-1/
FireWall-1 Technology and SVN Architecture

Check
Points VPN-1and FireWall-1 technology provides a powerful, easy-to-use solution for
the implementation of an integrated network security solution. A high level of security
and security management is achieved through the companys Secure Virtual Network
(SVN) architecture. Three key elements of the SVN architecture include:

Management
Technologies and Architecture (SMART  Security Management Architecture)

Check
Points Security Management Architecture (SMART) is based on a three-tier framework
that includes a powerful graphical user interface (GUI) for the system and security
administrator that enables flexible definition, review, audit and maintenance of the
security policy. An object-oriented architecture allows for the efficient storage and
specification of security policy elements (such as computers, users, networks and network
devices, network services and security rules). Powerful management tools, such as object
managers, audit and network activity logs, monitoring tools and policy editors are based
on this unifying architecture. VPN-1 and FireWall-1 SMART management servers can manage
multiple security enforcement points regardless of their size and physical location.

Security
and Network Traffic Enforcement Technologies (based on Stateful Inspection)

Check
Point VPN-1/FireWall-1 enforcement points are installed at the network border (as security
gateways), deployed on critical servers, and installed on client platforms (with VPN-1
SecureClient). These enforcement points implement the companys patented Stateful
Inspection technology using the INSPECT engine. The INSPECT engine scans all incoming and
outgoing IP traffic and is based on the companys patented Stateful Inspection
technology, which matches all traffic against the security policy. The INSPECT engine can
be enhanced by the company, its partners, or users by using the INSPECT programming
language.

Based
on fine-grained matching, network traffic can be dropped (indicating a violation of the
security policy), encrypted and forwarded (secured VPN traffic), prioritized (FloodGate-1
QoS) or sent for further analysis through additional enforcement modules. Additional
enforcement modules perform functions such as checking the credentials and authentication
of requesting users, or inspecting traffic through screening technology such as URL
filtering or an Anti-Virus system. Many of these additional security technologies are
provided by 3rd party vendors and are integrated through the OPSEC
architecture. In addition, technologies like Check Points SecureXL further
accelerate the performance of security and network operations using system extensions or
3rd party ASIC-based accelerators and platforms.

SmartDefnese
and Active Defense

Active
Defense solutions are a new category in Internet security. Our SmartDefense solution
pioneers this category. It actively protects organizations from all known and unknown
network attacks using intelligent security technology and blocking attacks by class and
type rather then by specific signature. Using Check Points patented Stateful
Inspection technology it creates a single, centralized console for real-time information
on attacks as well as attack detection, blocking and logging.

Integration
with additional systems (OPSEC  Open Platform for Security)

The
OPSEC architecture provides a single platform that manages various aspects of network
security through an open, extensible management framework. Various third-party security
applications plug into the OPSEC framework through published application programming
interfaces (APIs), such as the CVP (Content Vectoring Protocol) which integrates virus
scanning software and other content inspection programs, UFP (URL Filtering Protocol)
which integrates URL list services, and SAMP (Suspicious Activity Monitoring Protocol)
which integrates suspicious activity monitoring programs. OPSEC also supports
industry-standard protocols such as RADIUS, IPSec, and SNMP. Once integrated into the
OPSEC framework, all applications can be set-up and managed from a central point,
utilizing a single policy editor.

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Network
security is implemented in both the management module and the firewall enforcement
module. The management module defines security policy through a set of
rules established by the system administrator. These rules are then enforced by any
number of firewall modules. The cornerstone of Check Points VPN-1/FireWall-1
technology includes the Companys patented Stateful Inspection technology, the
Secured Virtual Network (SVN) architecture, SMART (Security Management Architecture),
SecureXL for industry-leading VPN performance, One-Click VPN technology for easy VPN
deployment, and the OPSEC architecture.

Stateful
Inspection enables highly efficient, transparent screening of all communications
attempting to pass through a network gateway. Check Points SVN provides manageable
and scalable security solutions which are, fast, open, secure, and easy-to-use. The SVN
architecture includes new technologies such as Check Points Security Management
Architecture (SMART), which provides comprehensive management and policy tools for service
providers, enterprises, branch offices, small businesses and the home user.

SecureXL

Check
Points SecureXL is a software interface that enables Check Point to leverage
technologies from multiple silicon, appliance and computer system partners to accelerate
the performance of firewall and VPN gateways by off-loading simple, though computationally
intensive functions to third-party packet processors. Using SecureXL different hardware
appliance vendors can stimulate the performance of Secured by Check Point
appliances and provide greater value to their customers that are benefiting from
wire-speed advanced security.

# Sales and Marketing

The
Companys sales and marketing strategy is designed to promote its products as
strategic components of enterprise networks. The Companys marketing efforts are
focused on promoting FireWall-1 and VPN-1 as the leading brand names in enterprise
security. Sales efforts focus on expanding the installed base and increasing penetration
levels of end-user customers worldwide by leveraging multiple channels of distribution
(channel partners): distributors, resellers and Value Added Resellers (VARs), Original
Equipment Manufacture (OEMs), system integrators, and Managed Service Providers (MSPs).
The Company currently sells its products to end-user customers through numerous resellers
and distributors worldwide. The Company expects that it will continue to be dependent upon
a limited number of resellers for a significant portion of its revenues. In 2002, sales to
the Companys five largest distributors represented approximately 35% of the
Companys revenues. If anticipated orders from these resellers fail to materialize,
the Companys business, operating results and financial condition could be materially
adversely affected. The Companys agreements with its OEM partners and resellers are
non-exclusive. The Company allows channel partners to provide prospective customers with
30-day evaluation copies of the Companys software products. If the customer elects
to purchase the Companys product, it places its order through its reseller, which in
turn places the order with the Company. The Company issues an invoice to the reseller, and
sends a software key to the reseller to provide to the customer, which enables full use of
the products purchased by the customer. The Company offers a variety of fee-based software
services programs, including support of the Companys software products in accordance
with specifications contained in the users guide, and access to technical support
personnel and product enhancements.

The
Company has bundling relationships with server and workstation vendors and appliance
manufacturers, such as Nokia, IBM, Hewlett-Packard, Siemens, Crossbeam, Nortel, Intrusion
Inc. and other suppliers of enterprise network hardware products. The Company believes
that strategic relationships can significantly contribute to the achievement of its sales
and marketing goals by integrating complementary technologies. Additionally, these
hardware partners provide primary support and training to their customers thereby enabling
Check Point to concentrate its support efforts on high-level technical assistance for its
partners.

The
Company has derived substantially all of its revenues, and expects to continue to derive
the vast majority of its revenues in the foreseeable future, from sales of its network
security products, packaged and marketed mostly under the VPN-1 and FireWall-1 brands, ,
including related software subscriptions, support and technical services and training
programs. For information concerning the Companys sales to geographic areas, see
Item 5  Operating and Financial Review and Prospects. 

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The
Companys OPSEC Alliance program is focused on delivering integration and
interoperability with complimentary products and developing marketing relationships with
partners to promote best-of-breed solutions. With over 300 partners, OPSEC is
the industrys leading open multi-vendor security framework. OPSEC provides customers
with a broad choice of best-of-breed integrated applications and deployment
platforms that support Check Points Secured Virtual Network Architecture. Products
that carry the OPSEC Certified and Secured by Check Point seals
have been tested to enable integration and interoperability. System integrators with which
the Company maintains informal cooperative relationships include Accenture, Computer
Sciences Corporation, Electronic Data Systems, PriceWaterhouse Coopers, and IBM Global
Services. Companies that maintain a marketing relationship with the Company to promote
their integrated products include Aladdin, Baltimore Technologies, Entrust,
Hewlett-Packard, IBM, Intel, Network Associates, Novell, RSA Security, Symantec, Trend
Micro and VeriSign, as well as many others.

The
Company conducts a number of marketing programs to support the sale and distribution of
its products. These programs are designed to inform existing and potential OEM partners,
resellers, and end-user customers about the capabilities and benefits of the
Companys products.

# Customer Service and
Support

The
Company operates a Worldwide Technical Services (WTS) organization, providing a wide range
of educational and professional services. This enables the Company to partner with
resellers in implementing secure, reliable service solutions.

The
Companys channel partners generally provide the installation, training, maintenance
and support for their customers, with Check Point providing the high-level technical
backup support. Check Point also offers direct support agreements to end users which
prefer to purchase directly from the manufacturer, though this represents a minority of
support activity. As part of Check Points direct market participation, the Company
employs technical consultants and systems engineers who work closely with OEM partners,
resellers and territory sales managers to assist with the pre-sales configuration, use and
application support.

The
Company operates a worldwide 24-hour, 7-day call center, based primarily in Dallas, Texas.
The Company supports resellers, partners, and sales personnel through standard systems and
processes and are available via e-mail, the Internet, fax and telephone. The support
structure includes front line call center engineers for resolving the majority
of issues and questions during the first call and product specialists as required. If
necessary, bench testing using real-world configurations are performed by senior support
engineers. Third level support is provided by the Escalation Group, an organization that
resides with the Companys research and development group in Ramat Gan, Israel to
provide an extremely close coupling between customer issues and usage and product
development. The Escalation Group provides the highest level for troubleshooting and
simulation of customer scenarios. It also conducts code analysis and delivers updated
code, as appropriate. Analysis of historical trouble tickets is conducted and tracked.
This information is used in the development of features and enhancements in new product
releases.

To
provide hands-on training, education and certification, Check Point has an in-house
educational services group. The group develops courses and curricula for Check Point
classes conducted directly by the Company or by an affiliate company. Such classes include
both lecture-taught and computer-based training sessions on Check Point products,
including installation, management and advanced implementations. The Company offers
industry level certification programs including Check Point Certified Security Expert
(CCSE) and Check Point Certified Security Administrator (CCSA). Using a leveraged model,
Check Point has trained hundreds of partners, and these partners have in turn established
Authorized Training Centers.

The
Company also has a professional services organization that offers consulting services that
include on-site support for installation of its products, and assistance in developing
sound security business practices. .

Customers
are encouraged to purchase software subscriptions, which are a component of the services
program that provides product updates and version upgrades for Check Points products
on a when and if available basis. In addition, once the software subscription
has been purchased, customers can then purchase a variety of support programs. These
software support programs can be sold and delivered by the Companys resellers and
OEM partners or the customer can choose to purchase a Check Point software support program
that is sold by the reseller but delivered by Check Point through its WTS organization
directly to the customer.

17

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# Research and Product
Development

The
Company believes that its future success will depend upon its ability to enhance its
existing products and develop and introduce new products that address the increasingly
sophisticated needs of end-users. The Company works closely with its distribution channels
and major resellers, which provide significant feedback for product development and
innovation. The Companys new product development efforts are focused on enhancements
to its current family of products and new products for network security and management.
Although the Company expects to develop its new products internally, it may, based upon
timing and cost considerations, acquire or license certain technologies or products from
third parties.

Research
and development expenses for 2000, 2001 and 2002 were $30.3 million, $33.2 million and
$28.7 million, respectively. At December 31, 2002, the Company had 311 employees
dedicated to research and development activities and quality assurance.

# Competition

See Risk Factors 
Competition in Item 3  Key Information.

# Proprietary Rights

The
Company relies primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary rights.
The Company seeks to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection. The Company
generally enters into confidentiality agreements with employees, consultants, customers
and potential customers and limit access to, and distribution of its proprietary
information.

The
Company has patents pending worldwide and holds three U.S. patents, No. 5,606,668, No.
5,835,726 and 6,496,935. Patent 6,496,935 has corresponding pending applications in:
Europe, Japan, Australia, Canada, China, South Korea, Singapore, New Zealand, India,
Israel, South Africa, Brazil, Mexico, Czech Republic, Norway, Hungary, and Poland. The
Company also has corresponding patent applications to U.S. Patent No. 5,606,668 pending in
Canada and Japan, as well as under the European Patent Convention (designating Germany,
France, United Kingdom, Italy and Sweden as countries in which patent coverage may
potentially be sought). The Company has also filed co-pending PCT national phase patent
applications in Canada, Japan, Korea, Norway, and under the European Patent Convention
(designating France, United Kingdom, Ireland, Sweden, Germany, Switzerland and Finland)
based on an earlier patent application filed in Israel and currently pending. A patent
issued from the European Patent Office (the EPO) becomes effective as though
it were a national patent in each designated member nation once national fees are paid,
and all other local requirements are met. The EPO opposition period of nine months from
grant of the patent at the EPO can affect the enforcement of that patent nationally if an
opposition is filed during that time. If the opposition is won, it can negate the patent
altogether or result in the protection being offered by the patent being narrowed. There
can be no assurance that the Companys applications, whether or not currently
challenged by applicable governmental patent examiners, will be issued either at all or
within the scope of the claims sought by the Company. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior to the
Companys technology or design around any patents issued to the Company. Despite the
Companys efforts to protect its proprietary rights, unauthorized parties may copy
aspects of the Companys products or obtain and use information that the Company
regards as proprietary. Policing any of such unauthorized uses of the Companys
products is difficult, and although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the Companys
proprietary rights as fully as do the laws of the United States or Israel. There can be no
assurance that the Companys efforts to protect its proprietary rights will be
adequate or that the Companys competitors will not independently develop similar
technology.

# Organizational Structure

The Company is organized under the
laws of the State of Israel and wholly owns the subsidiaries specified below:

18

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|                                                       |                                    
|------------------------------------------------------ | -----------------------------------
|NAME OF SUBSIDIARY                                     | COUNTRY OF INCORPORATION           
|Check Point Software Technologies, Inc                 | United States of America (Delaware)
|Metainfo Inc. (1)                                      | United States of America (Delaware)
|Check Point Software Technologies (Canada) Inc.        | United States of America (Delaware)
|Check Point Software Technologies (Australia) PTY Ltd. | Australia                          
|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 Software Technologies SARL                 | France                             
|Israel Check Point Software Technologies Ltd. China    | China                              
|Check Point Holding (Singapore) PTE Ltd.               | Singapore                          
|Check Point Software Technologies Ireland Limited      | Ireland                            
|Check Point Software Technologies Cayman Islands (2)   | Cayman Islands                     

Check Point Software  Technologies  (Netherlands)  B.V. acts as a holding company and wholly owns the following
principal operating subsidiaries specified below:

|                                                         |                         
|-------------------------------------------------------- | ------------------------
|NAME OF SUBSIDIARY                                       | COUNTRY OF INCORPORATION
|Check Point Software Technologies B.V                    | Netherlands             
|Check Point Software Technologies (Italia) Srl (3)       | Italy                   
|Check Point Software Technologies (Switzerland) A.G      | Switzerland             
|Check Point Software Technologies Norway A.S             | Norway                  
|Check Point Software Technologies (Spain) S.A            | Spain                   
|Check Point Software Technologies Mexico S.A. de C.V     | Mexico                  
|Check Point Software Technologies (Brazil) LTDA          | Brazil                  
|Check Point Software Technologies (UK) Ltd.              | United Kingdom          
|Check Point Software Technologies GmbH                   | Germany                 
|C.P.S.T. Sweden A.B                                      | Sweden                  
|Check Point Software Technologies (Luxembourg) S.A       | Luxembourg              
|Check Point (Hungary) Group Financing Ltd. (4)           | Hungary                 
|Check Point Software Technologies (Denmark) ApS          | Denmark                 
|Check Point Software Technologies (Poland) Sp.z.o.o      | Poland                  
|Check Point Software Technologies (Czech Republic) s.r.o | Czech Republic          
|Check Point Software Technologies (Hong Kong) Ltd.       | Hong Kong               
|Check Point Software Technologies (Korea) Ltd.           | S. Korea                
|Check Point Software Technologies (Finland) Oy           | Finland                 
|Check Point Yazilim Teknolojileri Pazarlama A.S. (5)     | Turkey                  
|Check Point Software Technologies (Belgium) S.A          | Belgium                 

---

(1)    
          100% owned by Check Point Software Technologies, Inc. The Company intends to
          liquidate this subsidiary

(2)    
          100% owned by Check Point Software Technologies (Singapore) PTE Ltd

19

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

(4)    
          96.6% owned by Check Point Software Technologies (Luxembourg) S.A. and 3.4%
          owned by Check Point Software Technologies (Netherlands) B.V

(5)       
          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.

|                           |                         
|-------------------------- | ------------------------
|NAME OF AFFILIATED COMPANY | COUNTRY OF INCORPORATION
|Sofaware Technologies Ltd. | Israel                  

Check Point has  provided a  convertible  loan to SofaWare  and has the right to convert  this loan into 60% of
the equity of SofaWare on a fully  diluted  basis.  Check  Point also holds  warrants  that allow it to further
increase  its holdings in SofaWare to  approximately  two-thirds  of the equity of SofaWare on a fully  diluted
basis. Accordingly, the accounts of SofaWare are consolidated with the Company's financial statements.

Plants, Property and Equipment

The Company's headquarters and research and development  facilities are located in Ramat-Gan,  Israel,
near Tel-Aviv,  where the Company leases  approximately  106,000 square feet of office space.  These facilities
are leased under leases that expire between 2003 and 2011,  including renewal options.  The Company also leases
approximately  a total of 104,000  square feet of office  space in the United  States.  Of that,  approximately
48,000  square  feet of office  space are  leased for the US  headquarters  in Redwood  City,  California,  and
approximately  31,000 square feet of office space for its technical  services  center in Dallas,  Texas.  These
facilities are leased under leases for periods of up to five years.  In addition,  the Company leases  regional
office  space  in the  United  States  in  Texas,  California,  Colorado,  Michigan,  Illinois,  Massachusetts,
Washington,  Georgia, New York, Arizona,  Florida, New Jersey, Alabama,  Minnesota,  Virginia,  Ohio, Wisconsin
and Kansas. Other leased offices are located in Canada,  United Kingdom,  France,  Singapore,  Germany,  Japan,
Netherlands,  Italy, Australia, Sweden, Norway, Spain, Switzerland,  China, Czech Republic, Hong Kong, Belgium,
Poland, Korea, Turkey, Mexico, Brazil and Finland.

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

The  following  discussion  and analysis is based on and should be read in  conjunction  with the
Company's  consolidated  financial statements,  including the related notes, contained in "Item 18 - "Financial
Statements."

