SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

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

OR

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

OR

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

OR

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

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

For the transition period from ___________ to ___________

Commission file number 0-28584

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

(Exact name of Registrant as specified in its charter)

ISRAEL

(Jurisdiction of incorporation or organization)

3A Jabotinsky Street, Ramat-Gan 52520, Israel

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act: 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: 244,309,929 ordinary shares, NIS 0.01 nominal value .

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

Yes x No o

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

Yes o No o

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

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

Item 17 o Item 18 x

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

Yes o No x

PART I






Item 1.	Identity of Directors, Senior Management and Advisors	3

Item 2.	Offer Statistics and Expected Timetable	3

Item 3.	Key Information	5

Item 4.	Information on Check Point	16

Item 4A.	Unresolved staff comments	33

Item 5.	Operating and Financial Review and Prospects	33

Item 6.	Directors, Senior Management and Employees	48

Item 7.	Major Shareholders and Transactions with Related Party	57

Item 8.	Financial Information	58

Item 9.	The Offer and Listing	59

Item 10.	Additional Information	59

Item 11.	Quantitative and Qualitative Disclosures about Market Risk	75

Item 12.	Description of Securities Other than Equity Securities	77

PART II






Item 13.	Defaults, Dividend Arrearages and Delinquencies	78

Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	78

Item 15.	Controls and Procedures	78

Item 16.	Reserved	78

Item 16A.	Audit Committee Financial Expert	78

Item 16B.	Code of Ethics	78

Item 16C.	Principal Accountant Fees and Services	79

Item 16D.	Exemption for the Listing Standards for Audit Committee	79

Item 16E.	Purchase of Equity Securities by the Issuer and Affiliated Purchasers	80

PART III






Item 17.	Financial Statements	81

Item 18.	Financial Statements	81

Item 19.	Exhibits	82

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Currency of presentation and certain defined terms

In this Annual Report on Form 20-F, references to “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “$” or “dollar” or “U.S. dollar” are to the legal currency of the United States, references to “NIS” or “Israeli Shekel” are to the legal currency of Israel and references to “Euro” are to the legal currency of the European Union.

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

ITEM 3.

KEY INFORMATION

Selected financial data

We prepare our historical consolidated financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP). The selected financial data set forth in the table below have been derived from our audited historical financial statements for the years 2001 to 2005. The selected income data for the years 2003, 2004 and 2005, and the selected balance sheet data at December 31, 2004 and 2005, have been derived from our audited consolidated financial statements set forth in “Item 18 – Financial Statements.” The selected income data for the years 2001 and 2002, and the selected balance sheet data at December 31, 2001, 2002 and 2003, have been derived from our previously published audited consolidated financial statements, which are not included in this document. These selected financial data should be read in conjunction with our consolidated financial statements, and are qualified entirely by reference to them.

	Year Ended December 31,
	2001		2002		2003		2004(1)		2005(2)
	(in thousands, except per share data)


Consolidated Statement of Income Data:
Revenues	$	527,643	$	426,989	$	432,572	$	515,360	$	579,350

Operating expenses:
Cost of revenues		26,571		20,693		18,923		27,750		30,540
Research and development		33,221		28,709		29,314		44,483		50,542
Selling and marketing		109,086		104,606		111,007		135,712		142,336
General and administrative		22,002		17,969		17,644		24,098		24,244
Acquired in-process R&D		-		-		-		23,098		-

Total operating expenses		190,880		171,977		176,888		255,141		247,662

Operating income		336,763		255,012		255,684		260,219		331,688
Financial income, net		44,760		49,314		43,506		44,777		54,177

Income before taxes on income		381,523		304,326		299,190		304,996		385,865
Taxes on income		59,603		49,246		55,311		56,603		66,181

Net Income	$	321,920	$	255,080	$	243,879	$	248,393	$	319,684

Basic earnings per share	$	1.34	$	1.04	$	0.98	$	0.99	$	1.30
Shares used in computing basic earnings
per share		240,008		244,097		247,691		251,244		245,520
Diluted earnings per share	$	1.25	$	1.00	$	0.96	$	0.95	$	1.27
Shares used in computing diluted earnings
per share		258,075		254,772		255,083		260,608		251,747

(1)	Including the following significant acquisition related pre-tax charges: in-process R&D of $23.1 million, stock-based compensation of $4.6 million (related to Zone Labs acquisition) and amortization of intangible assets of $4.2 million.

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

	December 31,
	2001		2002		2003		2004		2005
	(in thousands)


Consolidated Balance Sheet Data:
Working capital	$	355,032	$	643,318	$	983,533	$	791,455	$	1,186,119
Total assets		1,145,665		1,425,611		1,713,665		1,919,819		2,092,495
Shareholders' equity		915,728		1,187,042		1,461,545		1,630,824		1,775,721
Capital Stock		144,642		163,975		194,251		370,017		387,303

RISK FACTORS

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

Forward looking statements include, among others, statements in (i) “Item 4 – Information on Check Point” regarding our belief as to increased acceptance of Internet technologies, expansion of connectivity services, acceleration of the use of networks, increasing demands on enterprise security systems, the impact of our relationship with our technology partners on our sales goals, the contribution of our products to our future revenue and our development of future products and (ii) “Item 5 – Operating and Financial Review and Prospects” regarding, among other things, future amounts and sources of our revenue, our ongoing relationships with our current and future customers and channel partners, our future costs and expenses, and the adequacy of our capital resources.

Forward-looking statements involve risks, uncertainties and assumptions, and our actual results may differ materially from those predicted. Many of these risks, uncertainties and assumptions are described in the risk factors set forth below in this section and elsewhere in this Form 20-F. Although we believe that our plans, intentions and expectations are reasonable, we may not achieve them. All forward looking statements included in this Form 20-F are based on information available to us on the date of the filing and reasonable assumptions. We undertake no obligation to update any of the forward looking statements after the date of the filing to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

Risks Related to Our Business and Our Market

If the market for Internet security solutions does not continue to grow our business will be adversely affected.

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

ⁿ

the continued expansion of Internet usage and the number of organizations adopting or expanding intranets,

ⁿ

the ability of their respective infrastructures to support an increasing number of users and services, and

ⁿ

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 we currently anticipate, our business, operating results and financial condition will be materially adversely affected. You can see more details in “Item 4 – Information on Check Point.”

We may not be able to successfully compete.

The market for Internet security solutions is intensely competitive and we expect that competition will increase in the future. Our principal competitors include Cisco Systems, Inc., F5 Networks, Inc., Internet Security Systems, Inc., Juniper Networks, Inc., McAfee, Inc., Microsoft Corporation, SonicWALL Inc., Symantec Inc. and WatchGuard Technologies Inc.

Some of our 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 us. As a result, they may be able to adapt better than us to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products. In addition, consolidation in the Internet security market may affect our competitive position. We may not be able to continue competing successfully against our current and future competitors. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which will materially adversely affect our business, operating results and financial condition.

The market for Internet security also includes many niche competitors, generally smaller companies at a relatively early stage of operations, which are focused on specific Internet security needs. These companies’ specialized focus may enable them to adapt better than us to new or emerging technologies and changes in customer requirements in their specific areas of focus. In addition, some of these companies can invest relatively large resources on very specific technologies or customer segments. Although to date none of these companies has materially affected our business, the cumulative effect of these companies’ activities in the market may result in price reductions, reduced gross margins and loss of market share, any of which will materially adversely affect our business, operating results and financial condition.

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

If any of the events described above are realized, our business, operating results and financial condition will be materially adversely affected. You can see more details in “Item 4 – Information on Check Point.”

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

The Internet security industry is characterized by rapid technological advances, changes in customer requirements, frequent new product introductions and enhancements, and evolving industry standards in computer hardware and software technology. In particular, the market for Internet and intranet applications is rapidly evolving. As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, programming tools and computer language technology.

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

Undetected product defects may increase our costs and impair the market acceptance of our products and technology.

Our products are complex and must meet stringent quality requirements. They may contain undetected hardware or software errors or defects, especially when new products are 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. We may need to divert the attention of our engineering personnel from our research and development efforts to address instances of errors or defects. In addition, we may in the future incur costs associated with warranty claims.

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

Our earnings will be adversely affected due to compliance with new accounting policies relating to the expensing of stock options.

We are required to prepare financial statements in accordance with the Financial Accounting Standards Board’s (FASB) recently issued accounting standard SFAS No. 123(R), “Shared-Based Payment.” SFAS No. 123(R) requires the fair value of all equity-based awards granted to employees to be recognized in financial statements beginning in the first quarter of 2006. The result is that we will be required to record an expense with respect to stock option grants, even if the exercise price of the stock options is equal to the market price of the underlying shares on the date of grant. The adoption of SFAS No. 123(R) will have a material adverse effect on our results of operations, although it will have no impact on our overall financial position or cash flows. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The impact will depend on our levels of share-based payments granted in the future, among other things. You can see more details in “Item 5 – Operating and Financial Review and Prospects.”

Risks relating to acquisitions.

We have made acquisitions in the past and we may make additional acquisitions in the future.

In October 2005 we announced that we had signed a definitive agreement to acquire privately-held Sourcefire, Inc., subject to various conditions, and we have not yet completed this acquisition. The closing of the acquisition of Sourcefire is subject to regulatory approval, for which we have submitted two separate applications with regulatory authorities in the U.S. We have received United States anti-trust approval and we are waiting for a determination on our pending application with the Committee on Foreign Investment in the United States (CFIUS) under the Exon-Florio legislation (Section 5021 of the Omnibus Trade and Competitiveness Act of 1988), which provides for a 30-day review following notification of a potential acquisition. CFIUS has the option to extend the review period for an additional 45-day investigation. In February 2006, CFIUS notified us that the 30-day review provided by the Exon-Florio legislation had expired and our pending application had moved into the investigative stage for an additional 45-day investigation. Although we are working with CFIUS through the investigative period, we cannot be certain that the acquisition will be approved or will be approved on the terms originally negotiated or otherwise acceptable to us. For more information regarding our proposed acquisition of Sourcefire and CFIUS review, see “Item 5 – Operating and Financial Review and Prospects” under the caption “Overview.”

In March 2004 we completed the acquisition of Zone Labs, Inc. The acquisition of Zone Labs involved the integration of two companies that had previously operated independently, as will the acquisition of Sourcefire if completed. The difficulties of combining the companies’ operations, which may be present in any substantial acquisition we may make, include issues such as: the coordination of geographically separate organizations, integrating personnel with diverse business backgrounds, potential difficulties in retaining employees and the associated adverse effects on relationships with existing partners. The integration may interrupt the activities of one or both of the combined companies’ businesses and may result in the loss of key personnel. This could have an adverse effect on our business, results of operations, financial condition or prospects.

Our operating margins may decline.

We may experience a decline in operating margins due to the following reasons:

ⁿ

increased competition that will result in pressure on us to reduce prices,

ⁿ

additional investments in the continuing development and expansion of our sales and marketing organization, including the expansion of our field organization both in the United States and additional countries in Europe, Asia and Latin America,

ⁿ

integration of an acquired business that at the time of acquisition has operating margins lower than ours,

ⁿ

additional expansion of our research and development organization,

ⁿ

changes to the treatment of stock option compensation due to the adoption of SFAS No. 123(R), and

ⁿ

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

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

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

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

ⁿ

changes in customer capital spending budgets and the allocation of these budgets over the course of the year,

ⁿ

seasonal trends in customer purchasing,

ⁿ

the occurrence of Internet security breaches or threats,

ⁿ

the timing and success of new products and new technologies introduced by us or our competitors,

ⁿ

regional or global economic and political conditions,

ⁿ

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

ⁿ

fluctuations in foreign currency exchange rates.

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

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

We operate with virtually no backlog. Therefore, the timing and volume of orders within a given period and our ability to fulfill these orders determine the amount of our revenues within the period. We derive our sales principally through indirect channels, making it difficult for us to predict revenues. Furthermore, our expense levels are based, in part, on our expectations as to future revenues. If our revenue levels are below expectations, our operating results are likely to be adversely affected, since most of our expenses are not variable. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Due to the factors described above, it is likely that in some future quarter our operating results may be below the expectations of public market analysts and investors. In this event, the price of our ordinary shares would likely decline significantly.

We are exposed to additional costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards.

As a public company, we will be spending an increased amount of management time and resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and Nasdaq National Market rules. Particularly, as a foreign private issuer, we will need to comply with the provisions of Section 404 of the Sarbanes-Oxley Act no later than the filing of our annual report on Form 20-F for the fiscal year ending December 31, 2006. Section 404 requires management’s annual review and evaluation of our internal controls over financial reporting, and attestation of the effectiveness of our internal controls over financial reporting by management and our independent registered public accounting firm in connection with the filing of our annual report on Form 20-F for the fiscal year ending December 31, 2006, and with each subsequently filed annual report on Form 20-F. As part of this process, we will need to document and test our internal control systems and procedures and make improvements in order for us to comply with the requirements of Section 404. This process will result in additional accounting and legal expenses.

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

Our future performance depends in large part on the continued service of our key technical, marketing, sales and management personnel, including particularly our executive officers who were involved in the development of our Stateful Inspection technology and all of our principal products and technologies. None of our key personnel is bound by an employment agreement requiring service for any defined period of time. Our future performance also depends on our ability to attract such skilled personnel in the future. Competition for these personnel is intense. In order to retain our employees, we provide many of them with cash and stock based awards that can be realized over time, for their long term contribution, and we offer some of them career development paths within Check Point. We cannot assure you that we can retain our key personnel in the future. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel could make it difficult for us to meet key objectives, such as timely product introductions, and could adversely affect our business, financial condition and results of operations.

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

Under current U.S. and Israeli law, we may not be able to enforce, in whole or in part, agreements that prohibit some of our employees from competing with us or working for our competitors after they cease working for us. It may be difficult for us to restrict our competitors from gaining the expertise our former employees gained while working for us. For example, Israeli courts have recently required employers seeking to enforce non-competition undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that material harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

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

Two distributors accounted for about 24% of our sales in 2005 (approximately 12% each), and in each of 2003 and 2004 a single distributor accounted for about 13% of our sales. We expect that a small number of distributors and resellers will continue to generate a significant portion of our sales. If these distributors and resellers reduce the amount of their purchases from us, our business, operating results and financial condition could be materially adversely affected.