Overview

Check Point develops,  markets and supports  Internet security  solutions for enterprise  networks and
service  providers  (Telcos,  ISPs, ASPs and MSPs),  including  Virtual  Private  Networks  (VPNs),  firewalls,
intranet and extranet  security.  The Company  delivers  solutions that enable secure,  reliable and manageable
business-to-business  communications  over Internet Protocol  networks,  including the Internet,  intranets and
extranets.

The Company's  business is subject to the effects of general global  economic  conditions and in
particular,  market  conditions in the  enterprise  security and VPN industry.  Recently,  these  economic and
market  conditions have reduced the high growth that the industry had experienced over the past several years.
As a result,  the market  value,  financial  results  and  capital  spending  levels of many of the  Company's
customers  have been  materially  adversely  affected.  The  Company  believes  that the impact of the current
general economic downturn in the industry may continue to adversely affect the Company's financial results.

The Company  has derived  substantially  all of its  revenues,  and expects to continue to derive the
vast  majority of its  revenues in the  foreseeable  future,  from sales of its  FireWall-1  and VPN-1  product
family, including related software subscriptions, support, technical services and training programs.

20

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No channel  partner  accounted  for more than 10% of the  Company's  revenues in 2000 or 2001.  During
2002 approximately 13% of the Company's revenues were derived from a single partner.

During each of the years 2000, 2001 and 2002, the Company  increased the number of its  distributors,
resellers, system integrators and managed service providers on a worldwide basis.

The following  table sets forth,  for the periods  indicated,  the  percentage  of total  consolidated
revenues derived from sales into each of the regions identified in the table:

|                               | Year Ended December 31,
|------------------------------ | -----------------------
|
|Americas                       | 48%                    
|Europe, Middle East and Africa | 36%                    
|Japan                          | 9%                     
|Asia Pacific                   | 7%                     

The
Company may experience declining operating margins as it expands its customer and
technical support organization. The Company also expects that it will experience
increasing competition and pricing pressure, which may result in lower operating margins.
In 2003, the Company intends to continue to make investments in the further development
and expansion of its sales and marketing organization, including the expansion of its
field organization both in the United States and in additional countries in Europe, Asia,
and Latin America. In addition, the Company expects to further expand its research and
development organization. As a result, operating margins may decrease from historical
levels. The amount and timing of these additional expenditures are likely to result in
fluctuations in operating margins.

# Critical Accounting
Policies:

The
Companys consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). These
accounting principles require management to make certain estimates, judgments and
assumptions based upon information available at the time that they are made, historical
experience and various other factors that are believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of the financial statements, as well as the
reported amounts of revenues and expenses during the periods presented.

In
many cases, the accounting treatment of a particular transaction is specifically dictated
by GAAP and does not require managements judgment in its application. There are also
areas in which managements judgment in selecting among available alternatives would
not produce a materially different result. The Companys management has reviewed
these critical accounting policies and related disclosures with the Audit Committee. See
Note 2 to the Companys Consolidated Financial Statements, which contain additional
information regarding the Companys accounting policies and other disclosures
required by GAAP.

Management
believes the significant accounting policies which affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements and which
are the most critical to aid in fully understanding and evaluating the Companys
reported financial results include the following:

| |  | Revenue
Recognition
| | - | -------------------

| |  | Allowance
for Doubtful Accounts and Sales Returns
| | - | -------------------------------------------------

| |  | Legal
Contingencies
| | - | -------------------

| |  | Income
taxes
| | - | ------------

21

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Revenue
Recognition

The
Company derives its revenues from three primary sources: (1) new software licenses (2)
software subscriptions and (3) services revenues, which include support, technical
services and training programs. The basis for new software license revenue recognition is
substantially governed by the provisions of Statement of Position No. 97-2, Software
Revenue Recognition, issued by the American Institute of Certified Public
Accountants (SOP 97-2).

According
to SOP 97-2, the Company recognizes revenue when: (1) persuasive evidence of an
arrangement for the license of software exists; (2) it delivers the products or perform
the services; (3) customer payment is deemed fixed or determinable and free of
contingencies or significant uncertainties; and (4) collection is probable.

Management
periodically considers arrangements regarding certain channel partners with payment terms
extending beyond the Companys customary payment terms not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is deferred and recognized
when payments become due from the channel partners, providing that all other revenue
recognition criteria have been met. See also note 2i to the Companys consolidated
financial statements.

Allowance
for Doubtful Accounts and Sales Returns

The
Company maintains an allowance for doubtful accounts for estimated losses, which may
result from the inability of its channel partners to make required payments. Management
exercises judgment as to its ability to collect outstanding receivables. Allowances for
doubtful accounts are made based upon a specific review of all significant outstanding
invoices. For those invoices not specifically reviewed, allowances for doubtful accounts
are made based upon the age of the receivable. In determining the allowance, the Company
analyzes its historical collection experience and current economic trends. If the
historical data used to calculate the allowances for doubtful accounts do not reflect the
future ability to collect outstanding receivables, additional allowances for doubtful
accounts may be needed and the future results of operations could be materially affected.

The
Company also records a provision for estimated sales returns in the same period as the
related revenues are recorded. This estimate is based on historical sales returns,
analysis of credit memo data and other known factors. If the historical data used to
calculate these estimates do not properly reflect future returns, additional provision for
sales returns may be required, and revenues in that period could be adversely affected.

Legal
Contingencies

As
discussed in Legal Proceedings in Item 8. Financial Information, a
trademark opposition is pending against the Company in the U.S. Trademark Office and, as
of December 31, 2002, management had accrued its estimate of the probable costs for the
resolution of this claim. This estimate was developed in consultation with outside counsel
handling the Companys defense in this matter and is based upon an analysis of
potential outcomes. Management does not believe this proceeding will have a material
adverse effect on the Companys consolidated financial position. Because of
uncertainties related to this matter, the provision is based on the best information
available at the time the accrual was made. As additional information becomes available,
management will reassess the potential liability related to the pending opposition and may
revise its estimate of the probable cost of this opposition. Such revisions in the
estimates of the probable cost could have a material impact on the Companys future
results of operations and financial position for a particular period.

Income
taxes

The
Company operates within multiple taxing jurisdictions and is subject to audits in these
jurisdictions. These audits can involve complex issues, which may require an extended
period of time to resolve. In managements opinion, adequate provisions for income
taxes have been made for all years. Although management believes that its estimates are
reasonable, no assurance can be given that the final tax outcome of these issues will not
be different than those, which are reflected in the Companys historical income tax
provisions. Such differences could have a material effect on the Companys income tax
provision and net income in the period in which such outcome occurs.

# Results of Operations:

The following table presents, for the
periods indicated, information concerning the Companys results of operations:

22

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|                                 | 2000 | 2001     | 2002
|-------------------------------- | ---- | -------- | ----
|
|Revenues:                        |      |          |     
|Products and licenses            |      | $326,998 |     
|Software subscriptions           |      | 65,273   |     
|Support, training and consulting |      | 33,012   |     
|                                 |      |          |     
|Total revenues                   |      | 425,283  |     
|                                 |      |          |     
|Operating expenses:              |     
|Cost of revenues                 |      | 35,265   |     
|Research and development, net    |      | 30,309   |     
|Sales and marketing              |      | 110,003  |     
|General and administrative       |      | 20,409   |     
|                                 |      |          |     
|Total operating expenses         |      | 195,986  |     
|                                 |      |          |     
|Operating income                 |      | 229,297  |     
|Financial income, net            |      | 29,147   |     
|                                 |      |          |     
|                                 |      |          |     
|Income before taxes on income    |      | 258,444  |     
|Taxes on income                  |      | 37,231   |     
|                                 |      |          |     
|Net income                       |      | $221,213 |     
|                                 |      |          |     

The following table presents, for the periods
indicated, information concerning the Companys results of operations as a percentage
of the Companys revenues.

|                                 | 2000 | 2001 | 2002
|-------------------------------- | ---- | ---- | ----
|Revenues:                        |      |      |     
|Products and licenses            | 77%  | 71%  | 60% 
|Software subscriptions           | 15   | 21   | 31  
|Support, training and consulting | 8    | 8    | 9   
|                                 |      |      |     
|Total revenues                   | 100  | 100  | 100 
|                                 |      |      |     
|Operating expenses:             
|Cost of revenues                 | 8    | 5    | 5   
|Research and development, net    | 7    | 6    | 7   
|Sales and marketing              | 26   | 21   | 24  
|General and administrative       | 5    | 4    | 4   
|                                 |      |      |     
|Total operating expenses         | 46   | 36   | 40  
|                                 |      |      |     
|Operating income                 | 54   | 64   | 60  
|Financial income, net            | 7    | 8    | 12  
|                                 |      |      |     
|                                 |      |      |     
|Income before taxes on income    | 61   | 72   | 72  
|Taxes on income                  | 9    | 11   | 12  
|                                 |      |      |     
|Net income                       | 52%  | 61%  | 60% 
|                                 |      |      |     

Revenues.
          The Companys revenues are derived from the sale of software products and
          related software subscriptions, support contracts, training and consulting. The
          Companys revenues were $425.3 million, $527.6 million and $427.0 million
          in 2000, 2001 and 2002, respectively. The increases in 2001 resulted primarily
          from the growth in the market for the Companys enterprise security
          products, expanded awareness of the Companys products, increased sales
          through resellers and the introduction of new versions of VPN-1, FireWall-1, and
          Provider-1. The decrease in revenues in 2002 was primarily a result of lower
          spending by the Companys customers, much of which was attributable to the
          global economic slow down, continuous weakness in the service providers sector
          and a more competitive market place. Revenues from sales to resellers and OEMs
          in the Americas represented 48%, 45% and 43% of revenues in 2000, 2001 and 2002,
          respectively.

Cost
of revenues. The Companys cost of revenues is comprised of the cost of freight,
media, software production, manuals and packaging, post-sale customer support, training,
consulting and license fees. Cost of revenues was $35.3 million, $26.6 million and $20.7
million for 2000, 2001 and 2002, respectively. The decrease in cost of revenues in 2002
was mainly attributable to a decrease in license payments to third parties and an increase
in the Companys operational efficiency.

23

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Research
and development,Research and development expenses consist primarily of salaries and
other related expenses for research and development personnel, as well as the cost of
facilities and depreciation of capital equipment. Net research and development expenses
were $30.3 million, $33.2 million and $28.7 million in 2000, 2001 and 2002,
respectively, representing 7%, 6% and 7% of revenues, respectively. The increase in
absolute dollars in 2001 was mainly attributable to recruiting skilled development
personnel and facility costs. The decrease in 2002 related both to lower compensation
expense and limited amounts being spent on special projects. The Company anticipates that
research and development expenditures in 2003 will remain at the same level as a
percentage of revenues.

Sales
and marketing. Sales and marketing expenses consist primarily of salaries,
commissions, advertising, trade shows, travel and other related expenses. Sales and
marketing expenses were $ 110.0 million, $109.1 million and $104.6 million in 2000, 2001
and 2002, respectively, representing 26%, 21% and 24% of revenues, respectively. The level
of expenses in 2001 was slightly lower than in 2000, mainly due to a reduction of
non-headcount related expenses. The decrease in 2002 was mainly due to lower expenses for
marketing activities. Despite the total expense decrease during the year, Sales expenses
(mostly headcount-related) increased due to Check Points sales force expansion in
new countries. The Company anticipates that sales and marketing expenditures in 2003 will
increase in absolute dollars, and may fluctuate as a percentage of revenues thereafter as
the Company continues to expand its sales and marketing activities.

General
and administrative. General and administrative expenses consist primarily of salaries,
outside professional fees and other related expenses. General and administrative expenses
were $20.4 million, $22.0 million and $18.0 million in 2000, 2001 and 2002,
respectively, representing 5%, 4% and 4% of revenues, respectively. The increase in
absolute dollars in 2001 was primarily due to the addition of staff and increased costs
associated with the expansion of the Companys business. The decrease in 2002 was
mainly due to lower non-headcount related expenses. The Company anticipates that in 2003,
general and administrative expenses will increase in absolute dollars.

Financial income, net.Financial income, net consists primarily of interest earned on
cash and cash equivalents, short and long term deposits and marketable securities.
Financial income, net was $29.1 million, $44.8 million, and $49.3 million in 2000, 2001
and 2002, respectively. The increase in these periods was primarily attributable to the
increase in the Companys cash and cash equivalents, short and long-term deposits and
marketable securities, all of which grew as a result of the Companys cash flow from
its operations. Interest income is heavily dependent on prevailing U.S. interest rates.

# Quarterly Results of
Operations.

The
following table sets forth certain unaudited consolidated statements of income data for
each of the quarters in 2001 and 2002, as well as the percentage of the Companys
revenues represented by each item. The unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements contained
herein and include all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of such information, when read in
conjunction with the Companys consolidated financial statements and notes thereto
appearing elsewhere in this annual report.

US$ in thousands, except per share
data:

|                                   | 2001 | 2002       
|---------------------------------- | ---- | -----------
|
|Revenues                           |      | $145,010   
|                                   |      |            
|Operating expenses:                |     
|Cost of revenues                   |      | 10,078     
|Research and development, net      |      | 9,320      
|Sales and marketing                |      | 30,382     
|General and administrative         |      | 6,538      
|                                   |      |            
|Total operating expenses           |      | 56,318     
|                                   |      |            
|Operating income                   |      | 88,692     
|Financial income, net              |      | 10,101     
|                                   |      |            
|Income before taxes on income      |      | 98,793     
|Taxes on income                    |      | 15,115     
|                                   |      |            
|Net income                         |      | $  83,678  
|Basic net earnings per share       |      | $      0.35
|                                   |      |            
|Shares used in computing basic net |     
|earnings per share                 |      | 236,945    
|                                   |      |            
|Diluted net earnings per share     |      | $      0.32
|                                   |      |            
|Shares used in computing diluted   |     
|net earnings per share             |      | 262,367    
|                                   |      |            

24

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|                              | 2001 | 2002
|----------------------------- | ---- | ----
|
|As a percentage of Revenues   |      |     
|Revenues                      | 100% | 100%
|                              |      |     
|Operating expenses:          
|Cost of revenues              | 7    | 5   
|Research and development, net | 6    | 6   
|Sales and marketing           | 21   | 20  
|General and administrative    | 5    | 5   
|                              |      |     
|Total operating expenses      | 39   | 36  
|                              |      |     
|Operating income              | 61   | 64  
|Financial income, net         | 7    | 9   
|                              |      |     
|Income before taxes on income | 68   | 73  
|Taxes on income               | 10   | 12  
|                              |      |     
|Net income                    | 58%  | 61% 
|                              |      |     

The
Companys future revenues and operating results are uncertain and may fluctuate from
quarter to quarter and from year to year due to a combination of factors, including the
timing of new product releases and acceptance of new products, the demand for the
Companys products, the volume and timing of orders and the ability to fulfill
orders, the level of product and price competition, the expansion of the Companys
sales and marketing organizations, the Companys ability to develop new and enhanced
products and control costs, the Companys ability to attract and retain key
technical, sales and managerial employees, the mix of distribution channels through which
products are sold, the mix of products and services sold, the growth in the acceptance of
and activity on the Internet and World Wide Web, the growth of intranets, seasonal trends
in customer purchasing, customer capital spending budgets, foreign currency exchange rates
and general economic factors. The Companys revenues are subject to seasonal
fluctuations related to the slowdown in spending activities in Europe for the quarter
ending September 30 and the increased activity related to the year-end purchasing
cycles of many end-users of the Companys products. The Company believes that it will
continue to encounter quarter-to-quarter seasonality that could result in proportionately
lower sales in the quarters ending September 30 and March 31 relative to sales
in the quarters ending June 30 and December 31, respectively.

The
Companys expense levels are based, in part, on expectations as to future revenues.
If revenue levels are below expectations, operating results are likely to be adversely
affected. Net income may be disproportionately affected by a reduction in revenues due to
the relatively small amount of the Companys expenses, which vary with its revenues.
As a result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as indications of
future performance. Due to all of the foregoing factors, it is likely that in some future
quarter the Companys operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Companys ordinary
shares would likely be materially adversely affected.

# Liquidity and Capital
Resources

The
Company has financed its operations through cash generated from operations. Cash and cash
equivalents and short term investments were $785.9 million, and long term interest bearing
investments were $528.9 million, totaling $ 1,314.8 million as of December 31, 2002,
as compared with cash and cash equivalents and short term investments of $ 487.0 million
and long term interest bearing investments of $541.4 million totaling $1,028.4 million as
of December 31, 2001. In 2003 the Company established a subsidiary in order to manage its
financial assets. This subsidiary currently holds the majority of the Companys
investments. The Company generated net cash from operations of $315.7 million, $347.2
million and $283.9 million in 2000, 2001 and 2002, respectively. Net cash from operations
for 2002 consisted primarily of net income plus increases in deferred revenues, employees
and payroll accruals, tax benefit related to exercise of stock options and depreciation
and amortization. Net cash from operations for 2001 consisted primarily of net income plus
increases in accrued expenses and other liabilities, depreciation and amortization and
decrease in trade receivables, offset by decreases in deferred revenues and employees and
payroll accruals. Net cash from operations for 2000 consisted primarily of net income plus
increases in deferred revenues, employee and payroll accruals and accrued expenses and
other liabilities, offset by increases in trade receivables and prepaid expenses.

The
Companys capital investments amounted to approximately $9.1 million, $9.7 million,
and $4.6 million in 2000, 2001 and 2002, respectively. Currently, the Companys
capital expenditures consist primarily of computer equipment and software for the
Companys research and development and technical service organization efforts as well
as increasing infrastructure to enable operation expansion. The Company does not
anticipate any change to this policy in the foreseeable future. As of December 31,
2002, the Company had no material commitments for capital expenditures.

25

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Net
cash provided by financing activities was approximately $25.8 million, $36.3 million
and $14.7 million in 2000, 2001 and 2002, respectively, primarily as a result of stock
options exercised. Excess cash is invested in marketable securities and bank deposits of
varying maturities, depending on projected cash needs for operations, capital purchases
and other business purposes.

The
Companys principal sources of liquidity consist of its current assets and long-term
investments (which aggregated $1,425.6 million as of December 31, 2002), its cash flow
from operations and its financial income, net. The Company believes that these sources of
liquidity will be sufficient to satisfy the Companys capital requirements for the
foreseeable future.

# Effective Corporate Tax
Rate

The
Companys effective tax rate was 14.4%, 15.6% and 16.2% in 2000, 2001 and 2002,
respectively. These low tax rates were mainly achieved as a result of the Companys
Approved Enterprise status under Israeli law of its production facilities in
Israel. The Companys production facilities have been granted the status of
Approved Enterprise, for its capital investment plans.

According
to the provisions of the Israeli law, the Company has elected to enjoy the
alternative plan benefits relating to these facilities, which grant tax
exemptions and a reduction of tax rates. Accordingly, the Companys income from its
Approved Enterprise 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. The tax benefits granted are
scheduled to gradually expire from 2002 through 2010. The period of tax benefits, for each
capital investment plan, is limited to the earlier of twelve years from commencement of
production, or fourteen years from receipt of approval.

Out of the Companys retained earnings as of December 31, 2002
          approximately $ 461.0 million were tax-exempt. If such retained 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 10%-25%) and an income tax liability of up to
          approximately $ 115.0 million would be incurred. The Company currently
          intends to reinvest the amount of its tax-exempt income and not to distribute
          such income as a dividend. Accordingly, no deferred income taxes have been
          provided with respect to this income. Distribution of other earnings derived
          from Approved Enterprise which were previously taxed at reduced tax
          rates, would not result in additional tax consequences to the Company.

If
the Company fails to meet the requirements of being an Approved Enterprise in
the future, the Company could be subject to the regular Israeli corporate tax rate of 36%
and could be required to refund a portion of the tax benefits already received. The law
prescribing the benefits will be terminated in May 2003 and therefore there is a doubt
regarding obtaining new benefits. There can be no assurance that such tax benefits will be
continued in the future at their current levels or otherwise.

On January 1, 2003 a comprehensive
tax reform took effect in Israel, which could adversely affect the Companys
effective tax rate. See Israeli Taxation, Foreign Exchange Regulation and Investment
Programs in Item 10  Additional Information.

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

The directors and executive officers
of the Company as at December 31, 2002 were as follows:

|                         |                                                      | 
|------------------------ | ---------------------------------------------------- | 
|
|Name                     | Position                                            
|Gil Shwed                | Chief Executive Officer and Chairman of the Board   
|Marius Nacht             | Senior Vice President and Vice Chairman of the Board
|Jerry Ungerman           | President                                           
|Eyal Desheh              | Chief Financial Officer                             
|Shlomo Kramer            | Director                                            
|Irwin Federman (1)(2)(3) | Director                                            
|David Rubner (2)         | Director                                            
|Ray Rothrock (1)(2)(3)   | Director                                            
|Alex Vieux               | Director                                            
|Tal Shavit               | Director                                            

26

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| | (1) | Member
of Compensation Committee
| | --- | --------------------------------

| | (2) | Member of
Audit Committee
| | --- | -------------------------

| | (3) | Outside
Director; see Outside and Independent Directors below in           this Item
6.
| | --- | -----------------------------------------------------------------------------------------

Gil
Shwed, a co-founder of the Company, is Chairman of the Board of the Company, a position he
has held since July 1998, and is also the Companys Chief Executive Officer and a
Director of the Company, both positions he has held since the Companys inception in
July 1993. Mr. Shwed also served as President of the Company from its inception until
2001. Mr. Shwed is also a Director of Backweb Technologies.

Marius
Nacht, a co-founder of the Company, has served as the Companys Senior Vice President
and Vice Chairman of the Board since the beginning of 2001. Mr. Nacht served as the
Companys Senior Vice President from January 1999 until the beginning of 2001. Mr.
Nacht served as the Companys Vice President of International Operations from
September 1995 until December 1998, and from July 1993 to September 1995 Mr. Nacht served
as a Vice-President of the Company. Mr. Nacht has served as a director of the Company
since its inception in July 1993. Mr. Nacht received a Masters degree in Electrical
Engineering and Communication Systems from Tel Aviv University, as well as a B.S. in
Physics and Mathematics from Hebrew University of Jerusalem.

Jerry
Ungerman was appointed President of the Company in 2001 and has global responsibility for
sales, marketing, business development, product management and technical services. He
served as Executive Vice President from 1998 until 2000. He began his career with IBM in
1967 and from July 1971 to October 1998, Mr. Ungerman held a number of senior management
positions with Hitachi Data Systems Corp., a provider of computer networking and data
storage solutions for computing environments. Mr. Ungerman holds a B.S.B. in business from
the University of Minnesota and is a director of Serena Software.

Eyal
Desheh has been Chief Financial Officer of the Company since May 2000. He was Chief
Financial Officer for Scitex Corporation Ltd., a company engaged in digital imaging for
graphics communications, where he was responsible for all the major finance functions,
investor relations, risk management, mergers and acquisitions and legal affairs. Before
joining Scitex, he served as Vice President for business development and strategy at
Bezeq, The Israeli Telecommunications Corp. Ltd., Deputy Chief Financial Officer of Teva
Pharmaceuticals Ltd., Chief Executive Officer of H.L. Financial Services Ltd. and numerous
positions in Bank Hapoalim. Mr. Desheh holds a B.A. in Economics and an M.B.A in Finance,
both from Hebrew University of Jerusalem.

Shlomo
Kramer, a co-founder of the Company, served as the Companys Executive Vice President
from October 1996 until December 1998, and served as Vice President of Product and
Business Development from October 1995 to October 1996. From July 1993 to October 1995,
Mr. Kramer served as a Vice President of the Company. Mr. Kramer has served as a director
of the Company since its inception in July 1993. Mr. Kramer is the founder and CEO of
WebCohort Inc., a software security company. Mr. Kramer received a Masters degree in
Computer Science from Hebrew University of Jerusalem as well as a B.S. in Mathematics and
Computer Science from Tel Aviv University.

Irwin
Federman has served as a director of the Company since November 1995. Mr. Federman has
been a General Partner of U.S. Venture Partners, a venture capital firm, since April 1990.
From 1988 to 1990, he was a Managing Director of Dillon Read & Co., an investment
banking firm, and a general partner in its venture capital affiliate, Concord Partners.
Mr. Federman is a director of Centillium Communications, Inc., Netro Corporation, Nuance
Communications, Inc., SanDisk Corp., and a number of private companies. Mr. Federman
received a B.S. in Economics from Brooklyn College.

Ray
Rothrock has served as a director of the Company since November 1995. Mr. Rothrock has
been a member of Venrock Associates, a venture capital firm, since 1988 and a General
Partner of Venrock Associates 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 as a director of the Company since June 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 firm. Prior to
starting this company, 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 holds a B.S. degree in engineering from Queen Mary College,
University of London, and an M.S. degree from Carnegie Mellon University. Mr. Rubner was a
recipient of the Industry Prize in 1995 and serves on the boards of directors of a number
of companies, and is a member of the Board of Trustees of Bar Ilan University and Shaare
Zedek hospital.

27

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Alex
Serge Vieux is Chairman, CEO and founder of DASAR Brothers, Inc., which he founded in 1990
and the owner of ETRE, the European Technology Roundtable Exhibition. He is a member of
the board of several public and private technology companies including BVRP software,
Cibox, Commerce One, Kyriba, madge, Thrunet and White Pajama. Mr. Vieux has served as a
senior advisor to both government and industry and was lately named, for the second year
in a row, one of the most influential people in the European technology community. Mr.
Vieux is currently a visiting professor at the French University Paris Dauphine, where he
is teaching telecommunications in the United States. Mr. Vieux is a graduate of the
Institut dEtudes Politiques in Paris and HEC. He also holds a law degree from the
Université de Paris II-Assas and an M.B.A. from Stanford University, where he was a
Fulbright Scholar.

Dr.
          Tal 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 focus is on consultation to R&D upgrade in both Israeli companies and in
          American companies with Israeli-based R&D centers. 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 and a redefining of management roles in order to meet market changes.

Except
for Messrs. Shwed, Nacht and Kramer, as of February 28, 2003, none of the directors or
executive officers of the Company owned more than one percent of the outstanding ordinary
shares. For information as to the share ownership of Messrs. Shwed, Nacht and Kramer, see
Item 7  Major Shareholders and Related Party Transactions.

# Board Composition

The
Companys Articles of Association provide for a Board consisting of not less than six
nor more than twelve members. Each director (other than an outside director, as explained
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 and serves at the
discretion of the Board of Directors. Each of the Companys officers and directors,
other than non-employee directors, devotes substantially all of his business time to the
affairs of the Company. There are no family relationships among any of the directors,
officers or key employees of the Company.

The
Articles of Association of the Company provide that any director may, by written notice to
the Company, appoint another person to serve as an alternate director and may cancel such
appointment. Any person, whether or not already a director, may act as an alternate and
the same person may act as the alternate for several directors. An alternate has the
number of votes equivalent to the number of the directors who appointed him. The term of
appointment of an alternate director may be for one meeting of the Board or for a
specified period or until notice is given of the cancellation of the appointment. To the
Companys knowledge, no director currently intends to appoint any other person as an
alternate director.

The
Companys Articles of Association provide that the Board of Directors may delegate
all of its powers to committees of the Board of Directors, as it deems appropriate,
subject to the provisions of Israeli law. The Board of Directors has appointed a
Compensation Committee and an Audit Committee.

# Outside and Independent
Directors

In
accordance with Israels Companies Law and the regulations promulgated under the
Companies Law, the Company must have two outside directors. The outside directors must
meet certain statutory requirements of independence. The term of office of an outside
director is three years. An outside director can be removed from office only under very
limited circumstances. Both of the outside directors must serve on the Companys
statutory audit committee, and at least one outside director must serve on each committee
of the Board of Directors. The Company has appointed Irwin Federman and Ray Rothrock as
its outside directors under Israels Companies Law. In addition, the NASDAQ National
Market requires that companies listed thereon must have at least three independent
directors. The current independent directors of the Company are Irwin Federman, Ray
Rothrock and David Rubner.

28

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# Audit Committee

The
Israeli Companies Law requires public companies to appoint an audit committee. The
responsibilities of the audit committee include identifying irregularities in the
management of the companys business and approving related party transactions as
required by law. An audit committee must consist of at least three directors, including
both of the outside directors. The Chairman of the Board of Directors, any director
employed by or otherwise providing services to the company, and a controlling shareholder
or any relative of a controlling shareholder may not be a member of the audit committee.
An audit committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two outside
directors are serving as members of the audit committee and at least one of the outside
directors was present at the meeting in which an approval was granted. In addition, the
NASDAQ National Market requires the Company to establish an audit committee of at least
three members, comprised solely of independent directors. The responsibilities of the
audit committee under the NASDAQ rules include evaluating the independence of a
companys outside auditors. The Companys Audit Committee satisfies both the
Israeli law and the NASDAQ National Market requirements. The current members of the
Companys audit committee are Irwin Federman, Ray Rothrock and David Rubner.

# Compensation Committee

The
Companys Compensation Committee reviews and, as required, approves policies under
which compensation is awarded to the Companys executive officers and key managers
and oversees the administration of the Companys executive compensation programs,
including the Companys stock option plans. The current members of this committee are
Irwin Federman and Ray Rothrock.

# Compensation of
Directors and Officers

The
aggregate accrued compensation of all 10 persons as a group who served in the capacity of
director or executive officer during the year ended December 31, 2002 was
approximately U.S. $3.5 million. This does not include amounts expended by the Company for
business travel, professional and business association dues and expenses reimbursed to
officers. Except for severance payments mandated by Israeli law for all employees employed
in Israel, the Company does not have any agreements with those directors who are also
officers of the Company providing for benefits upon termination of employment. The
Companys directors who are officers will not receive compensation for serving as
directors in 2003; the Companys directors who are not officers will receive
compensation for serving as directors in 2003. From time to time, the Company grants
options under its stock option plans (described below) to its executive officers and
directors. As of February 23, 2003, the Companys executive officers and directors
held options to purchase an aggregate of 13,467,500 shares under the Companys stock
option plans. The exercise prices of these options range between $2.65 and $79.79, and
their expiration dates range between July 2004 and July 2010.

Stock
Options

Israel
Stock Option Plan

The
Companys 1996 Israel Stock Option Plan (the 1996 Israel Plan) was
adopted by the Board of Directors on April 12, 1996 and subsequently restated, most
recently in February 2003. The 1996 Israel Plan authorizes the issuance of up to
66,386,176 ordinary shares. As of February 23, 2003, 11,390,472 ordinary shares had been
issued under the 1996 Israel Plan, options to purchase 20,003,183 ordinary shares
were outstanding (including options incorporated from previous grants to employees in
Israel prior to the adoption of the 1996 Israel Plan) and 34,992,521 shares remained
available for future grant. The exercise prices range between $0.64 and $86.54. Starting
October 2002, $0.60 is added to the exercise price of all options granted thereafter. The
1996 Israel Plan is administered by the Board of Directors, which has broad discretion,
subject to certain limitations, to determine the persons entitled to receive options, the
terms and conditions on which options are granted and the number of shares subject to each
grant. Options under the 1996 Israel Plan are issued to Israeli employees of the Company
and, under subsidiary plans of the 1996 Israel Plan that are tailored for various other
jurisdictions worldwide, to employees of the Companys subsidiaries in other
countries outside the United States. In accordance with the terms and conditions imposed
by Section 102 of the Israel Income Tax Ordinance, grantees that receive options
under the 1996 Israel Plan (excluding grantees who previously received options that
were incorporated upon the adoption of the 1996 Israel Plan, and those who are not
employees or controlling shareholders of the Company) are afforded certain tax benefits.
The Company has elected the benefits available under the capital gains
alternative. There are various conditions that must be met in order to qualify for these
benefits, including registration of the options in the name of a trustee (the
Trustee) for each of the employees who is granted options. Each option, and
any ordinary shares acquired upon the exercise of the option, must be held by the Trustee
for a period commencing on the date of grant and ending no earlier than 24 months after
the end of the tax year in which the option was granted and deposited in trust with the
Trustee. The 1996 Israel Plan provides for the options granted under the Plan to have
a maximum exercise period of seven years from the date of grant. Options granted under the
1996 Israel plan are generally exercisable over five years. Options that are not exercised
will become available for further grant by the Board under the 1996 Israel Plan.

29

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United
States Stock Option Plan

The
Companys 1996 United States Stock Option Plan (the 1996 U.S. Plan) was
adopted by the Board of Directors on April 12, 1996 and was approved by the shareholders
as the successor to the Companys 1995 Stock Option Plan (the 1995 Plan).
The 1996 U.S. Plan authorizes the issuance of up to 92,679,264 ordinary shares. As of
February 23, 2003, 34,300,643 ordinary shares have been issued under the 1996 U.S. Plan,
options to purchase 8,170,788 ordinary shares were outstanding (including options
incorporated from the 1995 Plan) and options to purchase 50,207,833 ordinary shares
remained available for future grant. Ordinary shares subject to outstanding options,
including options granted under the 1995 Plan, which expire or terminate prior to
exercise, will be available for future issuance under the 1996 U.S. Plan. Starting October
2002, $0.60 is added to the exercise price of all options granted thereafter. Options
granted under the 1996 U.S. plan are generally exercisable over four years.

Under
the 1996 U.S. Plan, employees (including officers) and independent consultants may, at the
discretion of the plan administrator, be granted options to purchase ordinary shares at an
exercise price not less than 85% of the fair market value of such shares on the grant date
(the Company does not intend to issue options at an exercise price of less than fair
market value). Non-employee members of the Board of Directors will be eligible solely for
automatic option grants under the 1996 U.S. Plan.

The
Compensation Committee of the Board administers the 1996 U.S. Plan. The Compensation
Committee has complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of any granted
option as either an incentive option or a non-statutory option under U.S. Federal tax
laws, the vesting schedule to be in effect for each option grant and the maximum term for
which each granted option is to remain outstanding. In no event, however, may any one
participant in the 1996 U.S. Plan acquire ordinary shares under the 1996 U.S. Plan in
excess of 3,000,000 shares, exclusive of any option grants received prior to January 1,
1996.

The
exercise price for options granted under the 1996 U.S. Plan may be paid in cash. Options
may also be exercised on a cashless basis through the same-day sale of the purchased
shares. The Compensation Committee may also permit the optionee to pay the exercise price
through a promissory note payable in installments over a period of years. The amount
financed may include any U.S. Federal or state income and employment taxes incurred by
reason of the option exercise.

The
Compensation Committee has the authority to effect, from time to time, the cancellation of
outstanding options under the 1996 U.S. Plan in return for the grant of new options for
the same or a different number of option shares with an exercise price per share based
upon the fair market value of the ordinary shares on the new grant date.

In
the event the Company is acquired by merger, consolidation or asset sale, the ordinary
shares subject to each option outstanding at the time under the 1996 U.S. Plan will
terminate to the extent not assumed by the acquiring entity. The Compensation Committee
also has discretion to provide for the acceleration of one or more outstanding options
under the 1996 U.S. Plan and the vesting of shares subject to outstanding options upon the
occurrence of certain hostile tender offers.

The
Board may amend or modify the 1996 U.S. Plan at any time. The 1996 U.S. Plan will
terminate on April 11, 2006, unless terminated sooner by the Board.

Stock
Option Grants to Board Members

Under
the automatic grant program, each individual joining the Board as a non-employee director
receives at that time, an automatic option grant for up to 30,000 ordinary shares, vesting
over four years. In addition, at each annual shareholders meeting, each non-employee
director who is to continue to serve as a non-employee director after such annual meeting
is automatically granted a fully vested option to purchase up to an additional 18,000
ordinary shares, provided that the director has served as a non-employee director for at
least six months prior to the date of such annual meeting. The exact number of ordinary
shares covered by the options to be granted to each non-employee director is determined by
the other directors in office immediately prior to the date of his or her election or
appointment, or the date of the annual meeting, as the case may be. Each option has an
exercise price not less than the fair market value of the ordinary shares on the automatic
grant date and a maximum term of ten years, subject to earlier termination following the
optionees cessation of Board service.