Currently, most of our revenues are generated from sales of Internet security products, which are primarily sold under the VPN-1 and related brands, and related sales of software subscriptions, support, training and consulting. Our future growth depends heavily on our ability to effectively develop and sell new product lines as well as add new features to existing product lines. You can see more details in “Item 4 – Information on Check Point” and in “Item 5 – Operating and Financial Review and Prospects.”

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

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

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

We are the defendants in various lawsuits, including employment claims and other legal proceedings in the normal course of our business. In addition, we received several class action complaints alleging violations of the federal securities laws. These complaints were later consolidated by the court into one action. You can see more details in “Item 8 – Financial Information” under the caption “Legal proceedings.” Legal proceedings can be expensive, lengthy and disruptive to normal business operations, and can require extensive management attention and resources, regardless of their merit. Moreover, we cannot predict the results of complex legal proceedings, and an unfavorable resolution of a lawsuit or proceeding could materially adversely affect our business, results of operations and financial condition.

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

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

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

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

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

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

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

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technology import and export license requirements,

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costs of localizing our products for foreign countries, and the lack of acceptance of localized products in foreign countries,

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trade restrictions,

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imposition of or increases in tariffs or other payments on our revenues in these markets,

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changes in regulatory requirements,

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greater difficulty in protecting intellectual property,

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difficulties in managing our overseas subsidiaries and our international operations,

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changes in general economic conditions,

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political instability and civil unrest, which could discourage investment and complicate our dealings with governments,

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variety of foreign laws and legal standards,

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expropriation and confiscation of assets and facilities,

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

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difficulties in collecting receivables from foreign entities or delayed revenue recognition,

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differing labor standards,

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potentially adverse tax consequences, including taxation of a portion of our revenues at higher rates than the tax rate that applies to us in Israel, and

ⁿ

the introduction of exchange controls and other restrictions by foreign governments.

These difficulties could cause our revenues to decline, increase our costs or both.

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

As of December 31, 2005 our directors and executive officers beneficially owned approximately 23.5% of our outstanding ordinary shares. The interests of these shareholders may differ from your interests and present a conflict. If these shareholders act together, they could exercise significant influence over our operations and business strategy. For example, although these shareholders hold considerably less than a majority of our outstanding ordinary shares, they have sufficient voting power to influence all matters requiring approval by our shareholders, including the election and removal of directors and the approval or rejection of mergers or other business combination transactions. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive you of a possible premium for your ordinary shares as part of a sale of our company.

Indemnification of directors and officers.

We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them against some types of claims, subject to dollar limits and other limitations. These agreements provide, subject to Israeli law, for us to indemnify each of these directors and senior officers for any of the following obligations or expenses that they may incur:

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monetary liability imposed on the director or senior officer in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court, for an act that the director or senior officer performed by virtue of being our director or senior officer,

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reasonable legal costs, including attorneys’ fees, expended by a director or senior officer as a result of an investigation or proceeding instituted against the director or senior officer by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the director or senior officer and either:

no financial liability was imposed on the director or senior officer in lieu of criminal proceedings, or

financial liability was imposed on the director or senior officer in lieu of criminal proceedings but the alleged criminal offense does not require proof of criminal intent, and

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reasonable legal costs, including attorneys’ fees, expended by the director or senior officer or for which the director or senior officer is charged by a court:

in an action brought against the director or senior officer by us, on our behalf or on behalf of a third party,

in a criminal action in which the director or senior officer is found innocent, or

in a criminal action in which the director or senior officer is convicted but in which proof of criminal intent is not required.

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

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

Risks Related to Our Operations in Israel

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

We are incorporated under the laws of the State of Israel, and our principal executive offices and principal research and development facilities are located in Israel. Accordingly, political, economic and military conditions in and surrounding Israel may directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could materially adversely affect our operations. Since October 2000 terrorist violence in Israel has increased significantly. Ongoing and revived hostilities or other Israeli political or economic factors could materially adversely affect our business, operating results and financial condition.

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

Our facilities in Israel have been granted Approved Enterprise status under the Law for the Encouragement of Capital Investments, 1959, commonly referred to as the Investment Law. The Investment Law provides that capital investments in a production facility (or other eligible assets) may be designated as an Approved Enterprise. Until recently, the designation required advance approval from the Investment Center of the Israel Ministry of Industry, Trade and Labor (the Investment Center). For these programs to be eligible for tax benefits, we must meet certain conditions, relating principally to adherence to the approved programs and to periodic reporting obligations. We believe that we are currently in compliance with these requirements. However, if we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory rate. We could also be required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index.

Our board of directors has determined that we will not distribute any amounts of our undistributed tax exempt income as dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to our Approved Enterprise program as the undistributed tax exempt income is essentially permanent in duration.

On April 1, 2005, an amendment to the Investment Law came into effect, which revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a Privileged Enterprise (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. The amendment does not apply to investment programs approved prior to December 31, 2004. The new tax regime will apply to new investment programs only.

As a result of the amendment, tax-exempt income generated under the provisions of the new law will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income. We are currently evaluating the impact the amendment will have on us. Based on our preliminary analysis, it may materially adversely affect our 2006 financial statements.

You can see more details in “Item 5 – Operating and Financial Review and Products” under the caption “Taxes on income” and in “Item 10 – Additional Information” under the caption “Israeli Taxation, Foreign Exchange Regulation and Investment Programs.”

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

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

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

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

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

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

ITEM 4.

INFORMATION ON CHECK POINT

We develop, market and support a wide range of software and combined hardware and software products and services that enable our customers to communicate securely over IP (Internet Protocol) networks, primarily targeting those connected to the Internet. Our products and services protect our customers’ networks in four areas: perimeter, internal, Web and endpoint. Perimeter security protects against unauthorized entry and other threats that are introduced from outside the network. Internal security protects against threats that are introduced from inside the network. Web security enables remote employees and partners to connect to an organization’s network securely from any Web browser and protects Web-based business applications. Endpoint security protects personal computers from hackers, worms, cyber spies (spyware) and data thieves. Our products and services operate under a unified security architecture, with central management and enforcement of security policy. Our products and services are sold to enterprises, service providers, small- and medium-sized businesses and consumers. Our Open Platform for Security (OPSEC) framework, allows customers to extend the capabilities of our products and services, enabling integration with leading hardware appliances and third-party security software applications. Our products are sold, integrated and serviced by a network of partners around the world.

You can see more details regarding the important events in the development of our business since the beginning of 2005 in “Item 5 – Operating and Financial Review and Prospects” under the caption “Overview.”

We were incorporated in Israel in 1993. Our registered office and principal place of business is located at 3A Jabotinsky Street, Ramat-Gan 52520, Israel. The telephone number of our registered office is 972-3-753-4555. Our company’s Web site is www.checkpoint.com . The contents of our Web site are not incorporated by reference into this Form 20-F.

This Form 20-F is available on our Web site. If you’d like to receive a printed copy via mail, please contact our Investor Relations department at 800 Bridge Parkway, Redwood City, CA 94065, U.S.A., tel: 650-628-2000, email: ir@us.checkpoint.com .

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

Industry background

The ability to access and distribute information is a key strategic asset in today’s competitive business environment. The resulting need to effectively use and communicate information as well as work more collaboratively has led to the extensive deployment of network-based communications systems (connectivity). Increased connectivity has in turn expanded the need for technology to safeguard and manage the access to information available over these networks, which have become increasingly global.

Increase in connectivity

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

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

The need for security

The growth of connectivity among organizations of all sizes has increased the risk that an organization’s information technology (IT) resources can be attacked via the Internet. Organizations have recognized this risk and are deploying security solutions in an effort to protect their confidential information from unauthorized access.

The primary means of controlling access to organizational networks and protecting against attacks is the deployment of Internet firewalls. Firewalls are typically deployed at the demarcation of an organization’s LAN and the Internet, and are used to strictly control traffic into and out of the organizational network. Firewall technology is currently undergoing an evolution, enabling it to detect and defeat highly sophisticated network and application-level attacks that are increasingly prevalent on the Internet today. Increasing numbers of organizations are deploying an additional layer of security by applying security software to networked endpoint devices such as personal computers. Endpoint security includes personal firewall, security and policy enforcement features that have been specifically designed for internal and remote personal computing devices.

In addition to protecting an organization’s IT assets from attack, organizations take steps to guard their sensitive information traversing untrusted networks, such as the Internet. Securing organizational information on the Internet is critical as more organizations utilize the Internet as their corporate network backbone to link company offices and employees. Transmitting information over the Internet without adequate security exposes this information to unauthorized interception, manipulation or replication. To mitigate this risk, an increasing number of organizations are deploying VPNs to encrypt and authenticate their Internet-bound traffic.

Frequently, firewalls and VPNs are provided in an integrated manner or as a single product. Integrating firewall and VPN functionality delivers greater security for all network traffic and facilitates the management and enforcement of an organization’s security policies.

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

Technologies

We have developed a variety of technologies that secure information and networks. Our technologies provide protection:

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

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for internal threats – to protect our customers’ networks and endpoints from the threats that emerge within an organization, such as worms, internal hacking and misuse of business applications,

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for Web-based communications – by allowing remote and mobile employees to securely connect to their organizations’ networks via a Web browser, and to defend against attacks targeting our customers’ Web-based business applications,

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for network endpoints – with security solutions that address the risks posed by hackers, worms, spyware and other threats to the internal and remote computers that access our customers’ networks.

Our products and services implement these technologies to protect our customers’ networks and private information, and enable their IT administrators to define their security policies and enforce these policies across the network. These technologies also collect and bring together related information, monitor security and traffic flow, and analyze and update configurations to reflect changes in the security policy.

We package and market our products and services under different names and at a variety of prices. Each package addresses security tasks for different networking environments.

Stateful Inspection technology

Our patented Stateful Inspection technology is the de facto standard in network security technology. Stateful Inspection extracts and maintains extensive “state information” (data that provides context for future screening decisions) from all relevant communications layers, to provide accurate and highly efficient traffic inspection.

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

Stateful Inspection enables our products to inspect network traffic with virtually no loss in performance. This means that our products respond efficiently to larger volumes of data as network traffic increases. Our Stateful Inspection technology can be adapted to new protocols, software applications and security threats, can be upgraded, and can be run on a wide range of operating systems.

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

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

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

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drop it when the security policy has been violated,

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

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

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

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

Application Intelligence

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

Security Management Architecture (SMART)

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

SecurePlatform

SecurePlatform is an optimized, pre-hardened version of the Linux operating system that enables easy deployment of our products on a variety of open systems (systems whose key interfaces are based on widely supported standards). SecurePlatform bundles our products with a set of tools that ease setup and network configuration. SecurePlatform lowers costs while maintaining network performance, thus reducing the total cost of ownership for security servers.

SecureXL

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

Malicious Code Protector

Malicious Code Protector, a patent-pending technology, provides protection against buffer overflow attacks that occur when a program or process tries to store more data in a buffer (temporary data storage area) than it was intended to hold. This is a common technique used by hackers to execute malicious code on business computer systems in an attempt to gain unauthorized access or bring the system down. Malicious Code Protector helps prevent these types of attacks by providing highly accurate and efficient detection and analysis of executable code in a virtual server environment combined with the ability to prevent any malicious code from being allowed to run on the system.

Cooperative Enforcement

Our patented Cooperative Enforcement technology enables our Integrity product family (described below) to work cooperatively with network devices such as VPN gateways, switches and routers to cooperate in the enforcement of corporate security policies. Cooperative Enforcement technology helps ensure that every endpoint personal computer is compliant with a designated security policy (such as having anti-virus software or the latest operating system patches installed) before it is allowed to access network resources.

TrueVector technology

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

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

ClusterXL

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

Open Platform for Security (OPSEC)

Our OPSEC framework provides a single platform that enables the integration and interoperability of multi-vendor information security products and technologies. The OPSEC framework allows certified third-party security applications to plug into our solutions through our published application programming interfaces. Examples include:

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content vectoring protocol – integrates virus scanning software and other content inspection programs,

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URL filtering protocol – integrates URL list services, which deny client requests for Web sites that are listed in a “bad URL” list, or allow only those requests for URLs that appear in a “good URL” list,

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suspicious activity monitoring protocol – integrates programs that monitor suspicious activity.

Products that carry the OPSEC Certified seal have been tested and certified for integration and interoperability within the OPSEC framework.

Products

Historically, we have focused on VPN and firewall technologies, the main building blocks for network security. In June 2003 we introduced a new version of our flagship VPN-1 family, “NG with Application Intelligence.” NG with Application Intelligence integrated network and application-level capabilities to deliver comprehensive attack protection and network security. In 2005 we introduced NGX, an advanced security software platform that is the basis for all of our enterprise security solutions. The NGX platform delivers a unified security architecture for perimeter, internal, Web and endpoint security. This unified security architecture enables enterprises of all sizes to reduce the cost and complexity of security management and ensure that their security systems can be easily extended to adapt to new and evolving threats.

Our products address specific customer needs in a wide range of deployment scenarios with a variety of operating systems such as Nokia IPSO, Microsoft Windows, Sun Solaris and Linux.

The table below summarizes our product offerings:

Perimeter Security	Internal security	Web Security	Endpoint Security	Security Management and Online Services

VPN-1 Pro Integrated firewall and VPN gateway for enterprises VPN-1 Edge Secure connectivity for remote sites and large scale deployments Check Point Express Integrated security gateway for mid-sized businesses VPN-1 VSX Virtualized security and network services for service providers and large enterprises FireWall-1 GX Security gateway designed to protect network infrastructure of wireless operators UTM - Unified Threat Management Products Check Point Express CI Integrated security gateway - including anti-virus - for mid-sized businesses Safe@Office Security appliances for small businesses VPN-1 Edge Secure connectivity for remote sites and large scale deployments	InterSpect gateway that blocks attacks introduced from inside the network	Connectra Web security gateway that provides secure remote access via SSL VPN Web Intelligence Attack protection for the Web-based business applications SSL Network Extender Web browser plug-in that enables secure remote access via SSL VPN	Integrity product family Security for every desktop and laptop in the organization VPN-1 SecureClient Secure remote network access ZoneAlarm Product Family Security for home-user and small-business PC	SmartCenter A singe console for centrally managing security Eventia product family Security event management and reporting SmartDefense Services Real-time security update subscription Provider-1 Security management for service providers and large scale enterprises Security Management Portal (SMP) Security management of up to tens of thousands of Safe@Office gateways

Perimeter security

Perimeter security ensures the confidentiality, integrity and availability of corporate networks by controlling access to all entry and exit points of the network. Perimeter security solutions are also used to securely connect geographically distributed offices or sites.