30

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# Employee Stock Purchase
Plan

On
November 24, 1996, the Company adopted an Employee Stock Purchase Plan (the Purchase
Plan), which was ratified by the Companys shareholders. Under the Purchase
Plan, 6,000,000 ordinary shares were authorized for issuance. As of February 28, 2003,
1,017,342 ordinary shares have been issued under the Purchase Plan. The Purchase Plan,
which is intended to qualify under Section 423 of the United States Internal Revenue
Code, is implemented by six-month offerings with purchases occurring at six-month
intervals in February and July. The Compensation Committee of the Board administers the
Purchase Plan. Employees of the Company and some of its subsidiaries are eligible to
participate if they are employed for more than 20 hours per week. The Purchase Plan
permits eligible employees to purchase ordinary shares through payroll deductions, which
may not exceed 15% of an employees compensation, nor more than 1,250 shares per
participant on any purchase date. The price of the ordinary shares purchased under the
Purchase Plan will be 85% of the lower of the fair market value of the ordinary shares at
the beginning of the six-month offering period or on the semi-annual purchase date.
Employees may terminate their participation in the Purchase Plan at any time during the
offering period, and participation ends automatically on termination of employment with
the Company. Each outstanding purchase right will be exercised immediately prior to a
merger or consolidation of the Company. The Board may amend or terminate the Purchase Plan
immediately after the close of any purchase date. However, the Board may not, without
shareholders approval, materially increase the number of ordinary shares available for
issuance, alter the purchase price formula so as to reduce the purchase price payable for
ordinary shares, or materially modify the eligibility requirements for participation or
the benefits available to participants. The Purchase Plan terminates by its terms in July
2006.

# Change of Control
Arrangements

The
Compensation Committee of the Board of Directors, as administrator of the 1996 Plan, has
the authority to provide for accelerated vesting of the ordinary shares subject to
outstanding options held by the executive officers in connection with certain changes in
control of the Company or the subsequent termination of the officers employment
following the change in control event.

# Employees

As
of December 31, 2002, the Company had 1,203 employees, of whom 311 were engaged in
research, development, and quality assurance, 541 were engaged in marketing and sales, 200
were engaged in customer support and operations, and 151 were engaged in Information
systems, administration and finance. From time to time, the Company also engages a limited
number of consultants, subcontractors and temporary help. As of December 31, 2002, the
Company had 61 people of the abovementioned nature. The Company believes that its
relations with its employees are satisfactory.

As
of December 31, 2002, the Company employs 503 people in Israel, 496 people in the United
States and 204 people in the rest of the world. With respect to its employees in Israel,
the Company is subject to various Israeli labor laws and labor practices, and to
administrative orders extending certain provisions of collective bargaining agreements
between the Histadrut (Israels General Federation of Labor) and the Coordinating
Bureau of Economic Organizations (the Israeli federation of employers organizations)
to all private sector employees. For example, mandatory cost of living adjustments, which
compensate Israeli employees for a portion of the increase in the Israeli consumer price
index, are determined on a nationwide basis. Israeli law also requires the payment of
severance benefits upon the termination, retirement or death of an employee. The Company
meets this requirement by contributing on an ongoing basis towards managers
insurance funds that combine pension, insurance and, if applicable, severance pay
benefits. In addition, Israeli employers and employees are required to pay specified
percentages of wages to the National Insurance Institute, which is similar to the United
States Social Security Administration. Other provisions of Israeli law or regulation
govern matters such as the length of the workday, minimum wages, other terms of employment
and restrictions on discrimination. The Company is subject to the labor laws and
regulations of other jurisdictions in the world where it has employees.

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

The
following table sets forth certain information regarding ownership of the Companys
ordinary shares as of February 13, 2003 for each person who is known by the Company to own
beneficially more than five percent of the Companys outstanding ordinary shares:

31

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|Name of Ten Percent
Shareholders, Officers and Directors | Amount Beneficially
Owned | Percentage of
Class
|-------------------------------------------------------- | ------------------------- | -------------------
|
|Gil Shwed (1)                                            | 28,198,995                | 11.5%              
|Franklin Templeton Investments (2)                       | 27,013,630                | 10.9%              
|Marius Nacht (1)                                         | 26,241,795                | 10.7%              
|Shlomo Kramer (1)                                        | 13,798,650                | 5.6%               

| | (1) | The
amount includes ordinary shares owned by each of the above, directly or
          indirectly and options immediately exercisable or that are exercisable
          within 60 days from December 31, 2002. The exercise price of some of these
          options is higher than the current Check Points share market price.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Based
on Franklin Templeton Investment 13G filing.
| | --- | --------------------------------------------------

The Company is not directly or
indirectly controlled by another corporation or by any foreign government. The
Companys major shareholders do not have different voting rights with respect to
their shares.

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

| | Consolidated
Financial Statements
| | ---------------------------------

The
Companys Consolidated Financial Statements included in this Annual Report on Form
20-F beginning on page F-1 are hereby incorporated into this Annual Report by reference.

| | Dividend
Policy
| | ---------------

The
Company anticipates that it will retain any future earnings to support operations and to
finance the growth and development of its business. In addition, tax-exempt income
attributable to the Companys status as an Approved Enterprise under
Israeli tax law can be distributed to shareholders without subjecting the Company to
taxes only upon the complete liquidation of the Company. The Company currently intends to
reinvest the amount of its tax-exempt income and not to distribute such income as a
dividend.

| | Legal
Proceedings
| | -----------------

On
June 20, 2001, the Company, through its subsidiary in France received a formal request
for information from the Directorate-General for Competition of the European Commission
(the Commission) regarding a complaint submitted by Stonesoft Corporation, a
Finnish company alleging anti-competitive behavior, and in particular, alleging abuse of
a dominant position held by the Company, and requesting that the Commission investigate
the allegations and order injunctive relief. The Company responded to the Commission in a
timely manner both to this and a subsequent request for information received on November
6, 2001, and contested the existence of a dominant position or of infringing behavior on
its part. In, or about, April of 2002, Check Point and the Commission reached an
agreement whereby Check Point would affirm its commitment to adhere to the European
competition rules. In accordance with this undertaking, the matter was resolved.

On
July 5, 1996, Checkpoint Systems, Inc. (CSI) a manufacturer of theft
prevention devices for retail stores filed an action alleging trademark infringement and
unfair competition against the Company in the United States District Court for the
District of New Jersey. CSI sought to enjoin the Company from using the Check Point name
in connection with the Companys products and services. The District Court issued
its opinion in the Companys favor on July 12, 2000, and the District Courts
decision was affirmed on appeal during 2001. In 2002 a trademark opposition was filed by
CSI with the Patent and Trademark Office. As of December 31, 2002, management had accrued
its estimate of the probable costs for the resolution of this claim.

32

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

The Companys ordinary shares
are traded publicly on the NASDAQ National Market under the symbol CHKP.

The following table lists the high
and low closing sale prices for the ordinary shares for the periods indicated as reported
by the NASDAQ National Market:

|                                                                                                                                                                                                                                                                       | High                                                                                                                                      | Low                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------
|199819992000200120022001
First Quarter 
Second Quarter 
Third Quarter 
Fourth Quarter 2002
First Quarter 
Second Quarter 
Third Quarter 
Fourth Quarter Most recent six months
September 2002 
October 2002 
November 2002 
December 2002 
January 2003 
February 2003 | $7.96 
34.85 
113.33
110.58
49.47 
 
113.33
80.16 
52.70 
44.95 
 
49.47 
29.80 
19.03 
18.00 
 
18.75 
17.34 
17.80 
18.00 
16.00 
15.60 | $2.17
 4.46
 30.54
 20.70
10.37
 42.56
39.50
19.56
20.20
27.03
12.00
10.37
12.62
13.57
12.62
13.56
12.83
13.35
13.55

On
March 25, 2003, the last reported sale price of the Companys Ordinary shares on the
NASDAQ National Market was $15.12 per share. According to the Companys transfer
agent, as of March 17 2003, there were 328 holders of record of the Companys
ordinary Shares.

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

The
objectives and purposes of the Company are to engage in any lawful activity everywhere in
the world. In connection therewith, Check Point develops, markets and supports Internet
security solutions for enterprise networks, and service providers (Telcos, ISPs, ASPs and
MSPs), including Virtual Private Networks, firewalls, intranet and extranet security. The
Company delivers solutions that enable secure, reliable and manageable
business-to-business communications over Internet Protocol networks including the
Internet, intranets and extranets.

The
following is a summary of the material provisions of the Companys Articles of
Association and related provisions of Israeli corporate law. This summary is qualified in
its entirety by reference to the complete text of the Articles of Association; see
Item 4  Information on the Company  General and Item 19
 Exhibits.

| | Description
of Shares
| | ---------------------

The
Companys 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. The deferred shares are not entitled to any rights other than the
right to receive their nominal value upon liquidation of the Company.

33

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| | Description
of Ordinary Shares
| | ------------------------------

All
issued and outstanding ordinary shares are validly issued, fully paid and non-assessable.
The ordinary shares do not have pre-emptive rights. Neither the Memorandum of Association,
the Articles of Association of the Company nor the laws of Israel restrict in any way the
ownership or voting of ordinary shares by non-residents of Israel, except with respect to
subjects of counties which are in a state of war with Israel.

| | Dividend
and Liquidation Rights
| | -------------------------------

Subject
to the rights of the holders of shares with preferential or other special rights which may
be authorized in the future, holders of ordinary shares are entitled to receive dividends
out of assets legally available therefore and, in the event of the winding up of the
Company, to share ratably in all assets remaining after payment of liabilities, subject to
applicable law.

| | 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. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that may be
authorized in the future.

An
annual general meeting is to be held once every calendar year at such time (within a
period of not more than 15 months after the last preceding annual general meeting) and at
such place, either within or outside of Israel, as may be determined by the Board of
Directors. The quorum required for a general meeting of shareholders consists of at least
two shareholders present in person or by proxy and holding, or representing, more than 50%
of the voting rights of the issued share capital. A meeting adjourned for lack of quorum
shall be adjourned to the same day in the next week at the same time and place, or to such
time and place as the chairman may determine with the consent of the holders of a majority
of the voting power represented at the meeting in person or by proxy and voting on the
question of adjournment. If at such reconvened meeting a quorum is not present within one
half hour from the time appointed for holding the meeting, any two shareholders present in
person or by proxy will constitute a quorum, regardless of the number of shares
represented.

An
ordinary resolution (such as resolution for the election of directors and the appointment
of auditors) shall be deemed adopted if approved by the holders of a majority of the
voting power represented at the meeting, in person or by proxy, and voting thereon. A
special or extraordinary resolution (such as a resolution amending the Memorandum of
Association or Articles of Association) shall be deemed adopted if approved by the holders
of not less than 75% of the voting power represented in person or by proxy at the meeting
and voting thereon.

Israels
Companies Law requires that the shareholders approve certain transactions, actions and
arrangements. Such transactions, actions and arrangements include: (i) arrangements with a
director as to the term of office or compensation; (ii) certain extraordinary transactions
(as defined in the Companies Law); and (iii) any action or extraordinary transaction
involving a director or officer in which a majority of the Board or the statutory audit
committee has a personal interest. See Approval of Certain Transactions; Obligations
of Directors, Officers and Shareholders below in this Item 10.

| | Transfer
of Shares and Notices
| | ------------------------------

Fully
paid ordinary shares are issued in registered form and, subject to applicable securities
laws, may be transferred freely. Each shareholder of record is entitled to receive at
least 21 days prior notice of shareholder meetings. For purposes of determining the
shareholders entitled to notice and to vote at such meeting, the Board of Directors may
fix the record date which shall be not more than fourty nor less than four days prior to
the date of the meeting.

| | Election
of Directors
| | ---------------------

The
ordinary shares do not have cumulative voting rights in the election of directors. Thus,
the holders of ordinary shares conferring more than 50% of the voting power have the power
to elect all the directors, to the exclusion of the remaining shareholders.

| | Transfer
Agent and Registrar
| | ----------------------------

American Stock Transfer & Trust
Company is the Transfer Agent and Registrar for the ordinary shares.

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| | Description
of Preferred Shares
| | -------------------------------

The
Company has 5,000,000 preferred shares authorized. 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 such 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. The issuance of preferred shares may have the effect
of delaying, deferring or preventing a change in control of the Company without further
action by the shareholders. For example, the Board of Directors could issue preferred
shares with voting and conversion rights, which may adversely affect the voting power of
the holders of ordinary shares, including the loss of voting control to others. The
Company currently has no plans to issue any preferred shares.

| | Provisions
Affecting a Potential Change of Control
| | --------------------------------------------------

The
Companys Articles of Association provide that the Company may not engage in any
business combination with an interested shareholder for a period of three years following
the date that such shareholder became an interested shareholder, unless: (a) prior to such
date, the Board of Directors approved either the business combination or the transaction
that resulted in the shareholders becoming an interested shareholder; or (b) upon
consummation of the transaction that resulted in the shareholders becoming an
interested shareholder, the interested shareholder owned at least 75% of the voting shares
of the Company outstanding at the time the transaction commenced. A business combination
includes: (i) any merger or consolidation involving the Company and the interested
shareholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of
the assets of the Company in a transaction involving the interested shareholder;
(iii) subject to certain exceptions, any transaction that results in the issuance or
transfer by the Company of any shares of the Company to the interested shareholder;
(iv) any transaction involving the Company that has an effect of increasing the
proportionate share of the shares of any class or series of the Company beneficially owned
by the interested shareholder; or (v) the receipt by the interested shareholder of
the benefit of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the Company. In general, the Articles of Association define an
interested shareholder as any entity or person beneficially owning 15% or more of the
outstanding voting shares of the Company and any entity or person affiliated with,
controlling or controlled by such entity or person.

| | Approval
of Certain Transactions; Obligations of Directors, Officers and Shareholders
| | -------------------------------------------------------------------------------------

The
Israeli Companies Law codifies the fiduciary duties that office holders, including
directors and executive officers, owe to a company. An office holders fiduciary
duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes
avoiding any conflict of interest between the office holders position in the company
and such persons personal affairs, avoiding any competition with the company,
avoiding exploiting any corporate opportunity of the company in order to receive personal
advantage for such person or others, and revealing to the company any information or
documents relating to the companys affairs which the office holder has received due
to his or her position as an office holder. Each person listed in the table that appears
at the beginning of Item 6  Directors, Senior Management and Employees
is an office holder of the Company.

Under
the Israeli Companies Law, all arrangements as to compensation of office holders who are
not directors require approval of the board of directors unless the Articles of
Association provide otherwise. Arrangements regarding the compensation of directors also
require audit committee and shareholder approval. The Israeli Companies Law requires that
an office holder promptly disclose any personal interest that he or she may have and all
related material information known to him or her, in connection with any existing or
proposed transaction with the company. In addition, the office holder must also generally
disclose any personal interest held by the office holders spouse, siblings, parents,
grandparents, descendants, spouses descendants and the spouses of any of the
foregoing, or by any corporation in which the office holder is a five percent or greater
shareholder, director or general manager or in which he or she has the right to appoint at
least one director or the general manager. An extraordinary transaction is defined as a
transaction not in the ordinary course of business, a transaction that is not on market
terms, or a transaction that is likely to have a material impact on the companys
profitability, assets or liabilities.

In
the case of a transaction that is not an extraordinary transaction, after the office
holder complies with the above disclosure requirements, only board of directors
approval is required unless the Articles of Association of the company provide otherwise.
Such approval must determine that the transaction is not adverse to the companys
interest. If the transaction is an extraordinary transaction, then in addition to any
approval required by the Articles of Association, it also must be approved by the audit
committee and by the board of directors and, under specified circumstances, by a meeting
of the shareholders. An Israeli company whose shares are publicly traded shall not be
entitled to approve such a transaction unless, at the time the approval was granted, two
members of the audit committee were outside directors and at least one of them was present
at the meeting at which the audit committee decided to grant the approval. An office
holder who has a personal interest in a matter that is considered at a meeting of the
board of directors or the audit committee generally may not be present at this meeting or
vote on this matter.

35

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The
Israeli Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which includes a shareholder that holds 25% or more of
the voting rights if no other shareholder owns more than 50% of the voting rights in the
company. Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the terms of compensation of a
controlling shareholder who is an office holder, require the approval of the audit
committee, the board of directors and the shareholders of the company. Shareholder
approval must either include at least one-third of the disinterested shareholders who are
present, in person or by proxy, at the meeting or, alternatively, the total shareholdings
of the disinterested shareholders who vote against the transaction must not represent more
than one percent of the voting rights in the company.

Under
the Israeli Companies Law, a shareholder has a duty to act in good faith towards 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:

| |  | any
amendment to the Articles of Association;
| | - | ---------------------------------------------

| |  | an
increase of the companys authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | 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 does not describe the
substance of this duty.

| | Indemnification
of Directors and Officers; Limitations on Liability
| | -------------------------------------------------------------------

Israeli
law permits a company to insure an office holder in respect of liabilities incurred by him
or her as a result of the breach of his or her duty of care to the company or to another
person, or as a result of the breach of his or her fiduciary duty to the company, to the
extent that he or she acted in good faith and had reasonable cause to believe that the act
would not prejudice the company. A company can also insure an office holder for monetary
liabilities as a result of an act or omission that he or she committed in connection with
his or her serving as an office holder. Moreover, a company can indemnify an office holder
for (a) monetary liability imposed upon him or her in favor of other persons pursuant to a
court judgment, including a compromise judgment or an arbitrators decision approved
by a court, and (b) reasonable litigation expenses, including attorneys fees,
actually incurred by him or her or imposed upon him or her by a court, in an action, suit
or proceeding brought against him or her by or on behalf of the company or other persons,
or in connection with a criminal action which does not require criminal intent in which he
or she was convicted, in each case in connection with his or her activities as an office
holder. The Companys Articles of Association allow for insurance and indemnification
of office holders to the fullest extent permitted by law. The Company has entered into
indemnification, insurance and exculpation agreements with its directors and senior
officers, following shareholder approval of these agreements. The Company has
directors and officers liability insurance covering the officers and directors
of the Company and its subsidiaries for certain claims.

| | Borrowing
Power: Amendment of Rights of Ordinary Shares
| | -------------------------------------------------------

The
Companys Articles of Association grant broad powers to the Board of Directors to
authorize the Company to borrow funds, repay borrowings, make guarantees and grant
security interests in borrowings. The Companys Articles of Association provide that
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.

| | Israeli
Taxation, Foreign Exchange Regulation and Investment Programs
| | ---------------------------------------------------------------------

The
following is a summary of the material Israeli tax consequences, Israeli foreign exchange
regulations and certain Israeli government programs affecting the Company. To the extent
that the discussion is based on new tax or other legislation that has not been subject to
judicial or administrative interpretation, there can be no assurance that the views
expressed in the discussion will be accepted by the tax or other authorities in question.
The discussion is not intended, and should not be construed, as legal or professional tax
advice and is not exhaustive of all possible tax considerations.

36

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Tax Reform

On
January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to the reform,
resident companies are subject to Israeli tax on income accrued or derived in Israel or
abroad. In addition, the concept of controlled foreign corporation was
introduced according to which an Israeli company may become subject to Israeli taxes on
certain income of a non-Israeli subsidiary if the subsidiarys primary source of
income is passive income (such as interest, dividends, royalties, rental income or capital
gains). The tax reform also substantially changed the system of taxation of capital gains.

Statutory Corporate TaxRate

Israeli
companies are generally subject to corporate tax at the rate of 36% of their taxable
income. However in the Companys case, the rate is currently effectively reduced, as
described below.

Tax benefits under the Law for the
Encouragement of Capital Investments, 1959

The
Companys facilities have been granted Approved Enterprise status
pursuant to the Law for the Encouragement of Capital Investments, 1959 (the
Investment Law), which provides certain tax and financial benefits to
investment programs that have been granted such status.

The
Investment Law provides that a proposed capital investment in eligible facilities may,
upon application to the Investment Center of the Ministry of Industry and Commerce of the
State of Israel, be designated as an Approved Enterprise. Each certificate of
approval for an Approved Enterprise relates to a specific investment program delineated
both by its financial scope, including its capital sources, and by its physical
characteristics, e.g., the equipment to be purchased and utilized pursuant to the program.
The tax benefits derived from any such certificate of approval relate only to taxable
income attributable to the specific Approved Enterprise. If a company has more than one
approval or only a portion of its capital investments are approved, its effective tax rate
is the result of a weighted combination of the applicable rates.

A
company owning an Approved Enterprise may elect the alternative plan benefits.
Under the alternative plan route, a companys undistributed income
derived from an Approved Enterprise will be exempt from corporate tax for a period of two
years commencing in the first year of taxable income, and taxed at a reduced corporate tax
of 10% to 25% for the following five to eight years, depending on the extent of foreign
investment in the Company. The benefits period is limited to twelve years from completion
of the investment under the approved plan or fourteen years from the date of approval,
whichever is earlier. The Investment Law also provides that a company that has an Approved
Enterprise is entitled to accelerated depreciation on its property and equipment that are
included in an approved investment program. A Foreign Investors Company (FIC),
as defined in the Investment Law, may enjoy benefits for an extended period of up to ten
years, or twelve years if it complies with certain export criteria stipulated in the
Investment Law.

Distribution
of earnings derived from Approved Enterprise which were previously taxed at
reduced tax rates, would not result in additional tax consequences to the Company.
However, if retained tax-exempt income is distributed in a manner other than upon the
complete liquidation of the Company, the Company would be taxed at the reduced corporate
tax rate applicable to such profits (between 10%-25%). The Company is not obliged to
distribute exempt retained profits under the alternative plan, and may
generally decide from which years profits to declare dividends. The Company
currently intends to reinvest the amount of its tax-exempt income and not to distribute
such income as a dividend. Dividends from Approved Enterprises are generally taxed at a
rate of 15% (which is withheld and paid by the Company paying the dividend) if such
dividend is distributed during the benefits period or within twelve years thereafter. The
twelve-year limitation does not apply to an FIC.

The
Company has derived, and expects to continue to derive, a substantial portion of its
operating income from its Approved Enterprise facilities. The tax benefits are
scheduled to gradually expire from 2002 to 2010.

The
Investment Center of the Ministry of Industry and Commerce bases its decision as to
whether or not to approve an application, on the criteria set forth in the Investment Law
and regulations, the then prevailing policy of the Investment Center, and the specific
objectives and financial criteria of the applicant. Accordingly, there can be no assurance
that any such application will be approved. In addition, the benefits available to an
approved enterprise are conditional upon the fulfillment of conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the specific certificate
of approval. In the event that a company does not meet these conditions, it would be
required to refund a portion of the benefits already received, with the addition of
interest and penalties.

37

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The
Investment law is about to expire in May 2003, and no new benefits will be granted after
that date unless the expiration date is extended. There can be no assurance that new
benefits will be available after May 2003.

Tax Benefits Under the
Law for the Encouragement of Industry (Taxation), 1969

According to the Law for the
Encouragement of Industry (Taxation), 1969, or the Industry Encouragement Law, an
Industrial Company is a company resident in Israel, at least 90% of the income
of which, in any tax year, determined in Israeli currency, exclusive of income from
certain government loans, capital gains, interest and dividends, is derived from an
Industrial Enterprise owned by it. An Industrial Enterprise is
defined as an enterprise whose major activity in a given tax year is industrial production
activity. The Company believes it currently qualifies as an Industrial Company
within the definition of the Industry Encouragement Law. Under the Industry Encouragement
Law, Industrial Companies are entitled to certain tax benefits such as deduction of public
offering expenses and accelerated depreciation rates on equipment and buildings.

Eligibility for the benefits under
the Industry Encouragement Law is not subject to receipt of prior approval from any
governmental authority. No assurance can be given that the Company will continue to
qualify as an Industrial Company or that the benefits described above will be
available in the future.

Special Provisions
Relating to measurement of taxable income

Until
December 31, 2001, the Company measured its taxable income in accordance with the Income
Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary
Adjustments Law, which represents an attempt to overcome the problems presented to a
traditional tax system by an economy undergoing rapid inflation. The Inflationary
Adjustments Law is highly complex. Since January 1, 2002, the Company elected to measure
its taxable income based on the changes in the exchange rate of the U.S. dollar.

Capital Gains Tax
applicable to Shareholders

Israeli
law generally imposes a capital gains tax on the sale of capital assets located in Israel,
including shares in Israeli resident companies, by both residents and non-residents of
Israel, unless a specific exemption is available or unless a treaty between Israel and the
country of the non-resident provides otherwise. Regulations promulgated under the Israeli
Income Tax Ordinance provided for an exemption from Israeli capital gains tax for gains
accrued before January 1, 2003 and derived from the sale of shares of an Industrial
Company, as defined by the Industry Encouragement Law, that are traded on specified
non-Israeli markets, including The NASDAQ National Market, provided that the sellers
purchased their shares either in the companys initial public offering or in public
market transactions thereafter. This exemption does not apply to shareholders who are in
the business of trading securities, or to shareholders that are Israeli resident companies
subject to the Income Tax (Adjustments for Inflation) Law- 1985. The Company believes that
it is currently an Industrial Company, as defined by the Industry Encouragement Law. The
status of a company as an Industrial Company may be reviewed by the tax authorities from
time to time. There can be no assurance that the Israeli tax authorities will not deny the
Companys status as an Industrial Company, possibly with retroactive effect.

On
January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No.132),
5762-2002, known as the tax reform, came into effect thus imposing capital gains tax at a
rate of 15% on gains derived on or after January 1, 2003 from the sale of shares in
Israeli companies publicly traded on a recognized stock exchange outside of Israel. This
tax rate does not apply to:(1) dealers in securities;(2) shareholders that report in
accordance with the Income Tax Law (Inflationary Adjustment)  1985; or (3)
shareholders who acquired their shares prior to an initial public offering. The tax basis
of shares acquired prior to January 1, 2003 will be determined in accordance with the
average closing share price in the three trading days preceding January 1, 2003.
Non-Israeli residents shall be exempt from Israeli capital gains tax on any gains derived
from the sale of shares publicly traded on a stock exchange recognized by the Israeli
Ministry of Finance, provided such shareholders did not acquire their shares prior to an
initial public offering. In any event, the provisions of the tax reform shall not affect
the exemption from capital gains tax for gains accrued before January 1,2003, as described
in the previous paragraph and capital gains in respect of assets purchased prior to that
date will be subject to a blended tax rate calculated based on the relative time periods
before and after January 1, 2003.

38

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In
addition, pursuant to the Convention Between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income, as amended (the
United States- Israel Tax Treaty), the sale, exchange or disposition of
ordinary shares by a person who qualifies as a resident of the United States within the
meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits
afforded to such person by the United States- Israel Tax Treaty (a Treaty United
States Resident) generally will not be subject to the Israeli capital gains tax
unless such Treaty United States Resident holds, directly or indirectly,
shares representing 10% or more of the Companys voting power during any part of the
twelve- month period preceding such sale, exchange or disposition, subject to certain
conditions. However, under the United States-Israel Tax Treaty, such Treaty United
States Resident would be permitted to claim a credit for such taxes against the
United States federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in United States laws applicable to foreign tax
credits. The United States-Israel Tax Treaty does not relate to United States state or
local taxes.

Taxation of Non-Resident
Shareholders

Non-residents
of Israel are subject to Israeli income tax on income accrued or derived from sources in
Israel, including passive income such as dividends, royalties and interest. On
distributions of dividends, other than bonus shares and stock dividends, income tax at the
rate of 25% is withheld at the source, unless a different rate is provided in a treaty
between Israel and the shareholders country of residence. If the dividends are
distributed out of Approved Enterprise earnings, the applicable tax rate would
be 15%. Under the United States- Israel Tax Treaty, the maximum tax on dividends paid to a
holder of ordinary shares who is a Treaty United States Resident will be 25%,
however the tax rate is reduced to12.5% for dividends not generated by an Approved
Enterprise to a corporation which holds 10% or more of the Companys voting power
during a certain period preceding the distribution of the dividend., Dividends derived
from an Approved Enterprise will still be subject to 15% tax withholding..,

Foreign Exchange
Regulations

Dividends,
if any, paid to the holders of the ordinary shares, and any amounts payable upon
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of
the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if
paid in Israeli currency, may be converted into freely repatriable U.S. dollars at the
rate of exchange prevailing at the time of conversion.

# United States Federal
Income Taxes

The
following summary sets forth the material United States federal income tax consequences
applicable to the following persons who purchase, hold or dispose of the ordinary shares
(U.S. Shareholders); (i) citizens or residents (as defined for U.S.
federal income tax purposes) of the United States; (ii) corporations or other
entities taxable as corporations created or organized in or under the laws of the United
States or any state thereof; (iii) estates, the income of which is subject to United
States federal income taxation regardless of its source; and (iv) trusts, if (a) a U.S.
court is able to exercise primary supervision over its administration and (b) one or more
U.S. persons have the authority to control all of its substantial decisions. This
discussion is based on the provisions of the Internal Revenue Code of 1986, as amended
(the Code), United States Treasury Regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as in effect as of the date of
this Annual Report on Form 20-F. This discussion generally considers only U.S.
Shareholders that will hold the ordinary shares as capital assets and does not consider
(a) all aspects of U.S. federal income taxation that may be relevant to particular
U.S. Shareholders by reason of their particular circumstances (including potential
application of the alternative minimum tax), (b) 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, (c) U.S. Shareholders owning directly or by attribution 10% or more of the
Companys outstanding voting shares, (d) U.S. Shareholders who hold the ordinary
shares as part of a hedging, straddle or conversion transaction, (e) U.S. Shareholders who
acquire their ordinary shares in a compensatory transaction, (f) U.S. Shareholders whose
functional currency is not the U.S. dollar, or (g) any aspect of state, local or
non-United States tax law.

The
following summary does not address the impact of an investors individual tax
circumstances. Accordingly, each investor should consult his or her own tax advisor as to
the particular tax consequences to him or her of an investment in the ordinary shares,
including the effects of applicable state, local or foreign tax laws and possible changes
in the tax laws.

39

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Dividends Paid on the
Ordinary Shares

A
U.S. Shareholder generally will be required to include in gross income as ordinary
dividend income, the amount of any distributions paid in respect of the ordinary shares
(including the amount of any Israeli taxes withheld therefrom) to the extent that such
distributions are paid out of the Companys current or accumulated earnings and
profits as determined for U.S. federal income tax purposes. Distributions in excess of
such earnings and profits will be treated first as non-taxable return of capital reducing
the 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 such ordinary shares.
Such dividends will generally not qualify for the dividends received deduction available
to corporations. The amount of any cash distribution paid in Israeli shekels will equal
the U.S. dollar value of the distribution, calculated by reference to the spot exchange
rate in effect on the date of the distribution.

Credit for Israeli Taxes
Withheld

Subject
to certain conditions and limitations, any Israeli tax withheld or paid with respect to
dividends on the ordinary shares will generally be eligible for credit against a U.S.
Shareholders United States federal income tax liability at such U.S.
Shareholders election. The Code provides limitations on the amount of foreign tax
credits that a U.S. Shareholder may claim, including 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. U.S. Shareholders that do not elect to claim a
foreign tax credit may instead claim a deduction for Israeli income tax withheld or paid,
but only for a year in which these U.S. Shareholders elect to do so for all foreign income
taxes. Dividends with respect to the ordinary shares will generally be classified as
foreign source passive income for the purpose of computing a
U.S. Shareholders foreign tax credit limitations for U.S. foreign tax credit
purposes. The rules relating to foreign tax credits are complex, and each investor should
consult his of her tax advisor to determine whether and if he or her would be entitled to
this credit.

Disposition of the
Ordinary Shares

The
sale or exchange of ordinary shares will generally result in the recognition of capital
gain or loss in an amount equal to the difference between the amount realized on the sale
or exchange and the U.S. Shareholders tax basis in the ordinary shares. Such gain or
loss generally will be long-term capital gain or loss if the U.S. Shareholders
holding period of the ordinary shares exceeds one year at the time of the disposition.
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 tax treaty between the United States and Israel, 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 its current income, assets and activities, the Company believes that it is currently
not a passive foreign investment company (a PFIC) for U.S. federal income
tax purposes and currently does not anticipate that it will be a PFIC for any subsequent
year. The Company would be classified as a PFIC if, for any taxable year, either
(i) 75% or more of its gross income in the taxable year is passive income, or (ii)
50% or more of the average value of its 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, which produce passive income.
If the Company were a PFIC for any taxable year during a U.S. Shareholders holding
period and the U.S. Shareholder does not timely elect to treat the Company as a
qualified electing fund under Section 1295 of the Code or elect to mark the
ordinary shares to market, a U.S. Shareholder would be subject to special tax rules on the
receipt of an excess distribution on the ordinary shares (generally, a
distribution to the extent it exceeds 125% of the average annual distributions in the
prior three years) and on gain from the disposition of the ordinary shares. Under these
rules, the excess distribution and any gain would be allocated ratably over the U.S.
Shareholders holding period for the ordinary shares, the amount allocated to the
current taxable year and any taxable year prior to the first taxable year in which the
Company is a PFIC would be taxed as ordinary income, the amount allocated to each of the
other taxable years would be subject to tax at the highest marginal rate in effect for the
applicable class of taxpayer for that year, and an interest charge for the deemed deferral
benefit would be imposed on the resulting tax allocated to such other taxable years. The
tax liability with respect to amounts allocated to years prior to the year of the
disposition or excess distribution cannot be offset by any net operating
losses. Additionally, if the Company is deemed to be a PFIC, a U.S. Shareholder who
acquires ordinary shares in the Company from a decedent will be denied the normally
available step-up in tax basis to fair market value for the ordinary shares at the date of
the death, and instead will have a tax basis equal to the decedents tax basis if
lower than fair market value.

40

---

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U.S.
          Shareholders may avoid taxation under the rules described above by making (i) a
          qualified electing fund election for the first taxable year in which
          the Company is a PFIC to include such holders share of the Companys
          ordinary earnings and net capital gain on a current basis or (ii) a deemed
          sale election in a subsequent year, along with a qualified electing fund
          election, if the Company is still classified as a PFIC. However, a U.S.
          Shareholder may make a qualified electing fund election only if the Company
          agrees to furnish the U.S. Shareholder annually with certain tax information.
          The Company does not presently prepare or provide such information, and such
          information may not be available to U.S. Shareholders if the Company is
          subsequently determined to be a PFIC.

U.S.
          Shareholders holding marketable shares (which the Company considers
          the ordinary shares to be) in a PFIC may make an election to
          mark-to-market the ordinary shares annually, rather than be subject
          to the above-described rules. Under such election, the U.S. Shareholder will
          include in income each year any excess of the fair market value of the PFIC
          stock at the close of each taxable year over the U.S. Shareholders
          adjusted basis in such stock. The U.S. Shareholder will generally be allowed an
          ordinary deduction for the excess, if any, of the adjusted basis of the PFIC
          stock over its fair market value as of the close of the taxable year, or the
          amount of any net mark-to-market gains recognized for prior taxable years,
          whichever is less. A U.S. Shareholders adjusted tax basis in the ordinary
          shares will generally be adjusted to reflect the amounts included or deducted
          under the mark-to-market election. Additionally, any amounts included in income
          pursuant to a mark-to-market election, as well as gain on the actual sale or
          other disposition of the PFIC stock, are treated as ordinary income. Ordinary
          loss treatment also applies to any loss recognized on the actual sale or
          disposition of PFIC stock to the extent that the amount of such loss does not
          exceed the net mark-to-market gains previously included with respect to such
          stock. An election to mark-to-market generally will apply to the taxable year in
          which the election is made and all subsequent taxable years.

If
a U.S. Shareholder makes one of these two elections, distributions and gain will not be
recognized ratably over the U.S. Shareholders holding period or be subject to an
interest charge as described above. Further, the denial of basis step-up at death
described above will not apply. A U.S. Shareholder making one of these two elections may
experience current income recognition, even if no cash is distributed by the Company.

A
U.S. Shareholder who beneficially owns shares in a PFIC must file an annual return with
the IRS on IRS Form 8621 that describes any distributions received with respect to such
shares and any gain realized on the disposition of such shares.

A
number of specific rules and requirements apply to both of these elections available to
owners of a PFIC and a U.S. Shareholder is urged to consult his or her tax advisor
concerning these elections.

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 rate of 30%. 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). Finalized Treasury Regulations which are
applicable to payments made after December 31, 2000 have generally expanded the
circumstances under which information reporting and backup withholding may apply. 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.

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

Market
risks relating to the Companys operations result primarily from weak economic
conditions in the markets in which the Company sells its products and from changes in
exchange rates or in interest rates. Other than forward exchange currency contracts and
forward rate agreements described below which are used for hedging cash flow in
transactions not denominated in U.S. dollars, the Company does not use derivative
financial instruments in its investment portfolio.