Enterprise products:

VPN-1 Pro

VPN-1 Pro is an integrated firewall and VPN gateway that provides security and remote connectivity to corporate applications and network resources for enterprises with over 500 employees. VPN-1 Pro integrates access control, authentication and encryption to help ensure the security of network connections, the authenticity of local and remote users, and the privacy and integrity of data communications. VPN-1 Pro is available as a gateway or bundled with SmartCenter centralized management solution, which is described below.

VPN-1 Edge

VPN-1 Edge integrated security appliances deliver secure connectivity for remote sites such as branch offices, retail stores and partner sites. VPN-1 Edge integrates firewall, VPN, intrusion prevention and anti-virus capabilities with high availability and advanced routing features, and performs as a UTM solution (see description below). This ensures that remote site communications are available and secure. Centrally managed, VPN-1 Edge appliances enable the efficient setup of thousands of gateways. VPN-1 Edge appliances are available in wired and wireless models.

Products for medium businesses:

Check Point Express

Check Point Express is an integrated security gateway designed for mid-sized companies with up to 500 users, which have single or multiple sites. Check Point Express integrates firewall, VPN, and intrusion prevention capabilities with simple and centralized management of all security functions.

Unified Threat Management (UTM) Solutions:

Unified Threat Management (UTM) solutions are products that unify and integrate multiple security features in a single security solution. Typical UTM products integrate firewall, VPN, anti-virus, and intrusion prevention technologies within a single, centrally managed product. We are addressing this emerging market with the following products:

Check Point Express CI

Check Point Express CI is an integrated security gateway designed for mid-sized companies with up to 500 users, which have single or multiple sites. Check Point Express integrates firewall, VPN, anti-virus and intrusion prevention capabilities with simple and centralized management of all security functions.

Safe@Office

Safe@Office is a unified threat management appliance for small business networks of up to 100 users. Safe@Office provides integrated firewall, VPN, intrusion prevention, anti-virus, anti-spam and URL filtering capabilities. Safe@Office products can be managed locally using a Web browser, or centrally by a Managed Service Provider (MSP) using the Security Management Portal (SMP) described below. Safe@Office appliances are available in wired and wireless models.

VPN-1 Edge

You can see description above, under the caption “Enterprise products.”

Products for service providers, data centers and large enterprises:

VPN-1 VSX

VPN-1 VSX is a virtualized security gateway that allows enterprises and service providers to create up to 250 virtual systems on a single hardware platform. This means that a customer which manages multiple firewalls and VPNs does not need to purchase separate hardware for each. Rather, the customer can purchase a single hardware gateway, and then use VPN-1 VSX software to create numerous firewalls and VPNs on that single piece of hardware. This reduces the hardware investment needed to achieve security across an entire network and eases security administration. VPN-1 VSX can be administered by our SmartCenter and Provider-1 centralized management solutions, which are described below.

FireWall-1 GX

FireWall-1 GX is a security gateway that is designed to protect the network infrastructure of wireless operators. It protects wireless infrastructure by combining our patented Stateful Inspection technology with security services specifically designed for Global System for Mobile communication (GSM) technologies. With FireWall-1 GX, wireless network operators can offer seamless roaming to their data customers without exposing the network to potential security threats.

Internal security

Internal security is designed to protect corporate networks from security breaches that originate from inside the network, such as worm outbreaks, internal hacking or misuse of business applications by users within an organization.

InterSpect

InterSpect is an internal security gateway that blocks the spread of worms and other attacks that are introduced from inside the network. InterSpect segments the internal network into multiple “security zones” with varied security policies, and controls traffic and user access between these zones. When InterSpect detects malicious or unauthorized communications coming from a network segment, it blocks that traffic from reaching other network segments. InterSpect quarantines computers that generate suspicious activity or do not comply with security policy, and grants network access only after the problem has been resolved. InterSpect can be administered by our SmartCenter and Provider-1 centralized management solutions, which are described below.

Web security

Web Security products are designed to help companies take advantage of Web technologies in a safe and secure manner. Organizations are increasingly dependent on the Web to share information with customers, connect with business partners and keep employees productive. The increased dependence on the Web has been accompanied by a significant increase in the malicious targeting of Web systems for profit and advantage. Whether conducting business through Web applications or sharing information via SSL VPN, today’s businesses need to rely on the availability and integrity of their Web-based systems.

Connectra

Connectra is a Web security gateway that provides secure SSL VPN (Secure Socket Layer VPN) remote access with integrated application and endpoint security in a single, unified solution. It allows remote users, such as remote employees and business partners, to securely connect to an organization’s network, using any Web browser and without installing client software. Connectra is available as an appliance or as software for open servers.

Web Intelligence

Web Intelligence is an integrated Web application firewall that protects Web-based business applications from attack. It protects the multiple components that make up a Web application, including Web servers, communication protocols and databases. It is sold as an add-on to VPN-1 Pro and is integrated with the Connectra and InterSpect gateways.

SSL Network Extender

SSL Network Extender is a browser plug-in that extends SSL VPN remote access to network-based applications from any Web browser. It enables the convenience of browser-based remote access while enabling the utilization of software applications that are installed on the remote computer, such as email clients. It is sold as an add-on to VPN-1 Pro and is integrated with the Connectra gateways.

Endpoint security

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

Integrity product family

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

The Integrity product family includes Integrity, which secures desktops and laptops while enforcing network access security policy on every computer before it gains access to the corporate network; Integrity SecureClient, which combines endpoint security capabilities and desktop firewall with a VPN client; and Integrity Clientless Security, a browser plug-in version of Integrity that secures computers on demand without requiring a full software installation.

Integrity options include Integrity Anti-Spyware for spyware detection and removal; Integrity Advanced Server, which delivers maximum scalability and reliability through server clustering; and Integrity IM Security, which offers comprehensive instant messaging (IM) security that keeps these applications private and secure.

SmartDefense Program Advisor

The SmartDefense Program Advisor service provides real-time recommendations to administrators and end users on which programs should be allowed to run on an endpoint computer. This service accesses a knowledgebase of tens of thousands of programs that have been classified as either good or bad. SmartDefense Program Advisor saves administrators the effort of researching and defining which programs they should allow or deny as part of their endpoint security policy and helps end users make more accurate decisions on what programs they should allow to run on their computers.

VPN-1 SecureClient

VPN-1 SecureClient works with our VPN gateways to extend secure remote access to end users. It encrypts and authenticates data to protect against eavesdropping and data tampering. VPN-1 SecureClient also allows administrators to enforce desktop policies for additional security, such as protecting corporate networks from unauthorized users gaining access to the network by first gaining access to a remote user machine.

ZoneAlarm product family

ZoneAlarm Security Suite is a complete Internet security solution for individuals and small businesses, which protects personal computers running the Microsoft Windows operating systems. ZoneAlarm Security Suite integrates personal firewall, anti-virus and anti-spyware capabilities, SmartDefense update service, ID and privacy protection, email security, anti-phishing and anti-spam, instant messaging protection and wireless computer protection.

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

Security management and online services

We offer a variety of products based on our Security Management Architecture (SMART), which enables centralized policy configuration, monitoring, logging and reporting for our perimeter, internal, Web and endpoint security solutions.

SmartCenter

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

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SmartDashboard is the interface that enables administrators to centrally define and distribute security and VPN policies,

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SmartView Tracker provides real-time visual tracking of all logged connections and administrator activity.

SmartCenter Pro provides all the capabilities of SmartCenter plus the following additional management capabilities for the most complex environments:

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SmartLSM , for management of large-scale VPN and security gateway deployments,

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SmartUpdate for centralized distribution of software and license updates,

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SmartMap for a visual display of network and security deployment,

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SmartDirectory for integration with LDAP information stores for centralized network user management,

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SmartView Monitor for real-time network, VPN and user monitoring, and

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SmartPortal for Web-based access to SmartCenter.

Eventia product family

Eventia Analyzer is a comprehensive security event management solution that provides centralized, real-time correlation of security information from multi-vendor devices in order to help security administrators respond more quickly and decisively to security events, such as an attack against the network or an intruder trying to gain unauthorized access to a critical business application. Automated aggregation and correlation of data helps improve security incident response by filtering out unimportant information and automatically prioritizing the most significant threats.

Eventia Reporter enables security administrators to generate reports on metrics that are critical to network security operations. It provides centralized reporting on network utilization, security events and user activity, and consolidates the data into predefined reports with customizable filters. Eventia Reporter is closely integrated with SmartCenter and Provider-1, which is described below.

SmartDefense Services

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

Management solutions for large-scale enterprises

Provider-1

Provider-1 is a security management product designed for service providers and the very largest enterprises. It consolidates and centralizes the management of security policies for thousands of users. Provider-1 enables the administrator to simplify a complex security policy by dividing it into more manageable sub-policies. These sub-policies match geographic, functional or other logical groupings. Policies can be applied globally to all gateways or tailored to meet the needs of individual customers.

Security Management Portal (SMP)

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

Revenues by category of activity and geographic area

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

	Year Ended December 31,
	2003		2004		2005
Category of activity:	(in thousands)

Products and licenses	$	230,096	$	275,677	$	281,364
Software subscriptions		161,690		196,327		239,319
Support, training and consulting		40,786		43,356		58,667

Total revenues	$	432,572	$	515,360	$	579,350

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

Sales and marketing

We sell through a wide network of channel partners, including distributors, resellers, value-added resellers, system integrators and managed services providers. Our agreements with these channel partners are usually non-exclusive. Almost all of our enterprise sales are to our channel partners (we rarely sell directly to end users). Most of our sales to the consumer market are either directly via our Web sites or through retail stores.

We use various marketing tools to increase awareness and knowledge of our products and to promote sales. These include our corporate Web sites, seminars and tradeshows that we organize and participate in, print media and online advertising and telemarketing campaigns. In addition, we provide current and prospective customers with 30 day software evaluation licenses to try the products.

We have strategic relationships with various hardware partners that include server, workstation, appliance and networking vendors. These include Crossbeam Systems Inc., Dell Inc., Hewlett-Packard Co., International Business Machines Corporation (IBM), Nokia Corporation, Nortel Networks Corp., Siemens AG and Sun Microsystems Inc. The purpose of these relationships is to improve the integration of our security software with hardware platforms, support our marketing and sales efforts and help increase customer satisfaction. In addition, these hardware partners provide primary support and training to their customers.

We also initiated and continue to maintain our Open Platform for Security (OPSEC) framework, enabling integration with leading hardware appliances and third-party security software applications. OPSEC promotes interfaces that allow integration and interoperability between our products and “best of breed” complementary technologies. This enables users to create a complete Internet security architecture. Products that carry the “OPSEC certified” and “Secured by Check Point” seals have been tested to ensure integration and interoperability. OPSEC partners include both appliance manufacturers (such as those listed above) and application developers such as Computer Associates International, Inc., RSA Security, Inc., Trend Micro, Inc. and VeriSign, Inc.

Customer service and support

We operate a worldwide technical services organization, providing a wide range of technical, customer, educational and professional services. Our technical assistance centers in the United States and Israel offer worldwide 24-hour service, seven days per week. There are employees in additional locations supporting our call centers, as well as call centers operated by third parties.

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

Until the end of 2003, we generally offered a separate subscription and support program for each license. Since that time, we have begun offering more comprehensive programs that cover all of our products in a customer’s installed base. These new programs offer lower cost to our customers and achieve greater account coverage. In 2005, the majority of our subscription and support contracts were based on these new programs.

Research and product development

We believe that our future success will depend upon our ability to enhance our existing products and develop and introduce new products to address the increasingly sophisticated needs of our customers. We work closely with existing and potential customers, distribution channels and major resellers, who provide significant feedback for product development and innovation. Our product development efforts are focused on providing a unified security architecture that functions throughout all layers of the network. This includes enhancements to our current family of products and the continued development of new products to address perimeter, internal, Web and endpoint security needs and security management needs. Although we expect to develop most of our new products internally, we may decide, based upon timing and cost considerations, that it would be more efficient to acquire or license certain technologies or products from third parties, or to make acquisitions of other businesses.

Research and development expenses were $29.3 million in 2003, $44.5 million in 2004 and $50.5 million in 2005. These amounts include stock based compensation related to the Zone Labs acquisition in the amount of $1.3 million per year in 2004 and 2005. At December 31, 2005 we had 520 employees dedicated to research and development activities and quality assurance.

Competition

You can see more details in “Item 3 – Key Information” under the caption “Risk Factors – We may not be able to successfully compete.”

Proprietary rights

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

We have five U.S. patents and over 25 U.S. patents pending, and additional patent applications pending worldwide. Our efforts to protect our proprietary rights may not be adequate or our competitors may independently develop technology that is similar but is based on our technology.

Effect of government regulation on our business

Organizational structure

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

NAME OF SUBSIDIARY	COUNTRY OF INCORPORATION




Check Point Software Technologies, Inc.	United States of America (Delaware)
Check Point Software Technologies (Canada) Inc.	Canada
Check Point Software Technologies (Japan) Ltd.	Japan
Check Point Software Technologies (Singapore) PTE Ltd.	Singapore
Check Point Software Technologies (Netherlands) B.V	Netherlands
Israel Check Point Software Technologies Ltd. China (1)	China
Check Point Holding (Singapore) PTE Ltd.	Singapore
Check Point Holding (Singapore) PTE Ltd. - US Branch (2)	United States of America (New York)
Check Point Software Technologies Cayman Islands	Cayman Islands
Zone Labs LLC (3)	United States of America (California)
Zone Labs Ltd. (4)	United Kingdom
Zone Labs PTE. Ltd. (5)	Singapore
SofaWare Technologies Ltd. (6)	Israel

(1) Branch of Check Point Software Technologies Ltd.

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

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

(4) Wholly owned by Zone Labs LLC. In process of being merged into a subsidiary of Check Point in United Kingdom.

(5) Wholly owned by Zone Labs LLC. In process of being merged into a subsidiary of Check Point in Singapore.