41

---

---

The table below presents principal
amounts and related weighted average rates by date of maturity for the Companys
investments in cash and cash equivalents, deposits and marketable securities held as of
December 31, 2002

(In thousands, except percentages)

|Maturity                                                          | Total
Book
Value | Fair Value at
Dec. 31, 2002
|----------------------------------------------------------------- | ---------------- | ---------------------------
|                                                                 
|Government
 and corporate
 securities -
Floating interest
 rate** | BookValue        | $      225,617             
|WAIR*                                                             | 3.97%            | 3.93%                      
|Government and corporate securities - Fixed interest rate         | BookValue        | $       58,700             
|WAIR*                                                             | 4.75%            | 2.96%                      
|Mortgage andAsset BackedSecurities                                | BookValue        | $       12,855             
|WAIR*                                                             | 3.75%            | 4.20%                      
|Auction RateSecurities                                            | Book
Value       | $       19,997             
|WAIR*                                                             | 1.72%            | -                          
|Money market Fund                                                 | Book
Value       | $      444,449             
|WAIR*                                                             | 1.3%             | -                          
|Deposits                                                          | BookValue        | 24,279                     
|WAIR*                                                             | 3.18%            | 3.61%                      
|Total                                                             | BookValue        | $      785,897             
|WAIR*                                                             | 2.43%            | 3.86%                      

*
Weighted Average Interest Rate

** Based upon LIBOR as of December 31, 2002

# Foreign Currency Risk

Most
of the Companys sales are denominated in U.S. dollars. In addition, a substantial
portion of the Companys costs are incurred in U.S. dollars. The Companys
management believes that the U.S. dollar is the primary currency of the economic
environment in which the Company and its subsidiaries operate, and thus the U.S. dollar is
their functional and reporting currency. Accordingly, monetary accounts maintained in
currencies other than the U.S. dollar (principally cash and cash equivalents, short-term
deposits and liabilities) are remeasured into U.S. dollars using the foreign exchange rate
at the balance sheet date. Operational accounts and non-monetary balance sheet accounts
are measured and recorded at the rate in effect at the date of the transaction. All
transaction gains and losses of the remeasurement of monetary balance sheet items are
reflected in the statement of income as financial income or expenses, as appropriate.

42

---

---

The
Company hedges the exposure of assets and anticipated revenues denominated in the Japanese
yen with forward and option contracts. The Company monitors its foreign currency exposures
daily to maximize the overall effectiveness of its foreign currency hedge positions. If
these derivatives meet the definition of a hedge and is 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.

In
order to hedge portions of its risk of overall changes in cash flows resulting from
forecasted export sales over the next year, the Company has instituted a foreign currency
cash flow hedging program with zero cost-collar contracts. As of December 31, 2002, the
Company expects to reclassify $0.2 million of unrealized losses on hedging derivative
instruments, from accumulated other comprehensive loss to expenses during the next twelve
months, in line with actual export sales. The Company also enters into forward exchange
contracts designated to hedge the fair value of certain foreign currency denominated
customers balances.

As
of December 31, 2002, the Companys management believes that because the above
transactions are carried out with well-established institutions, liabilities owing to the
Company will be fulfilled. Total outstanding transactions to sell/purchase U.S. dollars in
exchange for the Japanese yen were in the amount of $ 31.9 million. The above
transactions were for a period ranged from three months to a year. As of December 31,
December 2002, the Company accumulated other comprehensive loss of $0.2 million with zero
cost-collar contracts.

# Interest Rate Risk

The
Companys exposure to market risk for changes in interest rates relates primarily to
the Companys investment in marketable securities. The Companys marketable
securities are comprised of U.S. and European government and corporate debt instruments.
The fair value of the Companys long and short-term securities is based upon their
market values as of December 31, 2002.

In
2001, the Company has entered into forward rate agreements (FRA,) in the
amount of $125 million that effectively convert a portion of its floating rate investments
to a fixed rate basis for a 12 month period beginning one year after the date of the
agreements, thus reducing the impact of the interest rate changes on future interest
income. The agreements were executed in November 2002, resulting in a total gain of
approximately $3.4 million presented in the statement of income as financial income. As of
December 31, 2002, the Company had no open FRA positions.

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

| | Not
applicable.
| | ---------------

43

---

---

# 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
|-------- | -----------------------

| | Evaluation
of Disclosure Controls and Procedures
| | ------------------------------------------------

Based
on their evaluation as of a date within 90 days of the filing date of this Report, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)) are
effective to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and
forms.

| | Changes
in internal controls
| | ----------------------------

There
were no significant changes in the Companys internal controls or in other factors
that could significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.

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

44

---

---

# PART III

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

| | The
Company has responded to Item 18.
| | -------------------------------------

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

| | See
pages F-1 to F-24 incorporated herein by reference.
| | -------------------------------------------------------

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

|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|
|1   | Articles of Association (incorporated by reference to Exhibit 2.5 to the Companys  
|    | annual report on Form 20-F for the year ended December 31, 2000)                    
|4.1 | Form of Indemnification Agreement between the Company and its officers and directors
|    | (Incorporated by reference to exhibit 4.1 of the (Companys annual report on Form   
|    | 20-F for the year ended December 31, 2001)                                          
|8   | List of subsidiaries (incorporated by reference to Item 4  Information on the     
|    | Company  Organizational Structure in this Annual Report on Form 20-F)             
|10  | Consent of Kost Forer & Gabbay, a member of Ernst & Young Global                    
|11  | Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002             

45

---

---

CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 IN U.S. DOLLARS INDEX PageReport of Independent Auditors
          F-2Consolidated Balance Sheets
          F-3Consolidated Statements of Income
          F-4Statements of Changes in Shareholders Equity
          F-5Consolidated Statements of Cash Flows
          F-6Notes to Consolidated Financial Statements
          F-7 - F-24 - - - - - - - - F-  1 
   ERNST
&YOUNG
          n
          Kost Forer & Gabbay
              3 Aminadav St.
              Tel-Aviv 67067, Israel
          n
          Phone:
              
               Fax:
          972-3-6232525
              
               972-3-5622555  REPORT OF INDEPENDENT AUDITORS To the Shareholders of CHECK POINT SOFTWARE TECHNOLOGIES LTD. We have audited the
accompanying consolidated balance sheets of Check Point Software Technologies Ltd. and its subsidiaries as of December 31, 2001 and
2002, 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, 2002. These financial statements are the responsibility of Check Point Software Technologies Ltd.s
management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the 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
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Check Point Software Technologies Ltd. and its subsidiaries as of December 31, 2001 and 2002, and the consolidated results of their
operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Tel-Aviv, Israel
          KOST FORER & GABBAYJanuary 21, 2003
          A Member of Ernst & Young Global F-  2 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESCONSOLIDATED BALANCE SHEETSU.S. dollars in thousands (except share data)  December 312001
          
          2002ASSETSCurrent assets:Cash and cash equivalents
          
          $
          219,068
          
          
          $
          444,449Short-term bank deposits
          
          
          112,253
          
          
          
          24,279Marketable securities
          
          
          155,636
          
          
          
          317,169Trade receivables (net of allowance for doubtful accounts and
product
              
                     returns of $8,377 and $8,722 for the
years 2001 and 2002, respectively)
          
          
          74,294
          
          
          
          73,165Other accounts receivable
          
          
          19,165
          
          
          
          17,045Total current assets
          
          
          580,416
          
          
          
          876,107Long-term assets:Long-term investments
          
          
          542,276
          
          
          
          529,407Property and equipment, net
          
          
          13,248
          
          
          
          10,453Severance pay fund
          
          
          2,757
          
          
          
          3,924Other long-term assets
          
          
          6,968
          
          
          
          5,720565,249
          
          
          
          549,504$
          1,145,665
          
          
          $
          1,425,611LIABILITIES AND
SHAREHOLDERS EQUITYCurrent liabilities:Trade payables
          
          $
          4,945
          
          
          $
          4,921Employees and payroll accruals
          
          
          26,153
          
          
          
          29,750Deferred revenues
          
          
          95,703
          
          
          
          99,227Accrued expenses and other liabilities
          
          
          98,583
          
          
          
          98,891Total current liabilities
          
          
          225,384
          
          
          
          232,789Accrued severance pay
          
          
          4,553
          
          
          
          5,780Shareholders equity:Share capital -Authorized: 500,000,000 Ordinary shares of NIS 0.01
par value; 10
              
                    Deferred shares of NIS 1 par value; 5,000,000 Preferred shares of NIS
              
                    0.01 par value as of December 31, 2001 and 2002;Issued and outstanding: 242,824,021 and 245,908,827
Ordinary shares as
              
                    of December 31, 2001 and 2002, respectively; 1 Deferred share and no
              
                    Preferred shares as of December 31, 2001 and 2002
          
          
          735
          
          
          
          740Additional paid-in capital
          
          
          143,907
          
          
          
          163,235Accumulated other comprehensive income (loss)
          
          
          2,909
          
          
          
          (190
          )Retained earnings
          
          
          768,177
          
          
          
          1,023,257Total shareholders equity
          
          
          915,728
          
          
          
          1,187,042$
          1,145,665
          
          
          $
          1,425,611 The accompanying notes are an integral part of the consolidated financial
statements. F-  3 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEU.S. dollars in thousands (except per share data)  Year ended December 31,2000
          
          2001
          
          2002Revenues:Product and licenses
          
          $
          326,998
          
          
          $
          374,026
          
          
          $
          256,113Software subscription
          
          
          65,273
          
          
          
          110,236
          
          
          
          130,879Support, training and consulting
          
          
          33,012
          
          
          
          43,381
          
          
          
          39,997Total revenues
          
          
          425,283
          
          
          
          527,643
          
          
          
          426,989Operating expenses:Cost of revenues
          
          
          35,265
          
          
          
          26,571
          
          
          
          20,693Research and development
          
          
          30,309
          
          
          
          33,221
          
          
          
          28,709Sales and marketing
          
          
          110,003
          
          
          
          109,086
          
          
          
          104,606General and administrative
          
          
          20,409
          
          
          
          22,002
          
          
          
          17,969Total operating expenses
          
          
          195,986
          
          
          
          190,880
          
          
          
          171,977Operating income
          
          
          229,297
          
          
          
          336,763
          
          
          
          255,012Financial income, net
          
          
          29,147
          
          
          
          44,760
          
          
          
          49,314Income before taxes on income
          
          
          258,444
          
          
          
          381,523
          
          
          
          304,326Taxes on income
          
          
          37,231
          
          
          
          59,603
          
          
          
          49,246Net income
          
          $
          221,213
          
          
          $
          321,920
          
          
          $
          255,080Basic net earnings per share
          
          $
          0.95
          
          
          $
          1.34
          
          
          $
          1.04Diluted net earnings per share
          
          $
          0.84
          
          
          $
          1.25
          
          
          $
          1.00 The accompanying notes are an integral part of the consolidated financial
statements. F-  4 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESSTATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYU.S. dollars in thousands (except share data)  Sharecapital
          
          Additionalpaid-inCapital
          
          Accumulatedothercomprehensiveincome (loss)
          
          Retainedearnings
          
          TotalcomprehensiveIncome (loss)
          
          TotalshareholdersequityBalance as of January 1, 2000
          
          $
          234
          
          
          $
          67,230
          
          
          $
          -
          
          
          $
          225,044
          
          
          
          
          
          
          $
          292,508Tax benefit related to exercise of stock options
          
          
          -
          
          
          
          9,730
          
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          9,730Stock split effected as a stock dividend (100%)
          
          
          236
          
          
          
          (236
          )
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          -Issuance of shares upon exercise of options and stock purchase
plan
              
                      (7,695,721 shares), net
          
          
          12
          
          
          
          25,820
          
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          25,832Stock split effected as a stock dividend (50%)
          
          
          241
          
          
          
          (241
          )
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          -Comprehensive income:Net income
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          221,213
          
          
          $
          221,213
          
          
          
          221,213Total comprehensive income
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          $
          221,213Balance as of December 31, 2000
          
          
          723
          
          
          
          102,303
          
          
          
          -
          
          
          
          446,257
          
          
          
          
          
          
          
          549,283Tax benefit related to exercise of stock options
          
          
          -
          
          
          
          5,345
          
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          5,345Issuance of shares upon exercise of options and stock purchase
plan
              
                      (7,395,667 shares), net
          
          
          12
          
          
          
          37,724
          
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          37,736Purchase of stock dividend fractional shares
          
          
          -
          
          
          
          (1,465
          )
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          (1,465
          )Comprehensive income -Unrealized gains on hedging derivative
instruments
          
          
          -
          
          
          
          -
          
          
          
          2,909
          
          
          
          -
          
          
          $
          2,909
          
          
          
          2,909Net income
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          321,920
          
          
          
          321,920
          
          
          
          321,920Total comprehensive income
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          $
          324,829Balance as of December 31, 2001
          
          
          735
          
          
          
          143,907
          
          
          
          2,909
          
          
          
          768,177
          
          
          
          
          
          
          
          915,728Tax benefit related to exercise of stock options
          
          
          -
          
          
          
          4,597
          
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          4,597Issuance of shares upon exercise of options and stock purchase
plan
              
                      (3,084,806 shares), net
          
          
          5
          
          
          
          14,731
          
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          14,736Comprehensive income -Realized gains on hedging derivative
instruments
          
          
          -
          
          
          
          -
          
          
          
          (2,909
          )
          
          
          -
          
          
          $
          (2,909
          )
          
          
          (2,909
          )Unrealized loss on hedging derivatives
instruments
          
          
          -
          
          
          
          -
          
          
          
          (190
          )
          
          
          -
          
          
          
          (190
          )
          
          
          (190
          )Net income
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          255,080
          
          
          
          255,080
          
          
          
          255,080Total comprehensive income
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          $
          251,981Balance as of December 31, 2002
          
          $
          740
          
          
          $
          163,235
          
          
          $
          (190
          )
          
          $
          1,023,257
          
          
          
          
          
          
          $
          1,187,042 The accompanying notes are an integral part of the consolidated financial
statements. F- 5 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands  Year ended December 31,2000
          
          2001
          
          2002Cash flows from operating activities:Net income
          
          $
          221,213
          
          
          $
          321,920
          
          
          $
          255,080Adjustments to reconcile net income to net cash provided by
              
                     operating activities:Depreciation and
amortization
          
          
          7,107
          
          
          
          8,949
          
          
          
          7,390Amortization of
marketable securities premium and
              
                         accretion of discount
          
          
          92
          
          
          
          1,405
          
          
          
          7,565Deferred income
taxes, net
          
          
          (4,312
          )
          
          
          (240
          )
          
          
          796Decrease (increase)
in trade receivables, net
          
          
          (36,742
          )
          
          
          10,087
          
          
          
          1,129Decrease (increase)
in other accounts receivable
          
          
          (7,970
          )
          
          
          939
          
          
          
          (527
          )Increase (decrease)
in trade payables
          
          
          (1,328
          )
          
          
          1,301
          
          
          
          (24
          )Increase (decrease)
in employees and payroll accruals
          
          
          17,611
          
          
          
          (7,090
          )
          
          
          3,597Increase in accrued
expenses and other liabilities
          
          
          44,492
          
          
          
          29,482
          
          
          
          635Increase (decrease)
in deferred revenues
          
          
          65,203
          
          
          
          (25,499
          )
          
          
          3,524Tax benefit related
to exercise of stock options
          
          
          9,730
          
          
          
          5,345
          
          
          
          4,597Increase in accrued
severance pay, net
          
          
          540
          
          
          
          630
          
          
          
          60Other
          
          
          25
          
          
          
          (54
          )
          
          
          105Net cash provided by operating activities
          
          
          315,661
          
          
          
          347,175
          
          
          
          283,927Cash flows from investing activities:Proceeds from short-term bank deposits
          
          
          160,035
          
          
          
          216,980
          
          
          
          125,884Investment in short-term bank deposits
          
          
          (144,414
          )
          
          
          (103,749
          )
          
          
          (20,841
          )Proceeds from held-to maturity marketable securities
          
          
          40,523
          
          
          
          186,620
          
          
          
          803,903Investment in held-to-maturity marketable securities
          
          
          (249,073
          )
          
          
          (603,119
          )
          
          
          (955,244
          )Investment in long-term bank deposits
          
          
          (7,000
          )
          
          
          (8,635
          )
          
          
          (22,388
          )Investment in privately - held companies
          
          
          (1,145
          )
          
          
          -
          
          
          
          -Purchase of property and equipment
          
          
          (9,051
          )
          
          
          (9,678
          )
          
          
          (4,596
          )Net cash used in investing activities
          
          
          (210,125
          )
          
          
          (321,581
          )
          
          
          (73,282
          )Cash flows from financing activities:Proceeds from issuance of shares upon exercise of options and
              
                     stock purchase plan, net of expenses
          
          
          25,832
          
          
          
          37,736
          
          
          
          14,736Purchase of stock dividend fractional shares
          
          
          -
          
          
          
          (1,465
          )
          
          
          -Net cash provided by financing activities
          
          
          25,832
          
          
          
          36,271
          
          
          
          14,736Increase in cash and cash equivalents
          
          
          131,368
          
          
          
          61,865
          
          
          
          225,381Cash and cash equivalents at the beginning of the year
          
          
          25,835
          
          
          
          157,203
          
          
          
          219,068Cash and cash equivalents at the end of the year
          
          $
          157,203
          
          
          $
          219,068
          
          
          $
          444,449Supplemental disclosure of cash flow activities:Cash paid during the year for income taxes
          