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

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

NAME OF SUBSIDIARY	COUNTRY OF INCORPORATION




Check Point Software Technologies (Australia) PTY Ltd.	Australia
Check Point Software Technologies SARL	France
Check Point Software Technologies B.V	Netherlands
Check Point Software Technologies (Italia) Srl (1)	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 (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 (Hong Kong) Ltd. Shanghai office (2)	China

Check Point Software Technologies (Korea) Ltd.	S. Korea
Check Point Software Technologies (Finland) Oy	Finland
Check Point Yazilim Teknolojileri Pazarlama A.S. (3)	Turkey
Check Point Software Technologies (Belgium) S.A	Belgium
Check Point Software Technologies (Austria) GmbH	Austria
Check Point Software Technologies (India) Private Limited	India
Check Point Software Technologies (Russia) OOO	Russia
Check Point Software Technologies (Belarus) LLC	Belarus
Check Point Software Technologies (Taiwan) Ltd. (4)	Taiwan

(1) 97% owned by Check Point Software Technologies (Netherlands) B.V. and 3% owned by Check Point Software Technologies Ltd.

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

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

(4) Under formation.

Property, plants and equipment

Our headquarters and principal research and development facilities are located in Ramat-Gan, Israel, near Tel-Aviv, where we lease approximately 106,000 square feet of office space pursuant to several lease agreements. All of these leases expire on December 31, 2006 (with options to extend the leases for periods ranging from one to three years). We also lease a total of approximately 170,000 square feet of office space in the United States. About 48,000 square feet of this space is in Redwood City, California, approximately 70,000 square feet is in San Francisco, California, approximately 31,000 square feet is near Dallas, Texas and approximately 21,000 square feet is in field offices. These facilities are leased for periods of up to five years. In January 2006 we signed an agreement to lease approximately 28,000 square feet near Dallas, Texas. This new lease will commence in May 2006 and will replace our existing facility in Dallas, Texas. In addition, we lease regional office space in Canada, Europe and Asia.

Principal capital expenditures and divestitures

For more information regarding our principal capital expenditures currently in progress, see “Item 5 – Operating and Financial Review and Prospects” under the caption “Liquidity and Capital Resources.”

ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis is based on our consolidated financial statements, including the related notes, and should be read in conjunction with them. You can find our financial statements in “Item 18 – Financial Statements.”

Overview

Our business is subject to the effects of general global economic conditions and, in particular, market conditions in the information technology (IT) industry and Internet security industry. During the past few years these economic and market conditions have reduced the high growth that the Internet security industry had previously experienced. As a result, the financial results and capital spending levels of many of our customers have been materially adversely affected. If general economic and industry conditions fail to improve, or if they deteriorate, demand for our products could be adversely affected.

We derive most of our revenues from sales of our Internet security products (primarily under the VPN-1 and related brands), and related software subscriptions, support, training and consulting. We expect this to continue to be the case in the foreseeable future.

During each of 2003 and 2004 we derived approximately 13% of our sales from a single distributor. During 2005 we derived approximately 24% of our sales from two distributors (approximately 12% each).

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

	Year Ended December 31,
Region:	2003			2004			2005



Americas		43	%		44	%		46	%
Europe, Middle East and Africa		41	%		42	%		41	%
Japan		9	%		7	%		6	%
Asia Pacific other than Japan		7	%		7	%		7	%

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

In October 2005 we announced that we had signed a definitive agreement to acquire privately-held Sourcefire, Inc., subject to various conditions, and we have not yet completed this acquisition. The total consideration for the acquisition is approximately $225 million. We anticipate this consideration will consist of approximately $215 million in cash and the assumption of the Sourcefire stock option plan. In addition, we will assume the cost of additional options issued by Sourcefire after February 15, 2006. The agreement has been approved by the boards of directors of both companies and by the stockholders of Sourcefire. The closing of the acquisition of Sourcefire is subject to regulatory approval, for which we have submitted two separate applications with regulatory authorities in the U.S. We have received United States anti-trust approval and we are waiting for a determination on our pending application with the Committee on Foreign Investment in the United States (CFIUS) under the Exon-Florio legislation (Section 5021 of the Omnibus Trade and Competitiveness Act of 1988), which provides for a 30-day review following notification of a potential acquisition. CFIUS has the option to extend the review period for an additional 45-day investigation. In February 2006, CFIUS notified us that the 30-day review provided by the Exon-Florio legislation had expired and our pending application had moved into the investigative stage for an additional 45-day investigation. Although we are working with CFIUS through the investigative period, we cannot be certain that the acquisition will be approved or will be approved on the terms originally negotiated or otherwise acceptable to us. You can see more details in “Item 3 – Key Information” under the caption “Risk Factors – Risks related to Acquisition.”

Critical accounting policies and estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP). U.S. GAAP requires that we make estimates and assumptions in certain circumstances that affect the amounts reported in our consolidated financial statements and related footnotes. We base our estimates on our experience and various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe that the estimates and assumptions involved in the accounting policies described below have the greatest potential impact on our financial statements, thus we consider these to be our critical accounting policies. You can see a summary of all of our significant accounting policies in Note 2 to our consolidated financial statements.

Revenue recognition

We generally derive our revenues from three primary sources:

ⁿ

new software licenses,

ⁿ

software subscriptions, and

ⁿ

services revenues, which include support, training and consulting.

The basis for revenue recognition for new software licenses 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, we recognize revenue when:

ⁿ

persuasive evidence of an arrangement for the license of software exists,

ⁿ

the products are delivered or services are performed,

ⁿ

the price is deemed fixed or determinable and free of contingencies or significant uncertainties, and

ⁿ

collection is probable.

When we grant certain channel partners longer than customary payment terms, we consider the fee not to be fixed or determinable. In these cases, we defer revenues and recognize them when payment becomes due from the channel partners, or when payment is actually collected, provided that all other revenue recognition criteria have been met.

We also defer revenues from software subscription and support, and recognize them either in equal portions over the term of the software subscription and support agreement, or when services are performed.

We follow very specific and detailed guidelines, several of which are discussed above, in measuring revenue; however, certain judgments affect the application of our revenue recognition policy.

Our revenue recognition policy takes into consideration the creditworthiness and past transaction history of each channel partner in determining the probability of collection as a criterion of revenue recognition. This determination requires the exercise of judgment, which affects our revenue recognition. If we determine that collection of a fee is not probable, we defer the revenue recognition until the time collection becomes probable, which is generally upon receipt of cash.

Revenues earned on software arrangements involving multiple elements are allocated to each element based on the “residual method.” The fair value of the undelivered element is determined based on objective figures, called Vendor Specific Objective Evidence (VSOE). The Vendor Specific Objective Evidence of the fair value of the undelivered elements (including software subscription, support, training and consulting) is generally determined based on the price charged for the undelivered element when sold separately or renewed. Such determination is judgmental and for most contracts is based on normal pricing and discounting practices for those elements in similar arrangements.

Allowance for doubtful accounts and sales returns

We maintain an allowance for doubtful accounts for losses that may result from the failure of our channel partners to make required payments. We estimate this allowance based on our judgment as to our ability to collect outstanding receivables. We form this judgment based on an analysis of significant outstanding invoices, the age of the receivables, our historical collection experience and current economic trends. If the financial condition of our channel partners were to deteriorate, resulting in their inability to make payments, we would need to increase the allowance for doubtful accounts. We also record a provision for estimated sales returns in the same period as we record the related revenues. We base this estimate on historical sales returns and other factors. If the historical data used to calculate these estimates do not properly reflect future returns, we may need to increase the provision for sales returns.

Derivative and hedge accounting

Most of our sales are denominated in U.S. dollar, and we incur most of our expenses in U.S. dollar, Euro and Israeli shekels. We enter into option contracts to hedge our foreign currency exposure to lower fluctuations in revenue denominated in Japanese Yen and expenses denominated in Euro. These hedging arrangements are classified as cash flow hedges. Accordingly, changes in their fair value are recorded in other comprehensive income. We also enter into forward exchange contracts designated to hedge the fair value of certain foreign currency denominated assets. The changes in the fair value of these contracts are recognized in earnings. We estimate the fair value of such derivative contracts by reference to forward and spot rates and options’ pricing quoted in active markets.

Establishing and accounting for foreign exchange contracts involve judgments, such as determining the nature of the exposure, assessing its amount and timing, and evaluating the effectiveness of the hedging arrangement.

Although we believe that our estimates are reasonable and meet the requirement of hedge accounting, actual results may differ from these estimates, and such difference could cause fluctuation of our recorded revenue and expenses.

Legal contingencies

We are the defendants in various lawsuits, including employment claims and other legal proceedings in the normal course of our business. In addition, we received several class action complaints alleging violations of the federal securities laws. These complaints were later consolidated by the court into one action. In determining whether provisions should be recorded for pending litigation claims, we assess the allegations made and the likelihood that we will successfully defend ourselves. When we believe that it is probable that we will not prevail in a particular matter, we then estimate the amount of the provision required based in part on our legal counsel’s advice.

You can see more details in “Item 8 – Financial Information” under the caption “Legal proceedings.”

Income taxes and valuation allowance

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

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

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

Realizability of long-lived assets

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

Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of fair value to the carrying amount of the asset, an impairment charge is recorded. We measure fair value using discounted projected future cash flows.

Goodwill and other intangible assets

We follow SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to periodic impairment tests in accordance with the Statement. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The total purchase price of business acquisitions accounted for using the purchase method is allocated first to identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of net assets of purchased businesses is recorded as goodwill.

We perform an annual impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. We operate in one operating segment, and this segment comprises our only reporting unit. In calculating the fair value of the reporting unit, we use a discounted cash flow methodology, market multiples and market capitalization. Significant estimates that we use in these fair value methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples of the reportable unit. Other factors we consider are the brand awareness and the market position of the reporting unit and assumptions about the period of time we will continue to use the brand in our product portfolio. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill and intangible assets with an indefinite life. As of December 31, 2005 no impairment charges were required.

Results of Operations

The following table presents information concerning our results of operations in 2003, 2004 and 2005:

	Year Ended December 31,
	2003		2004		2005
	(in thousands)


Revenues:
Products and licenses	$	230,096	$	275,677	$	281,364
Software subscriptions		161,690		196,327		239,319
Support, training and consulting		40,786		43,356		58,667

Total revenues		432,572		515,360		579,350


Operating expenses*:
Cost of revenues		18,923		27,750		30,540
Research and development		29,314		44,483		50,542
Selling and marketing		111,007		135,712		142,336
General and administrative		17,644		24,098		24,244
Acquired in-process R&D		-		23,098		-

Total operating expenses		176,888		255,141		247,662


Operating income		255,684		260,219		331,688
Financial income, net		43,506		44,777		54,177


Income before taxes on income		299,190		304,996		385,865
Taxes on income		55,311		56,603		66,181

Net income	$	243,879	$	248,393	$	319,684


* Including stock-based compensation (related to Zone Labs acquisition) in the following items:

Cost of revenues			$	137	$	408
Research and development				1,297		1,252
Selling and marketing				2,745		1,825
General and administrative				441		260

Total stock-based compensation expenses			$	4,620	$	3,745

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

	Year Ended December 31,
	2003			2004			2005



Revenues:
Products and licenses		53	%		54	%		49	%
Software subscriptions		37			38			41
Support, training and consulting		10			8			10

Total revenues		100			100			100


Operating expenses:
Cost of revenues		4			5			5
Research and development		7			9			9
Selling and marketing		26			26			25
General and administrative		4			5			4
Acquired in-process R&D		-			5			-

Total operating expenses		41			50			43


Operating income		59			50			57
Financial income, net		10			9			9


Income before taxes on income		69			59			66
Taxes on income		13			11			11

Net income		56	%		48	%		55	%

Revenues

We derive our revenues from the sale of products and licenses and related software subscriptions, support, training and consulting. Our revenues were $432.6 million in 2003, $515.4 million in 2004 and $579.4 million in 2005. The increase in revenues in 2004 was attributable both to organic growth and to the inclusion of Zone Labs’ operations starting in the second quarter of 2004. Revenue in 2005 increased due to growth in our product sales and the continued strengthening of our subscription and support sales, and due to the inclusion of Zone Labs’ operations for a full year. Strengthening of our subscription and support sales is attributed mainly to greater account coverage of our new comprehensive subscription and support programs and growth of our SmartDefense service and the consumer business. We anticipate that revenues in 2006 will continue to increase due to organic growth and following completion of the anticipated acquisition of Sourcefire. We cannot assure you, however, that revenues will grow in 2006 due to several factors, any of which could materially adversely affect our revenues. These factors include the uncertainty of the global economic conditions, the market acceptance of new products, our ability to complete and if so, successfully integrate Sourcefire and the level of products and price competition.

Cost of revenues

Our cost of revenues is comprised of the cost of post-sale customer support, training and consulting. It also includes the cost of freight, software and hardware production, manuals, packaging and license fees. Cost of revenues was $18.9 million in 2003, $27.8 million in 2004 and $30.5 million in 2005. These amounts include amortization of intangible assets and stock-based compensation related to the Zone Labs acquisition in the amount of $4.2 million in 2004 and $5.8 million in 2005. The acquired intangible assets are amortized over their useful lives on a straight-line basis, which best represents the distribution of their economic value. In 2004 the increase in cost of revenues was mainly attributable to the inclusion of expenses of Zone Labs’ operations and amortization of intangible assets starting in the second quarter of 2004 and to the increase in sales of hardware-based products. The increase in cost of revenues in 2005 was attributable mainly to the inclusion of Zone Labs’ operations for a full year. We anticipate that cost of revenues will increase in 2006 in line with an expected growth in revenues derived from products incorporating hardware and with the inclusion of Sourcefire’s results of operations and amortization of intangible assets resulting from the acquisition of Sourcefire, if completed.

Research and development

Research and development expenses consist primarily of salaries and other related expenses for research and development personnel, as well as the cost of facilities and depreciation of capital equipment. Research and development expenses were $29.3 million in 2003, $44.5 million in 2004 and $50.5 million in 2005. These amounts include stock-based compensation related to the Zone Labs acquisition in the amount of $1.3 million in 2004 and $1.3 million in 2005. Research and development expenses represent 7% of revenue in 2003, 9% in 2004 and 9% in 2005. In 2004 the increase in these expenses was mainly attributable to the increase in the number of research and development employees, resulting from the acquisition of Zone Labs in the second quarter. In 2005 the increase was mainly attributable to the inclusion of Zone Labs’ research and development employees for the full year and to the increase in the number of our other research and development employees. We anticipate that research and development expenses in 2006 will increase due to expected additional recruiting of employees, an expected increase in payroll and related expense, and the acquisition of Sourcefire, if completed.