          $
          14,472
          
          
          $
          20,770
          
          
          $
          25,570Non-cash activities:Unrealized and (realized) gain on hedging derivative
              
                     instruments
          
          $
          -
          
          
          $
          2,909
          
          
          $
          (3,099
          ) The accompanying notes are an integral part of the consolidated financial
statements. F-  6 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 1:-
          GENERALCheck 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s revenues are mainly derived from the sales of its network security
products, packaged and marketed mostly under the VPN-1 and FireWall-1 brands, and related software subscription, support technical
services and training program. The Company sells its software 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 operates in one reportable operating segment.During 2002, approximately 13% of revenues were derived from a single channel
partner, the Companys largest distributor. No channel partner exceeded 10% of the Companys revenues in 2000 and 2001.NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIESa.
          Use of estimates:The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (U.S. GAAP). These accounting principles require management to make
certain estimates, judgments and assumptions. Management believes that the estimates, judgments and assumptions upon which it relies,
are reasonable based upon information available at the time that these estimates, judgments and assumptions were made. These
estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are
material differences between these estimates and actual results, the financial statements may be affected. F-  7 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIES (Cont.)b.
          Financial statements in United States dollars:Most of the Companys revenues are denominated in United States dollars
(dollars). In addition, a substantial portion of the Companys costs is incurred in dollars. 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 No. 52 Foreign
Currency Translation (SFAS No. 52). All transaction gains and losses of the remeasurement of monetary balance sheet items
are reflected in the statements of income as financial income or expenses, as appropriate.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.e.
          Short and long-term bank deposits:Bank deposits with maturities of more than three months but less than one year
are included in short-term bank deposits. Bank deposits with maturities of more than one year are included in long-term investments.
Deposits are presented at cost, while related accrued interest is included in other receivables.f.
          Investments in marketable securities:The Company accounts for investments in debt securities in accordance with
Statement of Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities
(SFAS No. 115).Management determines the appropriate classification of its investments in
marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities
are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity and are
stated at amortized cost. The amortized cost of held-to-maturity securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortizations, interest and declines in value determined to be other than temporary are included in
financial income, net. F-  8 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIES (Cont.)g.
          Property and equipment:Property and equipment are stated at cost less accumulated depreciation using the
straight-line method over the estimated useful lives of the assets, ranging from two to ten years. Leasehold improvements are
amortized by the straight-line method over the term of the lease.The Companys long-lived assets are reviewed for impairment in accordance
with Statement of Financial Accounting Standard No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets 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 assets. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.h.
          Research and development costs:Research and development costs, are charged to the statement of income as
incurred. Statement of Financial Accounting Standard No. 86 Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed (SFAS No. 86), 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, all research and development
costs have been expensed.i.
          Revenue recognition:The Company derives its revenues from license fees for its products, software
subscriptions, specified upgrades, support, technical services and training programs. The Company sells its products primarily
through distributors, resellers, OEMs, system integrators and MSPs, all of which are considered end-users. F-  9 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIES (Cont.)The Company accounts for software sales in accordance with Statement of Position
No. 97-2, Software Revenue Recognition (SOP No. 97-2), as amended.Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. The
Company maintains certain provisions for product returns based on its experience with historical sales returns, analysis of credit
memo data and other known factors. Such provisions amounted to $ 1,377 and $ 3,598 as of December 31, 2001 and 2002,
respectively. The Company considers arrangements regarding certain channel partners with payment terms extending beyond customary
payment terms not to be fixed or determinable. If the fee is considered to be not fixed or determinable, 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, specified upgrades, support, consulting services and
training program revenues included in multiple-element arrangements are deferred and either recognized on a straight-line basis over
the term of the software subscription and support agreement or when services are performed. Revenues earned on software arrangements
involving multiple-elements to be allocated to each element based on the relative fair value of the element. The Vendor Specific
Objective Evidence (VSOE) of fair value of the undelivered elements (software subscription, specified upgrades, support,
consulting services and training) is generally determined based on the price charged for the undelivered element when sold
separately.j.
          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 fully provided by monthly
payments deposited with insurers and by a reserve established by the Company to cover the portion of this liability not covered by
the Companys deposits.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, 2000, 2001 and 2002, were
$ 1,549, $ 1,997 and $ 1,741, respectively. F-  10 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIES (Cont.)k.
          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 no greater than $ 11 per year, of their annual compensation to
the plan through salary deferrals, subject to IRS limits. From January 1, 1996 (inception) to December 31, 2002, the Company
made no matching contributions to the plan.l.
          Income taxes:The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS No. 109 prescribes the use of
the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.m.
          Advertising expenses:Advertising costs are expensed as incurred. Advertising expenses for the years
ended 2000, 2001 and 2002, were $ 14,431, $ 15,516 and $ 11,502, respectively.n.
          Concentrations of credit risk:Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and
long-term bank deposits. The majority of the Companys cash and cash equivalents, short-term bank deposits and the long-term
bank deposits are invested in dollar and dollar-linked investments, and are deposited in major banks in the U.S. and Europe. Such
deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that
the financial institutions that hold the Companys investments are financially sound and, accordingly, minimal credit risk
exists with respect to these investments.The Companys marketable securities include investments in debentures of
corporations that are considered by management to be financially sound. The Companys investments in debt securities are
diversified among high-quality credit securities, in accordance with the Companys investment policy.The Companys trade receivables are geographically diversified and derived
from sales to channel partners mainly in the United States, Europe and Asia. The Company performs ongoing credit evaluations of its
partners. The allowance for doubtful accounts is mainly composed of specific debts that are doubtful of collection amounting to
$ 7,000 and $ 5,124 as of December 31, 2001 and 2002, respectively. F-  11 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIES (Cont.)o.
          Derivatives and hedging:The Company accounts for derivatives and hedging based on Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133).
SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. If the derivative meets the
definition of a hedge and is 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. During 2001 and 2002 there were no significant gains or losses
recognized in earning for hedge ineffectiveness.The Company hedges the exposure of anticipated revenues and assets, denominated
in foreign currencies with forward and option contracts. To protect against the risk of overall changes in cash flows resulting from
export sales over the next year, the Company has instituted a foreign currency cash flow hedging program with zero-cost collar
contracts. As of December 31, 2002, the Company expects to reclassify $ 190 of the unrealized loss on hedging derivative instruments,
from accumulated other comprehensive loss to expenses during the next twelve months, in line with actual export sales. Also, the
Company enters into forward exchange contracts designated to hedge the fair value of certain foreign currency denominated partner
balances and accrued liabilities. The net gains (losses) recognized in earnings during 2000, 2001 and 2002, representing the foreign
exchange contract gains (losses), were $ 0, $ 1,403 and $ (451), respectively.
              Those gains (losses) were presented within financial income, net.The Company has also entered into non-hedging Forward Rate Agreements
(FRA) in the amount of approximately $ 125,000. These agreements effectively convert a portion of the Companys
floating rate investments to a fixed rate basis for a twelve month period beginning one year after the date of the agreements, thus
reducing the impact of the interest rate changes on future interest income. The agreements were executed in November 2002, resulting
in a gain through December 31, 2002 of approximately $ 3,360, and included in the statement of income in financial income, net.As of December 31, 2002, the Companys management believed that since the
abovementioned activities were transacted with well-established institutions, the liabilities owed to the Company will be
fulfilled.p.
          Basic and diluted net earnings per share:Basic net earnings per share is computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of
Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in
accordance with Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS No. 128). F-  12 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except per share data)  NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIES (cont.)The total weighted average number of shares related to the outstanding options
excluded from the calculations of diluted net earnings per share, since they would have an anti-dilutive effect, were
694,128,   2,658,141 and 7,448,419 for 2000, 2001 and 2002, respectively.q.
          Accounting for stock-based compensation:The Company has elected to follow Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees (APB No. 25) and FASB. Interpretation No. 44 Accounting for
Certain Transactions Involving Stock Compensation (FIN No. 44) in accounting for its employee stock option plans.
Under APB No. 25, when the exercise price of the Companys stock options is less than  the market price of the underlying
shares on the date of grant, compensation expense is recognized.Under Statement of Financial Accounting Standard No. 123 Accounting for
Stock Based Compensation (SFAS No. 123), pro forma information regarding net income and earnings per share is required,
and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123.
The fair value for these options is amortized over their vesting period and estimated at the date of grant using a Black - Scholes
Option Valuation Model with the following weighted-average assumptions for 2000, 2001 and 2002: risk-free interest rates of 6.0% for
2000, 3.7% for 2001 and 3.7% for 2002; dividend yields of 0% for 2000, 2001 and 2002; volatility factors of the expected market price
of the Companys Ordinary shares of 1.09 for 2000, 1.00 for 2001 and 0.76 for 2002; and an expected life of the option of 6
months after the option is vested for 2000, 2001 and 2002.The following table illustrates the effect on net income and earnings per share,
assuming that the Company had applied the fair value recognition provision of SFAS 123 on its stock-based employee
compensation:  December 31,2000
          
          2001
          
          2002Net income as reported
          
          $
          221,213
          
          
          $
          321,920
          
          
          $
          255,080Deduct: Stock-based compensation expense
              
                  determined under fair value method for
              
                  all awards, net of related tax effects
          
          $
          64,741
          
          
          $
          71,848
          
          
          $
          61,490Pro forma net income
          
          $
          156,472
          
          
          $
          250,072
          
          
          $
          193,590Earnings per share:Basic, as reported
          
          $
          0.95
          
          
          $
          1.34
          
          
          $
          1.04Basic pro forma
          
          $
          0.67
          
          
          $
          1.04
          
          
          $
          0.79Diluted, as reported
          
          $
          0.84
          
          
          $
          1.25
          
          
          $
          1.00Diluted pro forma
          
          $
          0.60
          
          
          $
          0.97
          
          
          $
          0.76 F-  13 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 2:-
          SIGNIFICANT ACCOUNTING POLICIES (cont.)r.
          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, short-term deposits, 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 is based on quoted market prices (see
Notes 3 and 4).3.
          The carrying amount of the Companys long-term bank deposits are estimated
by discounting the future cash flows using the current interest rates for deposits of similar terms and maturities (see Note 4).4.
          The fair value of derivative instruments is estimated by obtaining current quotes
from brokers.s.
          Reclassification:Certain amounts from prior years have been reclassified to conform to the current
years presentation.NOTE 3:-
          MARKETABLE SECURITIES December 31,2001
          
          2002Amortizedcost
          
          Grossunrealizedgains
          
          Grossunrealizedlosses
          
          Marketvalue
          
          Amortizedcost
          
          Grossunrealizedgains
          
          Grossunrealizedlosses
          
          MarketvalueHeld-to-maturity  maturesin one year:Government and corporatedebt
          
          $
          155,241
          
          
          $
          4,787
          
          
          $
          (196
          )
          
          $
          159,832
          
          
          $
          284,317
          
          
          $
          4,613
          
          
          $
          (158
          )
          
          $
          288,772Mortgage and AssetBacked Securities (*)
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          
          
          
          
          12,855
          
          
          
          6
          
          
          
          (72
          )
          
          
          12,789Auction rate securities
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          19,997
          
          
          
          3
          
          
          
          -
          
          
          
          20,000Israeli Government debts
          
          
          395
          
          
          
          4
          
          
          
          -
          
          
          
          399
          
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          -Baked securities
          
          $
          155,636
          
          
          $
          4,791
          
          
          $
          (196
          )
          
          $
          160,231
          
          
          $
          317,169
          
          
          $
          4,622
          
          
          $
          (230
          )
          
          $
          321,561  (*)
          The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations without penalties. F-  14 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 4:-
          LONG-TERM INVESTMENTSLong-term investments due within one to five years, are as follows:  December 31,2001
          
          2002Government and corporate debt (a)
          
          $
          529,725
          
          
          $
          511,967Bank deposits (a)
          
          
          11,635
          
          
          
          16,888Investments in privately - held companies (b)
          
          
          916
          
          
          
          552$
          542,276
          
          
          $
          529,407 (a)
          Composed as follows: December 31,2001
          
          2002Amortizedcost
          
          Grossunrealizedgains
          
          Grossunrealizedlosses
          
          Marketvalue
          
          Amortizedcost
          
          Grossunrealizedgains
          
          Grossunrealizedlosses
          
          MarketvalueGovernment and corporatedebt
          
          $
          529,725
          
          
          $
          8,456
          
          
          $
          (1,976
          )
          
          $
          536,205
          
          
          $
          474,837
          
          
          $
          19,219
          
          
          $
          (2,760
          )
          
          $
          491,296Mortgage and AssetBacked Securities (*)
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          -
          
          
          
          37,130
          
          
          
          174
          
          
          
          -
          
          
          
          37,304Deposits
          
          
          11,635
          
          
          
          -
          
          
          
          (582
          )
          
          
          11,053
          
          
          
          16,888
          
          
          
          334
          
          
          
          -
          
          
          
          17,222$
          541,360
          
          
          $
          8,456
          
          
          $
          (2,558
          )
          
          $
          547,258
          
          
          $
          528,855
          
          
          $
          19,727
          
          
          $
          (2,760
          )
          
          $
          545,822  (*)
          The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations without penalties.(b)
          The investment in privately held companies is stated at cost.NOTE 5:-
          PROPERTY AND EQUIPMENT  December 31,2001
          
          2002Cost:Computers and peripheral equipment
          
          $
          25,272
          
          
          $
          28,852Office furniture and equipment
          
          
          4,866
          
          
          
          5,555Other
          
          
          2,966
          
          
          
          3,27533,104
          
          
          
          37,682Accumulated depreciation
          
          
          19,856
          
          
          
          27,229Depreciated cost
          
          $
          13,248
          
          
          $
          10,453 Depreciation and amortization expenses amounted to approximately $ 7,107,
$ 8,068 and $ 7,390 for 2000, 2001 and 2002, respectively. F-  15 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 6:-
          ACCRUED EXPENSES AND OTHER LIABILITIES  December 31,2001
          
          2002Income taxes payable
          
          $
          56,299
          
          
          $
          72,898Marketing expenses payable
          
          
          18,676
          
          
          
          11,672Other
          
          
          23,608
          
          
          
          14,321$
          98,583
          
          
          $
          98,891  NOTE 7:-
          COMMITMENTS AND CONTINGENT LIABILITIESa.
          Lease commitments:The facilities of the Company are rented under operating lease agreements which
expire on various dates.Aggregate minimum lease commitments under non-cancelable operating leases as of
December 31, 2002, are as follows:  2003
          
          $
          4,9752004
          
          
          3,6832005
          
          
          3,1342006
          
          
          2,0022007
          
          
          234$
          14,028  Rent expenses for the years ended December 31, 2000, 2001 and 2002, were
$ 6,125, $ 6,842 and $ 7,289, respectively.b.
          Litigation:On June 20, 2001, the Company, through its subsidiary in France, received a
formal request for information from the Directorate-General for Competition of the European Commission (the Commission)
regarding a complaint submitted by Stonesoft Corporation, a Finnish company alleging anti-competitive behavior, and in particular,
alleging abuse of a dominant position held by the Company, and requesting that the Commission investigates the allegations and order
injunctive relief. The Company responded to the Commission in a timely manner both to this and to a subsequent request for
information received on November 6, 2001, and has contested the existence of a dominant position or of infringing behavior on its
part.In April 2002, Check Point and the Commission reached an agreement, whereby Check
Point would affirm its commitment to adhere to the European competition rules. In accordance with this undertaking, this matter was
resolved and, therefore, the Company reversed the related provision. F-  16 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 7:-
          COMMITMENTS AND CONTINGENT LIABILITIES  (Cont.)On July 5, 1996, Checkpoint Systems, Inc. (CSI) a manufacturer of
theft prevention devices for retail stores, filed an action alleging trademark infringement and unfair competition against the
Company in the United States District Court for the District of New Jersey. CSI sought to enjoin the Company from using the
Check Point name in connection with the Companys products and services. The District Court issued its opinion in the
Companys favor on July 12, 2000, and the District Courts decision was affirmed on appeal during 2001. In 2002, a
trademark opposition was filed by CSI with the Patent and Trademark Office. Based on the opinion of the Companys management and
its legal counsel, a provision was recorded in the financial statements as of December 31, 2002, in respect of probable costs arising
from this matter.NOTE 8:-
          TAXES ON INCOMEa.
          Israeli taxation:1.
          Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985 (the Israeli law):Under the Israeli law, results for tax purposes are measured in real terms, in
accordance with the changes in the Israeli Consumer Price Index (Israeli CPI), or in the exchange rate of the dollar for
a foreign investors company. Until 2001, results for tax purposes were measured in terms of earnings in NIS after
certain adjustments for increases in the Israeli CPI. Beginning January 1, 2002, the basis for remeasurment is the changes in the
exchange rate of the U.S. dollar.2.
          Tax benefits under the Law for the Encouragement of Capital Investments, 1959
(the Law):Practically all of Check Point Ltd.s production facilities have been
granted the status of Approved Enterprise, under the Law.In accordance with the law, the Company has chosen to enjoy Alternative
plan benefits. Accordingly, Check Point Ltd.s income attributed to the Approved Enterprise 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. The tax benefits under these investment plans are scheduled to gradually expire from
2002 through 2010.The duration of tax benefits, for each of the programs is subject to limitations
of the earlier of 12 years from commencement of investment, or 14 years from receipt of approval, as an Approved
Enterprise under the Law. F-  17 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 8:-
          TAXES ON INCOME (Cont.)Tax-exempt income attributable to the Approved Enterprise cannot be
distributed to shareholders without subjecting the Company to taxes except upon complete liquidation of the Company. Out of the
Companys retained earnings as of December 31, 2002 approximately $ 461,000 are tax-exempt. If such retained 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 10%-25%) and an income tax liability of up to approximately $ 115,000 would be incurred as
of December 31, 2002. The Company currently intends to reinvest the amount of 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.The entitlement to the above benefits is conditional upon the Companys
fulfilling the conditions stipulated by the Law, regulations published thereunder and the certificates of approval for the specific
investments in approved enterprises.Should Check Point Ltd. fail to meet such requirements in the future, income
attributable to its Approved Enterprise programs could be subject to the regular Israeli corporate tax rate of 36%, and
the Company could be required to refund a portion of the tax benefits already received, with respect to such programs.Income from sources other than the Approved Enterprise is subject to
tax at regular Israeli corporate tax rate of 36%.3.
          The Israeli company has final tax assessments through the year 2000.4.
          On January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to
the reform, resident companies are subject to Israeli tax on income accrued or derived in Israel or abroad. In addition, the concept
of controlled foreign corporation was introduced, according to which an Israeli company may become subject to Israeli
taxes on certain income of a non-Israeli subsidiary if the subsidiarys primary source of income is passive income (such as
interest, dividends, royalties, rental income or capital gains). The tax reform also substantially changed the system of taxation of
capital gains. F-  18 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 8:-
          TAXES ON INCOME (Cont.)b.
          Deferred tax assets: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, 2001 and 2002, the Companys deferred taxes calculated on reserves and allowances are comprised as follows:  December 31,2001
          
          2002U.S. carryforward tax deductions
          
          $
          222,000
          
          
          
          $
          231,000Accrued vacation, severance pay, and property andEquipment
          
          
          5,759
          
          
          
          
          4,963Net deferred tax assets before valuation allowance
          
          
          227,759
          
          
          
          
          235,963Valuation allowance
          
          
          (222,000
          )
          
          
          
          (231,000
          )Net deferred tax assets
          
          $
          5,759
          
          
          
          $
          4,963Domestic
          
          $
          593
          
          
          
          $
          694Foreign
          
          
          5,166
          
          
          
          
          4,269$
          5,759
          
          
          
          $
          4,963  The subsidiary in the U.S. has provided valuation allowances in respect of
deferred tax assets resulting from tax benefits related to employee stock option exercises, which will be credited to additional
paid-in capital when realized. Management currently believes that it is more likely than not that those deferred tax deductions will
not be realized in the foreseeable future.Through December 31, 2002, Check Point Inc. had a U.S. federal loss carryforward
of approximately $ 625,000 thousands resulting from tax benefits related to employees stock option exercises that can be carried
forward and offset against taxable income for 15 to 20 years, expiring between 2010 - 2022.Utilization of U.S. net operating losses 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 net operating losses before utilization.c.
          Income before taxes on income is comprised as follows:  Year ended December 31,2000
          
          2001
          
          2002Domestic
          
          $
          243,843
          
          
          
          $
          366,237
          
          
          
          $
          289,116Foreign
          
          
          14,601
          
          
          
          
          15,286
          
          
          
          
          15,210$
          258,444
          
          
          
          $
          381,523
          
          
          
          $
          304,326 F-  19 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)  NOTE 8:-
          TAXES ON INCOME (Cont.)d.
          Income tax expenses are comprised as follows:  Year ended December 31,2000
          
          2001
          
          2002Current
          
          $
          41,543
          
          
          
          $
          59,843
          
          
          
          $
          48,450Deferred
          
          
          (4,312
          )
          
          
          
          (240
          )
          
          
          
          796$
          37,231
          
          
          
          $
          59,603
          
          
          
          $
          49,246Domestic
          
          $
          31,224
          
          
          
          $
          52,884
          
          
          
          $
          43,700Foreign
          
          
          6,007
          
          
          
          
          6,719
          
          
          
          
          5,546$
          37,231
          
          
          
          $
          59,603
          
          
          
          $
          49,246  e.
          Reconciliation of the theoretical tax expenses:A reconciliation between the theoretical tax expenses, assuming all income is
taxed at the statutory rate applicable to income of the Company and the actual income tax as reported in the statements of income, is
as follows:  Year ended December 31,2000
          
          2001
          
          2002Income before taxes as reported in thestatements of income
          
          $
          258,444
          
          
          
          $
          381,523
          
          
          
          $
          304,326Statutory tax rate in Israel
          
          
          36
          %
          
          
          
          36
          %
          
          
          
          36
          %Increase (decrease) in taxes resulting from:Effect of Approve Enterprise status (*)
          
          
          (25
          %)
          
          
          
          (17
          %)
          
          
          
          (22
          %)Other, net
          
          
          3
          %
          
          
          
          (3
          %)
          
          
          
          2
          %Effective tax rate
          
          
          14
          %
          
          
          
          16
          %
          
          
          
          16
          %(*)     Basic net earnings per share amounts ofthe
benefit resulting from theApproved Enterprise status
          
          $
          0.28
          
          
          
          $
          0.27
          
          
          
          $
          0.27(*)     Diluted net earnings per share amountsof the
benefit resulting from theApproved Enterprise status
          
          $
          0.25
          
          
          
          $
          0.25
          
          
          
          $
          0.26 F-  20 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)  NOTE 9:-
          SHARE CAPITALa.
          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.On June 29, 2000, the Companys Board of Directors approved a two-for-one
stock split in the form of a stock dividend, effective July 14, 2000.On January 18, 2001, the Companys Board of Directors approved a
three-for-two stock split in the form of a stock dividend, effective February 1, 2001. This stock split has been reflected in the
statement of changes in shareholders equity in 2000.Shareholders otherwise entitled to receive fractional shares because they held a
number of old Ordinary shares that are not evenly divisible by the split number, were paid by cash.All shares, options and earnings per share amounts have been retroactively
adjusted for all periods presented to reflect the stock splits effected as a stock 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 shares for issuance under the ESPP.
Eligible employees use up to 15% of their salaries to purchase Ordinary shares. The purchase plan is being implemented by effecting
an offering every six months. The price of an Ordinary share purchased under the purchase plan 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 2000, 2001 and 2002, employees purchased 143,813, 81,265 and 146,291
shares at average prices of $ 16.93, $ 46.90 and $ 21.08 per share, respectively.As of December 31, 2002, 5,088,416 shares were available for future
issuance. F-  21 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)  NOTE 9:-
          SHARE CAPITAL (cont.)d.
          Stock options:Under the Companys Stock Option Plan (the Plan), 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 this plan, generally vest over a period of four to five
years.Under the terms of the 1996 Incentive Employee Stock Option Plan, options to
purchase 101,452 thousand Ordinary shares were reserved for issuance for the U.S. plan and the international plan.As of December 31, 2002, 72,683 thousand options were available for future grant
under the U.S. plan and the international plan.A summary of the Companys stock option activity, and related information
for the years ended December 31, is as follows:  Options (in thousands)
          
          Weighted average exercise price2000
          
          2001
          
          2002
          
          2000
          
          2001
          
          2002Outstanding at beginning ofyear
          
          
          38,748
          
          
          
          
          33,428
          
          
          
          
          26,477
          
          
          
          $
          5.91
          
          
          
          $
          11.57
          
          
          
          $
          16.14Granted
          
          
          3,305
          
          
          
          
          2,607
          
          
          
          
          6,954
          
          
          
          
          57.73
          
          
          
          
          41.65
          
          
          
          
          17.84Exercised
          
          
          (7,552
          )
          
          
          
          (7,314
          )
          
          
          
          (2,939
          )
          
          
          
          3.25
          
          
          
          
          4.75
          
          
          
          
          4.16Forfeited
          
          
          (1,073
          )
          
          
          
          (2,244
          )
          
          
          
          (1,723
          )
          
          
          
          7.91
          
          
          
          
          14.84
          
          
          
          
          23.71Outstanding at end of year
          
          
          33,428
          
          
          
          
          26,477
          
          
          
          
          28,769
          
          
          
          $
          11.57
          
          
          
          $
          16.14
          
          
          
          $
          17.34Exercisable at end of year
          
          
          8,258
          
          
          
          
          9,611
          
          
          
          
          14,454
          
          
          
          $
          6.56
          
          
          
          $
          10.74
          
          
          
          $
          13.04 F-  22 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)  NOTE 9:-
          SHARE CAPITAL (cont.)The options outstanding as of December 31, 2002, have been separated into ranges
of exercise price, as follows:  Exercise price
          
          Options
              
               outstanding atDecember 31,
              
               2002
              
              (in thousands)
          
          Weighted
              
               average
              
               remaining
              
               contractual life
              
               (years)
          
          Weighted
              
               average
              
               exercise price
          
          Options
              
               exercisable at
              
               December 31,
              
               2002
              
               (in thousands)
          
          Weighted
              average
              
               exercise price
               of exercisable 
               options$
          
          
          
          
          
          
          
          
          
          
          $
          
          
          
          
          
          
          
          $0.64 - 2.65
          
          
          3,185
          
          
          
          2.74
          
          
          
          2.63
          
          
          
          2,406
          
          
          
          2.622.67 - 3.19
          
          
          1,798
          
          
          
          2.43
          
          
          
          3.12
          
          
          
          1,328
          
          
          
          3.103.77 - 4.46
          
          
          2,060
          
          
          
          2.74
          
          
          
          4.28
          
          
          
          1,259
          
          
          
          4.214.56 - 7.33
          
          
          700
          
          
          
          3.1
          
          
          
          5.89
          
          
          
          399
          
          
          
          5.848.17 - 9.83
          
          
          6,733
          
          
          
          3.61
          
          
          
          9.79
          
          
          
          5,271
          
          
          
          9.8110.33 - 13
          
          
          3,088
          
          
          
          6.16
          
          
          
          12.74
          
          
          
          553
          
          
          
          12.2913.02 - 17.00
          
          
          4,393
          
          
          
          5.29
          
          
          
          15.05
          
          
          
          1,364
          
          
          
          15.9820.36 - 23.60
          
          
          181
          
          
          
          3.87
          
          
          
          20.60
          
          
          
          90
          
          
          
          20.6227.22 - 30.54
          
          
          2,158
          
          
          
          5.73
          
          
          
          28.02
          
          
          
          207
          
          
          
          30.0231.75 - 36.72
          
          
          287
          
          
          
          4.53
          
          
          
          34.24
          
          
          
          186
          
          
          
          34.4640.09 - 51.21
          
          
          2,918
          
          
          
          5.18
          
          
          
          43.43
          
          
          
          921
          
          
          
          43.8157.59 - 65.58
          
          
          29
          
          
          
          4.66
          
          
          
          63.27
          
          
          
          9
          
          
          
          65.5868.42 - 70.02
          
          
          457
          
          
          
          4.77
          
          
          
          69.97
          
          
          
          193
          
          
          
          69.1070.19 - 75.08
          
          
          149
          
          
          
          4.54
          
          
          
          71.42
          
          
          
          66
          
          
          
          71.3679.79 - 86.54
          
          
          633
          
          
          
          5.13
          
          
          
          85.24
          
          
          
          202
          
          
          
          82.680.64 - 86.54
          
          
          28,769
          
          
          
          4.28
          
          
          
          17.34
          
          
          
          14,454
          
          
          
          13.04  The weighted average fair values at grant date of options granted for the years
ended December 31, 2000, 2001 and 2002, were $ 40.86, $ 28.29 and $ 9.44, respectively. All options are granted with
an exercise price of no less than the market value at the date of grant.NOTE 10:-
          EARNINGS PER SHAREThe following table sets forth the computation of historical basic and diluted
net earnings per share:  Year ended December 31,2000
          
          2001
          
          2002Net income
          
          $
          221,213
          
          
          
          $
          321,920
          
          
          
          $
          255,080Weighted average Ordinary sharesoutstanding
          
          
          232,611
          
          
          
          
          240,008
          
          
          
          
          244,097Diluted effect:Employee stock options
          
          
          29,904
          
          
          
          
          18,067
          
          
          
          
          10,675Diluted weighted average Ordinary sharesoutstanding
          
          
          262,515
          
          
          
          
          258,075
          
          
          
          
          254,772Basic net earnings per share
          
          $
          0.95
          
          
          
          $
          1.34
          
          
          
          $
          1.04Diluted net earning per share
          
          $
          0.84
          
          
          
          $
          1.25
          
          
          
          $
          1.00 F-  23 
  CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands  NOTE 11:-
          GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATAa.
          Summary information about geographical areas:  Year ended December 31,2000
          
          2001
          
          20021.
          Revenues based on the channel partnerslocation:Americas
          
          $
          204,373
          
          
          
          $
          235,360
          
          
          
          $
          184,823Europe, Middle East and Africa
          
          
          151,247
          
          
          
          
          199,303
          
          
          
          
          173,369Japan
          
          
          37,561
          
          
          
          
          52,827
          
          
          
          
          40,068Asia Pacific
          
          
          32,102
          
          
          
          
          40,153
          
          
          
          
          28,729$
          425,283
          
          
          
          $
          527,643
          
          
          
          $
          426,9892.
          Long-lived assets:Israel
          
          $
          6,952
          
          
          
          $
          7,772
          
          
          
          $
          6,134Americas
          
          
          3,616
          
          
          
          
          4,356
          
          
          
          
          3,499Other
          
          
          1,070
          
          
          
          
          1,120
          
          
          
          
          820$
          11,638
          
          
          
          $
          13,248
          
          
          
          $
          10,453  b.
          Financial income, net:  Financial income:Interest income
          
          $
          28,990
          
          
          
          $
          43,942
          
          
          
          $
          53,663Foreign currency translation adjustmentsand other
          
          
          1,033
          
          
          
          
          2,523
          
          
          
          
          3,52130,023
          
          
          
          
          46,465
          
          
          
          
          57,184Financial expense:Amortization of premium and accretionof discounts
          
          
          92
          
          
          
          
          1,405
          
          
          
          
          7,565Other
          
          
          784
          
          
          
          
          300
          
          
          
          
          305876
          
          
          
          
          1,705
          
          
          
          
          7,870$
          29,147
          
          
          
          $
          44,760
          
          
          
          $
          49,314 - - - - - - - - - - F-  24


# 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 DeshehChief Financial Officer
| |  | ----------------------------------------------------------------------

Date: March 27, 2003



---

---

# CERTIFICATION

I, Gil Shwed, certify
that:

|1. | I
have reviewed this annual report on Form 20-F of Check Point Software
               Technologies Ltd.;
|-- | ---------------------------------------------------------------------------------------------------------

|2. | Based
on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements
were                made, not misleading with respect to the period covered by this annual
report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based
on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects
the                financial condition, results of operations and cash flows of the
registrant as                of, and for, the periods presented in this annual report;
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The
registrants other certifying officers and I are responsible for
               establishing and maintaining disclosure controls and procedures (as
defined in                Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed
such disclosure controls and procedures to ensure that material           information
relating to the registrant, including its consolidated subsidiaries,           is made
known to us by others within those entities, particularly during the           period in
which this annual report is being prepared;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | evaluated
the effectiveness of the registrants disclosure controls and           procedures
as of a date within 90 days prior to the filing date of this annual           report (the
Evaluation Date); and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | presented
in this annual report our conclusions about the effectiveness of the           disclosure
controls and procedures based on our evaluation as of the Evaluation           Date;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
registrants other certifying officers and I have disclosed, based on
               our most recent evaluation, to the registrants auditors and the
audit                committee of registrants board of directors (or persons
performing the                equivalent functions):
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all
significant deficiencies in the design or operation of internal controls           which
could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weaknesses in internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | any
fraud, whether or not material, that involves management or other employees           who
have a significant role in the registrants internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The
registrants other certifying officers and I have indicated in this
               annual report whether or not there were significant changes in internal
controls                or in other factors that could significantly affect internal
controls subsequent                to the date of our most recent evaluation, including
any corrective actions with                regard to significant deficiencies and
material weaknesses.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated:   March 27, 2003 |  | By: /s/Gil Shwed
Gil ShwedChief  Executive  Officer  and  Chairman  of  the Board
|----------------------- |  | -----------------------------------------------------------------------------------------------



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# CERTIFICATION

I, Eyal Desheh, certify
that:

|1. | I
have reviewed this annual report on Form 20-F of Check Point Software
               Technologies Ltd.;
|-- | ---------------------------------------------------------------------------------------------------------

|2. | Based
on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements
were                made, not misleading with respect to the period covered by this annual
report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based
on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects
the                financial condition, results of operations and cash flows of the
registrant as                of, and for, the periods presented in this annual report;
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The
registrants other certifying officers and I are responsible for
               establishing and maintaining disclosure controls and procedures (as
defined in                Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed
such disclosure controls and procedures to ensure that material           information
relating to the registrant, including its consolidated subsidiaries,           is made
known to us by others within those entities, particularly during the           period in
which this annual report is being prepared;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | evaluated
the effectiveness of the registrants disclosure controls and           procedures
as of a date within 90 days prior to the filing date of this annual           report (the
Evaluation Date); and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | presented
in this annual report our conclusions about the effectiveness of the           disclosure
controls and procedures based on our evaluation as of the Evaluation           Date;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
registrants other certifying officers and I have disclosed, based on
               our most recent evaluation, to the registrants auditors and the
audit                committee of registrants board of directors (or persons
performing the                equivalent functions):
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all
significant deficiencies in the design or operation of internal controls           which
could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weaknesses in internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | any
fraud, whether or not material, that involves management or other employees           who
have a significant role in the registrants internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The
registrants other certifying officers and I have indicated in this
               annual report whether or not there were significant changes in internal
controls                or in other factors that could significantly affect internal
controls subsequent                to the date of our most recent evaluation, including
any corrective actions with                regard to significant deficiencies and
material weaknesses.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated:   March 27, 2003 |  | By:  _/s/ Eyal Desheh
Eyal DeshehChief Financial Officer
|----------------------- |  | ----------------------------------------------------------------------



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EXHIBITS

|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|
|1   | Articles of Association (incorporated by reference to Exhibit 2.5 to the Company's
|    | annual report on Form 20-F for the year ended December 31, 2000)                  
|4.1 | Form of Indemnification Agreement between the Company and its officers and        
|    | directors (Incorporated by reference to exhibit 4.1 of the (Company's annual      
|    | report on Form 20-F for the year ended December 31, 2001)                         
|8   | List of subsidiaries (incorporated by reference to "Item 4 - Information on the   
|    | Company - Organizational Structure" in this Annual Report on Form 20-F)           
|10  | Consent of Kost Forer & Gabbay, a member of Ernst & Young Global                  
|11  | Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002           



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|ERNST
&YOUNG | n | Kost Forer & Gabbay
              3 Aminadav St.
              Tel-Aviv 67067, Israel | n | Phone:
              
               Fax: | 972-3-6232525
              
               972-3-5622555
|------------ | - | ------------------------------------------------------------------------------------- | - | ----------------------------------------- | ---------------------------------------------------------

Consent of Independent Auditors

We  hereby  consent  to  the  incorporation  by  reference  in the  Registration  Statements  on  Form  S-8  (Registration
Nos.333-6032,  333-7260,  333-9136 and 333-9508) of Check Point Software Technologies Ltd. of our report dated January 21,
2003, with respect to the consolidated  financial  statements of Check Point Software  Technologies  Ltd. included in this
Annual Report on Form 20-F for the year ended December 31, 2002.

|March 27, 2003
Tel-Aviv, Israel | Yours Truly,
KOST, FORER & GABBAY
A Member of Ernst & Young Global
|------------------------------- | ------------------------------------------------------------------



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EXHIBIT 11

# CERTIFICATION

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350,CHAPTER 63 OF
 TITLE 18, UNITED STATES CODE)

Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code), each of the undersigned officers of Check
Point Software Systems Ltd., an Israeli corporation (the Company), does hereby
certify, to the best of such officers knowledge, information and belief, that

The
Annual Report on Form 20-F for the year ended December 31, 2002 (the Form
20-F) of the Company fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and information contained in the Form 20-F fairly
presents, in all material respects, the financial condition and results of operations of
the Company.

|Dated:   March 27, 2003 |  | By:     /s/Gil Shwed
Gil ShwedChief  Executive  Officer  and  Chairman  of  the Board
|----------------------- |  | ---------------------------------------------------------------------------------------------------

| |  | By:  _/s/ Eyal Desheh
Eyal DeshehChief Financial Officer
| |  | ----------------------------------------------------------------------



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