Selling and marketing

Selling and marketing expenses consist primarily of salaries, commissions, advertising, trade shows, travel and other related expenses. Selling and marketing expenses were $111.0 million in 2003, $135.7 million in 2004 and $142.3 million in 2005. These amounts include amortization of intangible assets and stock-based compensation related to the Zone Labs acquisition in the amount of $2.9 million in 2004 and $2.1 million in 2005. Selling and marketing expenses represent 26% of revenue in 2003, 26% in 2004 and 25% in 2005. In 2004 these expenses increased mainly due to the inclusion of Zone Labs’ operations, the increase in compensation expenses (in line with the increase of revenues), increase in marketing activities and the continued strengthening of the Euro. In 2005 the increase was mainly attributable to the inclusion of Zone Labs’ operations for the full year. The decrease in selling and marketing expenses as a percentage of revenue in 2005 is attributable mainly to improved efficiency of the sales force. We anticipate that selling and marketing expenses will increase in 2006 due to expected increased marketing activities, expected additional recruiting of employees, an expected increase in payroll and related expense, and the acquisition of Sourcefire, if completed.

General and administrative

General and administrative expenses consist primarily of salaries and headcount related expenses, professional fees, insurance costs and other. General and administrative expenses were $17.6 million in 2003, $24.1 million in 2004 and $24.2 million in 2005. These amounts represented 4% of revenue in 2003, 5% in 2004 and 4% in 2005. The increase in general and administrative expenses in 2004 compared to 2003 was mainly due to the inclusion of Zone Labs’ operations and a market increase in insurance costs. In 2005 the increase was mainly attributable to the inclusion of Zone Labs’ operations for the full year. The decrease in general and administrative expenses as a percentage of revenue in 2005 is attributable mainly to improved efficiency. We anticipate that general and administrative expenses will increase in 2006 due to an expected increase in payroll and related expense, and the acquisition of Sourcefire, if completed.

In-process research and development

Upon the acquisition date of Zone Labs in 2004 we recorded a $23.1 million charge for acquired in-process research and development (IPR&D). This expense was attributable to projects which qualified as not yet having reached technological feasibility and with no alternative future use. The value of IPR&D was determined using the discounted cash flow approach. The expected future cash flow attributable to IPR&D was discounted at 25%. At the time of the acquisition of Zone Labs we estimated that these IPR&D projects were 32% complete and would be completed over the following 3 years.

Deferred stock-based compensation

In conjunction with the acquisition of Zone Labs we recorded deferred stock-based compensation in the amount of $16.6 million. This amount represents the intrinsic value of approximately 2.8 million options to purchase our ordinary shares that we issued in exchange for Zone Labs’ unvested stock options. This amount is included in the total fair value of Zone Labs’ options assumed of $50.4 million. Deferred stock-based compensation is recognized over the remaining vesting period of the related options. Stock-based compensation associated with these options amounted to $4.6 million in 2004 and $3.7 million in 2005. We anticipate incurring additional compensation expense, as a result of the adoption of SFAS No. 123(R). The adoption of SFAS No. 123(R) will have a material adverse effect on our results of operations, although it will have no impact on our overall financial position or cash flows.

Operating margin

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

ⁿ

increased competition that will result in pressure on us to reduce prices,

ⁿ

integration of an acquired business that at the time of acquisition has operating margins lower than ours,

ⁿ

additional expansion of our research and development organization,

ⁿ

changes to the treatment of stock option compensation due to the adoption of SFAS No. 123(R), and

ⁿ

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

The amount and timing of these factors are likely to result in fluctuations in operating margins.

Financial income, net

Financial income, net consists primarily of interest earned on cash equivalents and marketable securities. Financial income, net was $43.5 million in 2003, $44.8 million in 2004 and $54.2 million in 2005. Interest income is heavily dependent on prevailing U.S. interest rates. In 2004 financial income, net increased slightly as a result of rising interest rates, despite the decrease in our average cash levels due to the amount we paid in the Zone Labs acquisition and the share repurchase programs executed in 2004. The increase in 2005 is attributable mainly to the continued rise in interest rates.

Taxes on income

Our effective tax rate was 18.5% in 2003, 18.6% in 2004 and 17.2% in 2005. These relatively low tax rates were mainly achieved as a result of the Approved Enterprise status granted to our production facilities in Israel. Our effective tax rate may increase in 2006, as a result of the amendment to the Investment Law. We are currently evaluating the impact the amendment will have on us. Based on our preliminary analysis, it may materially adversely affect our 2006 financial statements.

We have elected the alternative package of tax exemptions and reduced tax rates for our production facilities that have received Approved Enterprise status. Accordingly, income derived from these facilities is generally entitled to a tax-exemption period of two years and a reduced corporate tax rate of 10% to 25% for an additional period of eight years, based on our percentage of foreign investment. The tax benefits for our existing Approved Enterprise programs are scheduled to gradually expire by 2013. The period of tax benefits for each capital investment plan expires upon the earlier of: (1) twelve years from completion of the investment under the approved plan, or (2) fourteen years from receipt of approval.

Out of our retained earnings as of December 31, 2005, approximately $661 million are tax-exempt. If we were to distribute this tax-exempt income before our complete liquidation, it would be taxed at the reduced corporate tax rate applicable to these profits (10% to 25%), and an income tax liability of up to approximately $165 million would be incurred. Our board of directors has determined that we will not distribute any amounts of our undistributed tax exempt income as dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to our Approved Enterprise program as the undistributed tax exempt income is essentially permanent in duration.

If we fail to meet the requirements of an Approved Enterprise we would be subject to corporate tax in Israel at the regular statutory rate. We could also be required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index.

You can see more details in “Item 10 – Additional Information” under the caption “Israeli Taxation, Foreign Exchange Regulation and Investment Programs” and “Item 3 – Key Information” under the caption “The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes.”

Quarterly Results of Operations

The following tables set forth certain unaudited consolidated statements of income data for each of the quarters in 2004 and 2005, as well as the percentage of our revenues represented by each item. We prepare our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such information. You should read this information in conjunction with our consolidated financial statements, including the related notes, appearing in “Item 18 – Financial Statements.”

	Year Ended December 31, 2004								Year Ended December 31, 2005
	Q1		Q2(2)		Q3(3)		Q4(4)		Q1(1)		Q2(2)		Q3(3)		Q4(4)
	Unaudited
	(in thousands, except per share amounts)

Revenues	$	116,062	$	126,919	$	129,330	$	143,049	$	137,661	$	144,563	$	141,068	$	156,058

Operating expenses:
Cost of revenues		4,934		7,853		7,585		7,378		6,990		7,940		7,800		7,810
Research and development		8,662		11,329		12,087		12,405		13,147		12,211		12,733		12,451
Selling and marketing		28,598		35,480		34,267		37,367		34,777		37,442		33,461		36,656
General and administrative		4,850		6,660		6,415		6,173		6,348		6,063		6,009		5,824
Acquired in-process R&D		23,098		-		-		-		-		-		-		-

Total operating expenses		70,142		61,322		60,354		63,323		61,262		63,656		60,003		62,741

Operating income		45,920		65,597		68,976		79,726		76,399		80,907		81,065		93,317
Financial income, net		10,769		10,579		11,459		11,970		12,401		13,468		14,321		13,987

Income before taxes on income		56,689		76,176		80,435		91,696		88,800		94,375		95,386		107,304
Taxes on income		14,761		12,913		13,677		15,252		15,094		16,378		16,642		18,067

Net Income	$	41,928	$	63,263	$	66,758	$	76,444	$	73,706	$	77,997	$	78,744	$	89,237


Basic earnings per share	$	0.17	$	0.25	$	0.27	$	0.31	$	0.30	$	0.32	$	0.32	$	0.36
Shares used in computing basic
earnings per share		250,189		254,778		251,423		248,585		247,894		245,398		244,261		244,517
Diluted earnings per share	$	0.16	$	0.24	$	0.26	$	0.30	$	0.29	$	0.31	$	0.31	$	0.36
Shares used in computing
diluted earnings per share		259,829		266,800		258,341		257,459		256,150		252,179		250,075		248,585

(1)	Including pre-tax charges for amortization of intangible assets and deferred stock-based compensation of $2.6 million in first quarter of 2005 (related to Zone Labs acquisition).

(2)	Including pre-tax charges for amortization of intangible assets and deferred stock-based compensation of $3.1 million in second quarter of 2004 and $2.4 million in second quarter of 2005 (related to Zone Labs acquisition).

(3)	Including pre-tax charges for amortization of intangible assets and deferred stock-based compensation of $2.9 million in the third quarter of 2004 and $2.2 million in the third quarter of 2005 (related to Zone Labs acquisition).

(4)	Including pre-tax charges for amortization of intangible assets and deferred stock-based compensation of $2.8 million in the fourth quarter of 2004 and $2.2 million in fourth quarter of 2005 (related to Zone Labs acquisition).

As a percentage of revenues:

	Year Ended December 31, 2004												Year Ended December 31, 2005
	Q1			Q2			Q3			Q4			Q1			Q2			Q3			Q4



Revenues		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%

Operating expenses:
Cost of revenues		4			6			6			5			5			6			5			5
Research and development		7			9			9			9			9			8			9			8
Selling and marketing		25			28			26			26			25			26			24			23
General and administrative		4			5			5			4			5			4			4			4
Acquired in-process R&D		20			-			-			-			-			-			-			-

Total operating expenses		60			48			46			44			44			44			42			40

Operating income		40			52			54			56			56			56			58			60
Financial income, net		9			8			9			8			9			9			10			9

Income before taxes on income .		49			60			63			64			65			65			68			69
Taxes on income		13			10			11			11			11			11			12			12

Net Income		36	%		50	%		52	%		53	%		54	%		54	%		56	%		57	%

Our 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:

ⁿ

changes in customer capital spending budgets and its allocation throughout the year,

ⁿ

seasonal trends in customer purchasing,

ⁿ

the occurrence of Internet security breaches or threats,

ⁿ

the timing and success of new product and new technologies introduced by us or our competitors,

ⁿ

regional or global economic and political conditions,

ⁿ

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

ⁿ

fluctuations in foreign currency exchange rates.

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

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

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) (SFAS No. 123(R)), “Share-Based Payment,” which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB No. 25, and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values beginning in the first quarter of 2006. Pro forma disclosure is no longer an alternative. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB No. 107), which provides supplemental implementation guidance on SFAS No. 123(R).

We have the option to choose either the modified prospective or modified retrospective method. We currently expect to adopt SFAS No. 123(R) using the modified retrospective method of adoption. This method requires that compensation expense be recorded over the expected remaining life of all unvested stock options and restricted stock, and for any new grants thereof at the beginning of the first quarter of adoption of SFAS No. 123(R). Prior periods will be restated to recognize compensation cost in the amount previously reported in the pro forma footnote disclosures under SFAS No. 123.

As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB No. 25‘s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of the SFAS No. 123(R) fair value method will have a significant impact on our consolidated results of operations, although it will have no impact on our overall consolidated financial position or consolidated cash flows. However, our assessment of the estimated compensation charges is affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. These variables include, but are not limited to, the volatility of our stock price and employee stock option exercise behaviors. Had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on when employees exercise stock options, among other things), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $12.6 million in 2003, $1.2 million in 2004 and $12.6 in 2005.

Liquidity and capital resources

We have financed our operations through cash generated from operations. Our cash and cash equivalents and short-term investments were $954.2 million as of December 31, 2004 and $1,342.8 million as of December 31, 2005. Our long-term interest bearing investments were $623.1 million as of December 31, 2004 and $382.5 million as of December 31, 2005. Our total cash and cash equivalents, short-term investments and long-term interest bearing investments were $1,577.3 million as of December 31, 2004 and $1,725.3 million as of December 31, 2005. At the end of 2002 we established a wholly owned subsidiary in Singapore to manage our financial assets. This subsidiary currently holds the majority of our investments. We generated net cash from operations of $290.9 million in 2003, $302.0 million in 2004 and $358.0 million in 2005. Net cash from operations for 2003 consisted primarily of net income adjusted for non cash activity, increases in deferred revenues, employees and payroll accruals, accrued expenses and other liabilities. Net cash from operations for 2004 consisted primarily of net income adjusted for non cash activity including acquired in-process research and development, plus increases in deferred revenue, employees and payroll accruals, which were offset by decreases in accrued expenses and other liabilities and increases in trade receivables. Net cash from operations for 2005 consisted primarily of net income adjusted for non cash activity, plus increases in deferred revenue, which were offset by increases in trade receivables and decreases in employee and payroll accruals.

Net cash used in investing activities was $425.9 million in 2003, $256.7 million in 2004 and $39.9 million in 2005. In 2003 net cash used in investing activities consisted primarily of investments in marketable securities of varying maturities offset by proceeds from marketable securities and bank deposits. Excess cash is invested depending on our projected cash needs for operations, capital purchases and other business purposes. In 2004 net cash used in investing activities included, in addition to the above, net cash paid in conjunction with the acquisition of Zone Labs in the amount of $95.3 million. In 2005 net cash used in investing activities consisted primarily of investments in marketable securities offset by proceeds from marketable securities. In 2006 we anticipate to use approximately $215 million in cash to acquire Sourcefire, if the acquisition is completed. Our capital expenditures amounted to $3.0 million in 2003, $4.5 million in 2004 and $4.9 million in 2005. Currently, our capital expenditures consist primarily of computer equipment and software for our research and development and technical service organization efforts, as well as increasing infrastructure to enable operation expansion.

Net cash provided by (or used in) financing activities was approximately $17.7 million in 2003, $(210.1) million in 2004 and $(182.0) million in 2005. Net cash from financing activities in 2003 was primarily as a result of proceeds we received from the exercise of stock options. In 2004 and 2005 net cash used in financing activities was attributed primarily to the purchase of treasury shares. Our board of directors approved three programs to repurchase ordinary shares. Each program authorized the repurchase of up to $200 million. The first program was announced on October 28, 2003 and ended on August 24, 2004. The second program was announced on October 28, 2004 and ended on May 31, 2005. The third program was announced on July 25, 2005 and is still in effect. Under the repurchase programs we may purchase our ordinary shares from time to time, depending on market conditions, share price, trading volume and other factors. We fund the share purchases from available working capital. The repurchase programs have no time limit and may be suspended from time to time or discontinued. Under our repurchase programs described above, during 2004 we purchased a total of 12.0 million shares at a total cost of $244.6 million, at an average price of $20.40 per share. In 2005 we purchased a total of 10.6 million shares at a total cost of $236.9 million, at an average purchase price of $22.38 per share.

Until 2005, debt securities were classified as held-to-maturity as we had the positive intent and ability to hold the securities to maturity and were stated at amortized cost.

In 2005, debt securities are classified as available for sale. Available for sale securities are carried as fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income.

Our principal sources of liquidity consist of our cash and cash equivalents and marketable securities (which aggregated $1,725.3 million as of December 31, 2005), our cash flow from operations and our net financial income. We believe that these sources of liquidity will be sufficient to satisfy our capital requirements for the foreseeable future.

Research and development, patents and licenses, etc.

You can see more details in this Item 5, under the caption “Result of Operations.”

Trend information

You can see more details in this Item 5, under the caption “Result of Operations.”

Off-balance sheet arrangements

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

Disclosure of contractual obligations

The following table summarizes our material contractual obligations as of December 31, 2005:

	Payments due by period
	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
	(in thousands)


Operating Lease Obligations	$	10,428	$	4,406	$	3,936	$	1,738	$	348
Severance pay*		8,915		-		-		-		-

Total	$	19,343	$	4,406	$	3,936	$	1,738	$	348

* Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor law. These obligations are payable only upon termination, retirement or death of the respective employee and there is no obligation if the employee voluntarily resigns. Of this amount, only $2,784 is unfunded.

In October 2005 we announced the execution of a definitive agreement to acquire Sourcefire, for a total consideration of approximately $225 million. You can see a summary of our obligation to acquire Sourcefire in this Item 5, under the caption “Overview.” This summary is qualified in its entirety by the text of the Agreement and Plan of Merger by and among Check Point Software Technologies Ltd., Check Point Software Technologies, Inc., Seyfert Acquisition Corporation, and Sourcefire, Inc., dated as of October 5, 2005, which is filed as Exhibit 4.11 to this Form 20-F.

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and senior management

Our directors and executive officers as of December 31, 2005 were as follows:

Name	Position	Independent Director (1)	Outside Director (2)	Member of Audit Committee	Member of Compensation Committee	Member of Nominating Committee




Gil Shwed	Chief Executive Officer
	and Chairman of the
	Board

Marius Nacht	Senior Vice President and
	Vice Chairman of the
	Board

Jerry Ungerman	Vice Chairman of the Board

Eyal Desheh	Executive Vice President
	and Chief Financial
	Officer

Irwin Federman	Director	P	P	P	P	P

Ray Rothrock	Director	P	P	P	P	P

David Rubner	Director	P		P		P

Tal Shavit	Director	P				P

(1)	“Independent Director” under the applicable rules of the Securities and Exchange Commission and the NASDAQ National Market regulations (see explanation below)

(2)	“Outside Director” as required by Israel’s Companies Law (see explanation below)

Gil Shwed, one of our co-founders, has served on our board of directors and as our Chief Executive Officer since we were founded in 1993. Since 1998 Mr. Shwed has also served as the Chairman of our board of directors. From 1993 until 2001 he served as our President. Mr. Shwed has received numerous prestigious accolades for his individual achievements and industry contributions, including an honorary Doctor of Science from the Technion – Israel Institute of Technology, the World Economic Forum’s Global Leader for Tomorrow for his commitment to public affairs and leadership in areas beyond immediate professional interests, and the Academy of Achievement’s Golden Plate Award for his innovative contribution to business and technology.

Marius Nacht, one of our co-founders, has served on our board of directors since we were founded in 1993. Since 1999 he has served as our Senior Vice President and since 2001 he has also served as Vice Chairman of our board of directors. Mr. Nacht earned a B.S. cum laude in Physics and Mathematics from the Hebrew University of Jerusalem, and he earned an M.S. in Electrical Engineering and Communication Systems from Tel Aviv University.

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

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

Irwin Federman has served on our board of directors since 1995. Mr. Federman has been a General Partner of U.S. Venture Partners, a venture capital firm, since 1990. Mr. Federman serves as director of SanDisk Corp. and a number of private companies. Mr. Federman received a B.S. in Economics from Brooklyn College.

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

David Rubner has served on our board of directors since 1999. Mr. Rubner is Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd., a venture capital firm, and is a general partner in Hyperion Israel Advisors Ltd., a venture capital fund. Before Mr. Rubner started Rubner Technology Ventures, he served as President and Chief Executive Officer of ECI Telecommunications Ltd. Previously, he held various management positions in ECI Telecommunications. 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. In 1995 he received the Industry Prize. Mr. Rubner serves as a director of Koor Industries, Lipman Transaction Solutions Ltd., Elbit Imaging Ltd., TeleMessage Ltd. and a number of private companies. In addition, Mr. Rubner is a member of the Board of Trustees of Bar-Ilan University and Shaare Zedek hospital.

Dr. Tal Shavit has served on our board of directors since 2002. Dr. Shavit is an organizational consultant specializing in international collaboration between Israeli and American companies, consulting in the management of cultural differences in order to forge effective collaboration. Her work with leading management teams includes a defining of organizational culture as the engine of the company’s activities. She consults to companies undergoing structural change and a redefining of management roles in order to meet market changes.

Of the individuals mentioned above, only Gil Shwed and Marius Nacht owned more than one percent of our outstanding shares as of December 31, 2005. You can see more details in this Item 6, under the caption “Share Ownership” and in “Item 7 – Major Shareholders and Related Party Transactions.”

Some of our directors are board members of multiple companies, some of which may be technology companies. Currently we don’t see an existing conflict of interest.

The term of each director will expire in 2006. At that time Irwin Federman and Ray Rothrock will be completing their second terms as our outside directors under the Israeli Companies Law and will not be eligible for reelection to our board of directors.

Compensation of directors and officers

The total direct compensation that we accrued for our directors and executive officers as a group for each of the years ended December 31, 2004 and 2005 was approximately $3.2 million. This does not include amounts we expensed for business travel, professional and business association dues and other business expenses reimbursed to officers. We do not have any agreements with our directors who are also officers that provide for benefits upon termination of employment, except for severance payments mandated by Israeli law for all employees employed in Israel. In addition, only directors who are not officers receive compensation for serving as directors. From time to time we grant options under our stock option and equity incentive plans (described below) to our executive officers and directors. Option grants to directors who are not officers are made pursuant to the automatic option grant program under these plans, while option grants to directors who are officers are made only with audit committee, board of directors and shareholder approval. As of December 31, 2005, our executive officers and directors held options to purchase an aggregate of approximately 18.0 million shares under our stock option and equity incentive plans. The exercise prices of these options range between $9.83 and $79.79, and their expiration dates range between July 2006 and September 2012. Other than as specified in the share ownership table under Item 7 – “Major Shareholders and Related Party Transactions,” none of our directors and officers holds more than 1% of our outstanding shares.

Board practices

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

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

Outside and independent directors

Outside directors . In accordance with the Israeli Companies Law and the relevant regulations, we must have at least two outside directors who meet the statutory requirements of independence. An outside director serves for a term of three years, which may be extended once for an additional three-year term. An outside director can be removed from office only under very limited circumstances. Both of the outside directors must serve on the company’s audit committee, and at least one outside director must serve on each committee of the board of directors. Irwin Federman and Ray Rothrock are our outside directors under the Israeli Companies Law. Their second and final term of office will expire in 2006.

Independent directors . The Sarbanes-Oxley Act of 2002, as well as related new rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq National Market, require issuers to comply with various corporate governance practices. Under the rules applicable to us as a foreign private issuer, we are required to have at least three independent directors within the meaning of the applicable Nasdaq National Market regulations. Our board of directors complies with these requirements by including a majority of members who are independent, and our audit committee consists of three directors, all of whom are independent. Irwin Federman, Ray Rothrock, David Rubner and Tal Shavit are our independent directors under the applicable Nasdaq National Market regulations. Our independent directors have regularly scheduled meetings at which only independent directors are present.

Committees of the board of directors

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

Audit committee . Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the outside directors. The audit committee may not include the chairman of the board, any director whom we employ or who provides services to us on a regular basis, a controlling shareholder or certain relatives of a controlling shareholder. In addition, the listing requirements of the Nasdaq National Market also require us to maintain an audit committee consisting of at least three directors, all of whom must be independent under the Nasdaq National Market listing requirements. Irwin Federman, Ray Rothrock and David Rubner serve as the members of our audit committee. In 2003 the audit committee adopted an audit committee charter as required by the Nasdaq National Market listing requirements.

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

Compensation committee . Our compensation committee consists of Irwin Federman and Ray Rothrock. The compensation committee’s duties include making recommendations to the board of directors regarding the issuance of employee equity incentives under our equity incentive plans, and determining salaries and bonuses for our executive officers and incentives for our other employees. In 2004 the compensation committee adopted a compensation committee charter.

Nominating committee . The nominating committee identifies prospective board candidates, recommends nominees for election to our board of directors, develops and recommends board member selection criteria, considers committee member qualification, supervises the selection and composition of committees of our board of directors and provides oversight in the evaluation of our board of directors and each committee. Our nominating committee consists of Irwin Federman, Ray Rothrock, David Rubner and Tal Shavit. In 2005 the nominating committee adopted a nominating committee charter.

Employees

As of December 31, 2005, we had 1,414 employees.

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

	Year Ended December 31,
Function:	2003		2004		2005



Research, development, and quality assurance		321		439		520
Marketing, sales and business development		486		568		536
Customer support		163		124		122
Information systems, administration and finance		175		213		236

Total		1,145		1,344		1,414

From time to time, we also engage a limited number of consultants, subcontractors and temporary help. As of December 31, 2005, we had 64 people of this nature.

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

	Year Ended December 31,
Region:	2003		2004		2005



Israel		500		538		612
United States		463		612		564
Rest of the World		182		194		238

Total		1,145		1,344		1,414

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

Share Ownership

The following table shows information regarding beneficial ownership by our directors and executive officers as of December 31, 2005. Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission.

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

The share numbers and percentages listed below are based on 244,309,929 shares outstanding as of December 31, 2005.

Name	Number of Shares beneficially owned (1)	% of class of shares (2)	Title of securities covered by the options	Number of options (3)	Exercise Price	Date of Expiration




Gil Shwed	31,114,112	12.4%	Ordinary shares	6,159,015	$9.83-42.31	07/04/2006-09/26/2012
Marius Nacht (4)	26,260,811	10.6%	Ordinary shares	3,759,015	$9.83-42.31	07/04/2006-09/26/2012
All directors and officers
as a group (8 persons
including Messrs. Shwed
and Nacht)	60,354,153	23.5%	Ordinary shares	12,649,530	$9.83-79.79	07/04/2006-09/26/2012

(1)	The number of ordinary shares shown includes shares that each shareholder has the right to acquire pursuant to stock options that are exercisable within 60 days after December 31, 2005 (as determined in accordance with footnote (3)).

(2)

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

(3)	Number of options immediately exercisable or exercisable within 60 days from December 31, 2005. The exercise price of some of these options is greater than our current share market price.

(4)

In addition to the position stated in the table, Mr. Nacht is the beneficiary of a trust that as of May 2005, the date on which the trust was established by Mr. Nacht, held 1,000,000 ordinary shares. Mr. Nacht does not control the trust and has limited access to information concerning activities and holdings of the trust. The trust is irrevocable and is scheduled to expire May 2007.

Each of Messrs. Ungerman, Desheh, Federman, Rothrock, Rubner and Dr. Shavit beneficially owns less than one percent of our outstanding ordinary shares.

Equity incentive plans

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

Number of ordinary shares reserved for future grants under 2005 plans

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

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

As of December 31, 2005 we had issued options for an aggregate of 1,632,630 ordinary shares under the 2005 U.S. Plan and the 2005 Israel plan combined, of which options for 1,618,330 ordinary shares were outstanding on that date. The option exercise prices range between $21.50 and $23.19 per share.

Administration

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

2005 United States Equity Incentive Plan

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

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

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

Grants to non-employee directors . Our non-employee directors will receive an automatic option grant under the 2005 U.S. Plan or the 2005 Israel Plan (but not both), and will also be eligible for discretionary awards under the plans. We currently contemplate that automatic grants under the 2005 U.S. Plan will be made primarily to non-employee directors who are citizens or residents of the United States, and automatic grants under the 2005 Israel Plan will be made primarily to non-employee directors who are citizens or residents of Israel.

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

All options to directors will be granted at an exercise price equal to 100% of the closing price of the ordinary shares on the NASDAQ National Market on the date of grant.

2005 Israel Equity Incentive Plan

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

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

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

Grants to non-employee directors . Our non-employee directors who do not receive an automatic option grant under the 2005 U.S. Plan will receive an automatic option grant under the 2005 Israel Plan, and will also be eligible for discretionary awards under the 2005 Israel Plan. We currently contemplate that automatic grants under the 2005 Israel Plan will be made primarily to non-employee directors who are citizens or residents of Israel. The terms of grants to non-employee directors under the 2005 Israel Plan will be identical to those applicable under the 2005 U.S. Plan, described above.

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

As of December 31, 2005 we had outstanding options to acquire an aggregate of 28,267,886 ordinary shares under our 1996 United States Stock Option Plan and 1996 Israel Stock Option Plan combined. The option exercise prices range between $4.46 and $86.54 per share. We will not issue any more stock options under our 1996 United States Stock Option Plan and 1996 Israel Stock Option Plan.

Zone Labs 1998 Stock Option Plan

In connection with our acquisition of Zone Labs in March 2004, we assumed all of the outstanding Zone Labs stock options under the Zone Labs 1998 Stock Option Plan, which were converted into options to purchase approximately 2.8 million of our ordinary shares. As of December 31, 2005 419,663 ordinary shares had been issued under the Zone Labs 1998 Stock Option Plan, and options to purchase 365,215 ordinary shares were outstanding on that date. The stock options generally have terms of between five and ten years and generally vest over a four-year period. The option exercise prices range between $1.66 and $6.08 per share. No further stock options can be granted under the Zone Labs 1998 Stock Option Plan.

Employee Stock Purchase Plan

In 1996 we adopted an Employee Stock Purchase Plan, which we refer to as the ESPP. The ESPP permits our full-time employees (and full-time employees of some of our subsidiaries) to purchase ordinary shares through payroll deductions. 6,000,000 ordinary shares were authorized for issuance under the ESPP. As of February 1, 2006, 1,919,190 ordinary shares had been issued under the ESPP. The ESPP has six-month offering periods, with purchases occurring in January and July. The compensation committee of our board of directors administers the ESPP. According to our shareholders’ resolution at our annual meeting of shareholders, held in September 2005, the ESPP will terminate on the earliest of: (i) the last business day in January 2016, (ii) when no more shares are available for issuance under the ESPP, and (iii) when all purchase rights under the ESPP are granted or exercised in connection with a Corporate Transaction as defined in the ESPP.

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

Change of control arrangements

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

ITEM 7.

MAJOR SHAREHOLDERS AND TRANSACTIONS WITH RELATED PARTY

The following table shows information as of December 31, 2003, 2004 and 2005 for each person who, as far as we know, beneficially owned more than 5% of our outstanding ordinary shares:

Name of Five Percent Shareholders	No. of shares beneficially held					No. of shares beneficially held					No. of shares beneficially held
	December 31, 2003					December 31, 2004					December 31, 2005



Gil Shwed		29,751,494	(1)	11.7	%		31,102,744	(1)	12.2	%		31,114,112	(1)	12.4	%

Franklin Resources, Inc.		27,306,935	(2)	11.0	%		25,625,981	(2)	10.3	%		27,241,741	(2)	11.2	%

Marius Nacht (4)		27,311,794	(1)	10.8	%		27,981,794	(1)	11.1	%		26,260,811	(1)	10.6	%

Janus Capital Management LLC (5)		17,335,164	(2)	7.0	%
Shlomo Kramer (5)		13,746,900	(1)	5.5	%

(1)

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

(2)

As of December 31, 2003 and 2004, based on information contained in Schedules 13F filed with the Securities and Exchange Commission; as of December 31, 2005, based on information contained in a Schedule 13G filed with the Securities and Exchange Commission. In the Schedule 13G filed on February 14, 2006, Franklin Resources, Inc., Charles B. Johnson, Rupert H. Johnson and Templeton Global Advisors Limited indicate that they may be deemed to be the beneficial owners of some or all of these securities but they disclaim any pecuniary interest in any of the securities. The address for Franklin Resources, Inc. is One Franklin Parkway, San Mateo, California 94403.

(3)

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

(4)

In addition to the position stated in the table for December 31, 2005, Mr. Nacht is the beneficiary of a trust that as of May 2005, the date on which the trust was established by Mr. Nacht, held 1,000,000 ordinary shares. Mr. Nacht does not control the trust and has limited access to information concerning activities and holdings of the trust. The trust is irrevocable and is scheduled to expire May 2007.

(5)	Based on information available to us, as of December 31, 2004 and December 31, 2005, neither Janus Capital Management LLC nor Shlomo Kramer beneficially owned more than 5% of our outstanding ordinary shares.

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

As of August 2005, approximately 46% of the total number of our ordinary shares were held of record or beneficially owned by persons in the United States. According to our transfer agent, there were 283 holders of record of our ordinary shares in the United States.

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

ITEM 8.

FINANCIAL INFORMATION

Consolidated financial statements

You can find our financial statements in “Item 18 – Financial Statements.” Dividend policy

Out of our retained earnings of $1,781 million as of December 31, 2005, approximately $661 million are tax-exempt because they are attributable to our facilities’ status as Approved Enterprise under the Investment Law. Our board of directors has resolved not to distribute any dividend from our undistributed tax-exempt income. The undistributed tax-exempt income is essentially permanent in duration.

Legal proceedings

Beginning on August 29, 2003, we received a number of class action complaints filed in the United States District Court for the Southern District of New York by holders of our ordinary shares, alleging violations of the United States federal securities laws. On January 14, 2004, the court-appointed lead plaintiffs filed a Consolidated Amended Complaint on behalf of a putative class of all purchasers of ordinary shares between July 10, 2001 and April 4, 2002. The complaint generally alleges that we and certain of our senior officers made misrepresentations and omissions regarding, among other things, our sales and future prospects. We retained counsel and filed a motion to dismiss the complaint. On March 7, 2005 the District Court granted our motion to dismiss but permitted the lead plaintiffs to file an amended complaint to attempt to cure the defects in the dismissed complaint. On April 22, 2005, the lead plaintiffs filed their Consolidated Second Amended Complaint. On September 2, 2005, we filed a motion to dismiss this complaint, and this motion is currently pending before the District Court. We continue to dispute the allegations of wrongdoing and intend to defend the matter vigorously. We maintain applicable insurance as well as a financial reserve in our financial statements as of December 31, 2005.

On November 16, 2004, Etay Bogner, a shareholder of SofaWare, filed a motion in the Tel-Aviv District Court asking that the court authorize him to conduct a shareholders derivative suit against us on behalf of SofaWare in the amount of approximately NIS 22.7 million ($5.1 million as of the date of the filing), not including linkage and interest. The suit relates to discounts, sales commissions and royalties that the plaintiff alleges we owe to SofaWare, with respect to products that we sold or that were sold through us. Court hearings have taken place with respect to the plaintiff’s request that the court authorize him to conduct a shareholder’s derivative suit against us on behalf of SofaWare. The parties submitted written summations and are waiting for the court’s decision on this request. The matter is at a very preliminary stage, but we believe that the claim is without merit and intend to contest the claim vigorously.

On November 22, 2005, Etay Bogner also filed an initiating motion against us and against SofaWare. The motion alleges that some shareholders of SofaWare, among them the plaintiff, are entitled to exercise veto rights with respect to various actions of SofaWare. The plaintiff also filed a motion to obtain injunctive relief that would prevent SofaWare and us from taking certain actions with respect to the issuance of SofaWare’s securities to its employees and the determination of SofaWare’s auditors’ compensation. We have submitted a motion to dismiss the initiating motion, to convert it to a regular claim or to stay the proceedings as long as Bogner’s first suit is pending. We have responded to the motion to obtain injunctive relief. The matter is at a very preliminary stage, but we believe that the claim is without merit and intend to contest the claim vigorously.

On December 14, 2004, Adi Ruppin, a shareholder and director of SofaWare, filed an initiating motion in the Tel-Aviv District Court against us. The motion alleges that we are oppressing the plaintiff, who is a minority shareholder of SofaWare. Therefore, the plaintiff is asking the court to compel us to purchase the plaintiff’s shares in SofaWare, based upon a valuation to be determined by an independent expert. The plaintiff is also seeking disclosure of information and documents relating to our business plans and those of SofaWare, and to the inter-company balances between the two companies. We have submitted a motion to dismiss the initiating motion or to convert it to a regular claim, and a motion to stay the proceedings as long as Bogner’s first suit is pending. As also requested by the plaintiff, the court has stayed all proceedings in this case until after the court renders its decision with respect to Bogner’s request that he be authorized to conduct a shareholder’s derivative suit against us on behalf of SofaWare. The matter is at a very preliminary stage, but we believe that the claim is without merit and intend to contest the claim vigorously.

ITEM 9.

THE OFFER AND LISTING

Our ordinary shares are traded publicly on the NASDAQ National Market under the symbol “CHKP.”

The following table lists the high and low prices of the ordinary shares for the periods indicated:






2001	113.33	19.56
2002	49.47	10.37
2003	22.20	13.35
2004	27.16	16.46
2005	25.42	19.57

2004
First quarter	24.12	16.82
Second quarter	27.09	21.30
Third quarter	27.16	16.46
Fourth quarter	26.21	16.90

2005
First quarter	25.42	20.12
Second quarter	23.47	19.57
Third quarter	24.32	19.96
Fourth quarter	24.50	19.94

Most recent six months
September 2005	24.32	22.10
October 2005	24.50	20.49
November 2005	22.75	21.11
December 2005	22.03	19.94
January 2006	22.47	19.98
February 2006	22.24	20.44

On March 10, 2006, the last reported sale price of our ordinary shares on the NASDAQ National Market was $21.12 per share.

ITEM 10.

ADDITIONAL INFORMATION

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

The objectives and purposes stated in our articles of association are to engage in any lawful activity worldwide. We develop, market and support a wide range of software and combined hardware and software products and services for enterprises, service providers, small- and medium-sized businesses and consumers. Our products and services operate under a unified security architecture, with central management and enforcement of security policy, and protect our customers’ networks in four areas: perimeter, internal, Web and endpoint.

Articles of association and Israeli Companies Law

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

Description of shares

Our authorized share capital consists of 500,000,000 ordinary shares, NIS 0.01 nominal value, 5,000,000 preferred shares, NIS 0.01 nominal value, and 10 deferred shares, NIS 1 nominal value. On December 31, 2005 we had 244,309,929 ordinary shares outstanding and on January 1, 2005 we had 248,217,798 ordinary shares outstanding. During 2005 we issued 6,706,000 ordinary shares, all pursuant to employee equity incentive plans. On December 31, 2005 we held 16,914,041 ordinary shares in our treasury. No preferred shares are outstanding. We have 1 deferred share issued and outstanding, which is not entitled to any rights other than the right to receive its nominal value upon our liquidation.

Description of ordinary shares

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

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

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

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

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

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

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

The Israeli Companies Law requires that shareholders approve certain transactions, actions and arrangements. Such transactions, actions and arrangements include:

ⁿ

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

ⁿ

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

ⁿ

any action or extraordinary transaction involving a director or officer in which a majority of the Board or the statutory audit committee has a personal interest.

You can see more details in this Item 10, under the caption “Approval of certain transactions; obligations of directors, officers and shareholders.”

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

(1)

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

(2)

A voluntary liquidation – a majority of at least 75% of the shares voting on the matter is needed.

(3)

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

(4)

The nomination and dismissal of outside directors – outside directors may be elected or removed by a majority vote at a shareholders meeting, as long as either:

ⁿ

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

ⁿ

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

(5)

Extraordinary transactions with a controlling shareholder (any shareholder that has the ability to direct our actions, including any shareholder who holds 25% or more of our voting rights if no other shareholder owns more than 50% of our voting rights) – following audit committee and board of directors approval, these transactions must be approved by a majority vote at a shareholders meeting, as long as either:

ⁿ

the majority of shares includes at least two-thirds of the shares of the voting shareholders who have no personal interest in the transaction, or

ⁿ

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

Transfer of shares 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 prior notice of shareholders meetings. The law currently provides for at least 21 days’ notice. For purposes of determining the shareholders entitled to notice and to vote at such meeting, the board of directors may fix a record date, which shall be between 4 and 40 days prior to the date of the meeting.

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

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

Description of preferred shares

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

Anti-takeover measures

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

ⁿ

discourage potential acquisition proposals,

ⁿ

delay or prevent a change in control, and

ⁿ

limit the price that investors might be willing to pay in the future for our ordinary shares.

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

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

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

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there is a limitation on acquisition of any level of control of the company, or

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the acquisition of any level of control requires the purchaser to make a tender offer to the public.

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

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

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prior to that date, the board of directors approved either the business combination or the transaction that resulted in the shareholder’s becoming an interested shareholder, or

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upon consummation of the transaction that resulted in the shareholder’s becoming an interested shareholder, the interested shareholder owned at least 75% of our voting shares outstanding at the time the transaction commenced.

A business combination includes:

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any merger or consolidation between the interested shareholder and us,

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

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subject to certain exceptions, any transaction that results in our issuance or transfer of any of our shares to the interested shareholder,

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

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

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

In addition, our shareholders are not able to cumulate votes at a meeting, which may require the acquiror to hold more shares to gain representation on the board of directors than if cumulative voting were permitted. Moreover, our board of directors is authorized to issue preferred shares in series, with the terms of each series to be fixed by the board of directors.

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

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

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

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

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

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

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

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

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

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any amendment to the articles of association,

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an increase of the company's authorized share capital,

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a merger, or

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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. A recent amendment to the Israeli Companies Law provides that a breach of the duty of fairness will be governed by the laws governing breach of contract. The Israeli Companies Law does not describe the substance of this duty.

Indemnification of directors and officers; limitations on liability

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

Under the Israeli Companies Law, a company may indemnify an office holder against any monetary liability incurred in his or her capacity as an office holder whether imposed on him or her or incurred by him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by court. A company also can indemnify an office holder against reasonable litigation expenses including attorneys’ fees, incurred, whether or not paid by him or her in his or her capacity as an office holder, in proceedings instituted against him or her by the company, on its behalf or by a third-party, in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for a crime that does not require proof of criminal intent, or in which an indictment was not brought against the office holder.

In addition, a company may indemnify an office holder against reasonable legal fees, including attorney’s fees, incurred, whether or not paid by him, by him or her in consequence of an investigation or proceeding instituted against him or her by an authority that is authorized to conduct such investigation or proceeding, and that was resolved without an indictment against him or her and without imposing on him or her financial obligation as an alternative of a criminal proceeding, or that was resolved without filing an indictment against him or her but with the imposition on him or her of a financial obligation as an alternative to a criminal proceeding in respect of an offense that does not require the proof of criminal intent.

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

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

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

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

Borrowing power: amendment of rights of ordinary shares

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

NASDAQ National Market corporate governance rules

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

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

Material Contracts

In October 2005, we announced the execution of a definitive agreement to acquire Sourcefire. For a summary of the terms of our agreement to acquire Sourcefire, please see “Item 5 – Operating and Financial Review and Prospects,” under the caption “Overview.” This summary is qualified in its entirety by the text of the Agreement and Plan of Merger by and among Check Point Software Technologies Ltd., Check Point Software Technologies, Inc., Seyfert Acquisition Corporation, and Sourcefire, Inc., dated as of October 5, 2005, which is filed as Exhibit 4.11 to this Form 20-F.

Israeli taxation, foreign exchange regulation and investment programs

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

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

General corporate tax structure in Israel

Israeli companies were generally subject to corporate tax at the rate of 34% of their taxable income in 2005. Pursuant to tax reform legislation that came into effect in 2003, the corporate tax rate is to undergo further staged reductions to 25% by the year 2010. In order to implement these reductions, the corporate tax rate is scheduled to decline to 31% in 2006, 29% in 2007, 27% in 2008, and 26% in 2009.

As discussed below, however, the rate is effectively reduced for income derived from an Approved Enterprise.

Law for the Encouragement of Capital Investments, 1959

Our facilities in Israel have been granted Approved Enterprise status under the Law for the Encouragement of Capital Investments, 1959, commonly referred to as the Investment Law. The Investment Law provides that capital investments in a production facility (or other eligible assets) may be designated as an Approved Enterprise. Until recently, the designation required advance approval from the Investment Center of the Israel Ministry of Industry, Trade and Labor (the Investment Center). Each certificate of approval for an Approved Enterprise relates to a specific investment program, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.

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

After expiration of the initial tax exemption period, the company is eligible for a reduced corporate tax rate of 10% to 25% for the following five to eight years, depending on the extent of foreign investment in the company (as shown in the table below). The benefits period is limited to 12 years from completion of the investment under the approved plan or 14 years from the date of the approval, whichever is earlier. A company in which more than 25% of the shareholders are non-residents of Israel, defined in the Investment Law as a Foreign Investors Company, may be eligible for benefits for an extended period of up to ten years.

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

Percent of Foreign Ownership	Rate of Reduced Tax	Reduced Tax Period	Tax Exemption Period




0-25%	25%	5 years	2 years
25-49%	25%	8 years	2 years
49-74%	20%	8 years	2 years
74-90%	15%	8 years	2 years
90-100%	10%	8 years	2 years

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

Currently, we have six Approved Enterprise programs under the alternative track of the Investment Law. We have derived, and expect to continue to derive, a substantial portion of our operating income from our Approved Enterprise facilities. We are therefore eligible for a tax exemption for a limited period on undistributed Approved Enterprise income, and an additional subsequent period of reduced corporate tax rates ranging between 10% and 25%, depending on the level of foreign ownership of our shares. The tax benefits attributable to our current Approved Enterprises are scheduled to expire in phases by 2013. We intend to continue to apply for Approved Enterprise programs, but we cannot assure you that we will do so or that we will be successful. We intend to reinvest the entire amount of our tax-exempt income and not to distribute this income as a dividend.

The benefits available to an Approved Enterprise are conditioned upon terms stipulated in the Investment Law and the related regulations (which include making specified investments in property and equipment, and financing a percentage of these investments with share capital), and the criteria set forth in the applicable certificate of approval. If we do not fulfill these conditions in whole or in part, the benefits can be cancelled and we may be required to refund the amount of the benefits, linked to the Israeli consumer price index plus interest. We believe that our Approved Enterprise programs currently operate in compliance with all applicable conditions and criteria, but we cannot assure you that they will continue to do so.

Law for the Encouragement of Industry (Taxes), 1969

We believe that we currently qualify as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the Industrial Encouragement Law). The Industrial Encouragement Law defines an Industrial Company as a company that is resident in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major activity in a given tax year is industrial production.

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

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amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes,

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accelerated depreciation rates on equipment and buildings,

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under specified conditions, an election to file consolidated tax returns with related Israeli Industrial Companies, and

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expenses related to a public offering are deductible in equal amounts over three years.

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

Special provisions relating to taxation under inflationary conditions

The Income Tax Law (Inflationary Adjustments), 1985 represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. This law is highly complex. Until December 31, 2001, we measured our Israeli taxable income in accordance with the provisions of this law. Since January 1, 2002, however, we have elected to measure our taxable income based on the changes in the exchange rate of the U.S. dollar rather than on the basis of inflation, and the provisions of this law have not been applicable to us.

Stamp tax

Under Israel’s Stamp Tax on Documents Law, certain documents are subject to stamp tax. In 2004, the tax authorities began an enforcement campaign involving extensive audits of companies’ compliance with the stamp tax obligation with respect to all agreements which had been signed since June 2003. As part of this campaign, we received from the tax authorities a request to list all agreements signed since June 2003. We have received legal advice that there are a variety of defenses relating to our obligation to pay stamp tax or to the amount to be paid. We believe that the applicable provision in our financial statements as of December 31, 2005 is adequate to cover probable liabilities for stamp tax.

Effective January 1, 2006, stamp tax has been cancelled.

Taxation of non-Israeli shareholders on receipt of dividends

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

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

Capital gains taxes applicable to non-Israeli shareholders

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

Foreign exchange regulations

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

United States federal income tax considerations

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

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

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

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an estate, if the estate's income is subject to United States federal income taxation regardless of its source, or

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

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

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

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

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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,

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

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

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U.S. Shareholders who acquire their ordinary shares in a compensatory transaction,

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U.S. Shareholders whose functional currency is not the U.S. dollar, or

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

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

Dividends paid on the ordinary shares

A U.S. Shareholder as defined above will generally be required to include in gross income the amount of any distributions paid in respect of the ordinary shares to the extent that the distributions are paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of the distribution would include any Israeli taxes withheld as part of the distributions. A maximum U.S. federal income tax rate of 15% will apply if certain holding period requirements are met. This rate is applicable in tax years beginning after December 31, 2002 and before January 1, 2009 for “qualified dividend income” received by an individual as well as certain trusts and estates. Qualified dividend income generally includes dividends paid by a U.S. corporation or a “qualified foreign corporation.” A non-U.S. corporation such as ours generally will be considered to be a qualified foreign corporation if (i) our shares are readily tradable on an established securities market in the United States, or (ii) we are eligible for the benefits of a comprehensive U.S. income tax treaty determined to be satisfactory to the United States Department of the Treasury. The United States Department of the Treasury and the Internal Revenue Service have determined that the United States-Israel tax treaty is satisfactory for this purpose. In addition, the United States Department of the Treasury and the Internal Revenue Service have determined that ordinary shares are considered readily tradable on an established securities market if they are listed on an established securities market in the United States such as the NASDAQ National Market. Information returns reporting dividends paid to U.S. Shareholders will identify the amount of dividends eligible for the reduced rates.

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

Credit for Israeli taxes withheld

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

Disposition of the ordinary shares

The sale or exchange of ordinary shares will generally result in the recognition of capital gain or loss. The amount of gain or loss is the difference between the amounts realized on the sale or exchange and the tax basis in the ordinary shares. If a U.S. Shareholder’s holding period for the ordinary shares exceeds one year at the time of the disposition, the amount of the shareholder’s gain or loss generally will be long-term capital gain or loss. Long-term capital gains realized upon a sale or exchange of ordinary shares generally will be subject to a maximum U.S. federal income tax rate of 15% for taxable years which begin before January 1, 2009. Gain or loss recognized by a U.S. Shareholder on a sale or exchange of ordinary shares generally will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes. Under the United States-Israel tax treaty, gain derived from the sale, exchange or other disposition of ordinary shares by a holder who is a resident of the United States for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes.

Passive foreign investment company status

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

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

50% or more of the average value of our gross assets in the taxable year, calculated quarterly by value, produce or are held for the production of passive income.

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

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

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

Information reporting and back up withholding

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

Documents on display

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

100 F Street, NE
Public Reference Room
Washington, D.C. 20549

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

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

Additionally, documents referred to in this Form 20-F may be inspected at our principal executive offices located at 3A Jabotinsky Street, Ramat-Gan 52520, Israel.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks that result primarily from weak economic conditions in the markets in which we sell our products, and from changes in exchange rates or in interest rates.

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

The table below provides information regarding our investments in cash, cash equivalents, deposits and marketable securities as of December 31, 2005.

		Maturity															Total			Fair Value at Dec. 31, 2005
		2006			2007			2008			2009			2010 onwards
		(in thousands, except percentage)


Government and corporate	Amortized cost	$	636,767		$	219,147		$	80,328		$	50,100		$	3,501		$	989,843		$	979,437
debentures - fixed interest rates	WAIR*		3.30	%		3.87	%		3.98	%		3.95	%		4.07	%		3.52	%

Structured products***	Amortized cost	$	211,200			-			-			-			-		$	211,200		$	206,961
	WAIR*		3.06	%		-			-			-			-			3.06	%

Mortgage and asset backed	Amortized cost	$	51,720		$	3,699		$	1,042		$	2,000		$	4,536		$	62,997		$	65,611
securities	WAIR*		3.69	%		3.59	%		3.91	%		4.08	%		4.02	%		3.92	%

Auction rate securities	Cost	$	126,282			-			-			-			-		$	126,282		$	126,282
	WAIR*		3.88	%		-			-			-			-			3.88	%

Government and corporate	Amortized cost	$	26,101		$	17,400		$	5,000			-			-		$	48,501		$	48,521
debentures - floating interest rates**	WAIR*		3.41	%		3.87	%		3.80	%		-			-			3.55	%

Money market fund & cash	Book value	$	298,531			-			-			-			-		$	298,531		$	298,531
	WAIR*		3.50	%		-			-			-			-			3.50	%

Total		$	1,350,601		$	240,246		$	86,370		$	52,100		$	8,037		$	1,737,354		$	1,725,343
	WAIR*		3.36	%		3.88	%		3.97	%		4.01	%		4.65	%		3.49	%

*	WAIR – Weighted Average Interest Rate

**	Based upon LIBOR as of December 31, 2005

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

Foreign currency risk

Most of our sales are denominated in U.S. dollar, and we incur most of our expenses in U.S. dollar, Euro and Israeli shekel. According to the salient economic factors indicated in SFAS No. 52, “Foreign Currency Translation,” our cash flow, sale price, sales market, expense, financing and intercompany transactions and arrangement indicators are predominately denominated in U.S. dollar. In addition, U.S. dollar is the primary currency of the economic environment in which we operate, and thus U.S. dollar is our functional and reporting currency.

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

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

Historically, the effect of fluctuations in currency exchange rates has had low impact on our consolidated operations. In managing our foreign exchange risk, we enter from time to time into various foreign exchange hedging contracts. Our policy is to hedge significant net exposures in the major foreign currencies in which we operate. We periodically assess the applicability of the U.S. dollar as our functional currency by reviewing the salient indicators. Neither a 10% increase nor decrease from current exchange rates would have a material effect on our consolidated financial statements.

We attempt to limit our exposure resulting from assets and anticipated revenues that are denominated in Japanese Yen, as well as our anticipated expenses denominated in Euro, through option and forward contracts. We monitor foreign exchange rates and trends periodically, to measure the effectiveness of our foreign currency hedging. If our option and forward contracts meet the definition of a hedge and are so designated, changes in the fair value of the contracts will be:

ⁿ

offset against changes in the fair value of the hedged assets or liabilities through earnings, or

ⁿ

recognized in other comprehensive income until the hedged item is recognized in earnings.

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

As of December 31, 2005 we had outstanding option and forward contracts in the amount of $10.2 million. These transactions were for a period of up to twelve months. In 2006 we expect to reclassify an insignificant amount of unrealized losses from “accumulated other comprehensive loss” to “revenues.” We enter into option and forward contracts only with well-established institutions, and therefore we believe that the liabilities that were owed to us at December 31, 2005 will be realized.

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities. Our marketable securities portfolio includes government debt instruments (U.S., European and other) and corporate debt instruments. The fair value of our long and short-term securities is based upon their market values as of December 31, 2005.

In 2004, we entered into forward rate agreements in the amount of $125 million. By using forward rate agreements, we convert a portion of our floating rate investments to a fixed rate basis, thus reduced the impact of interest rate changes on future interest income. The agreements were all settled during 2005, resulting in a loss of $95,000. This loss is presented in the statement of income as financial income (loss).

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

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

(a) As of the end of the period covered by this report on Form 20-F, we performed an evaluation under the supervision and with the participation of our management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures as of the end of the period covered by this report, are effective to provide reasonable assurance that information required to be disclosed in filings and submissions under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) During the period covered by this report, no changes in our internal controls over financial reporting have occurred that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls after the date that we evaluated the controls. Therefore, we did not need to take any corrective actions with regard to significant deficiencies and material weaknesses.

ITEM 16.

Reserved.

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. Irwin Federman is an “audit committee financial expert” and that he is independent under the applicable Securities and Exchange Commission and NASDAQ National Market rules.

ITEM 16B.

CODE OF ETHICS

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

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees and services

The table below summarizes the audit fees that we paid during 2004 and 2005.

	Year Ended December 31, 2004					Year Ended December 31, 2005
	Amount		Percentage			Amount		Percentage
	(in thousands, except percentages)


Audit fees	$	379		49	%	$	418		51	%
Audit-related fees (1)		59		8			19		2
Tax fees (2)		327		43			381		47

Total	$	765		100	%	$	818		100	%

(1)	“Audit-related fees” are fees related to due diligence investigations and to other assignments relating to internal control and procedures over financial reporting.

(2)	“Tax fees” are fees for professional services rendered by our auditors for tax compliance, tax advice on actual or contemplated transactions, tax consulting associated with international transfer prices and employee benefits.

Audit committee’s pre-approval policies and procedures

Our audit committee chooses and engages the independent auditors to audit our financial statements, with the approval of our shareholders as required by Israeli law. In March 2004 our audit committee adopted a policy requiring our management to obtain the audit committee’s approval before engaging our independent auditors to provide any audit or permitted non-audit services to us or our subsidiaries. The policy was last amended in October 2004. This policy, which is designed to assure that such engagements do not impair the independence of our auditors, requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by our auditors. In addition, the audit committee limited the aggregate amount of fees our auditors may receive during 2005 and 2006 for non-audit services in certain categories.

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

ITEM 16D.

EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE

Not applicable.

ITEM 16E.

PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Our board of directors approved three programs to repurchase ordinary shares. The first program was announced on October 28, 2003 and ended on August 24, 2004, and authorized the repurchase of up to $200 million of our ordinary shares. The second program was announced on October 28, 2004 and ended on May 31, 2005, and also authorized the repurchase of up to $200 million of our ordinary shares. The third program was announced on July 25, 2005 and is in effect as of March 13, 2006, and authorizes the repurchase of up to $200 million of our ordinary shares.

During 2005 we spent $236.9 million to repurchase 10.6 million ordinary shares under the second and third repurchase programs. The table below provides detailed information.

Period		(b) Average Price per Ordinary Share			(d) Approximate Dollar Value of Ordinary Shares that May Yet Be Purchased Under the Plans or Programs
					(in thousands)



January 1 - January 31	N/A		N/A	N/A	$	155,695
February 1 - February 28	2,130,000	$	23.3	2,130,000	$	105,989
March 1 - March 31	N/A		N/A	N/A	$	105,989
April 1 - April 30	1,627,500	$	20.9	1,627,500	$	71,885
May 1 - May 31	3,050,800	$	22.3	3,050,800	$	3,424
June 1 - June 30	N/A		N/A 2	N/A	$	3,424
July 1 - July 31	400,000	$	22.7	400,000	$	194,310
August 1 - August 31	2,158,000	$	22.3	2,158,000	$	146,232
September 1 - September 30	N/A		N/A	N/A	$	146,232
October 1 - October 31	100,000	$	22.3	100,00	$	143,995
November 1 - November 30	1,149,200	$	22.0	1,149,200	$	118,767
December 1 - December 31	N/A		N/A	N/A	$	118,767

Total	10,615,500		N/A	10,615,500		N/A

PART III

ITEM 17.

FINANCIAL STATEMENTS

Check Point has responded to Item 18.

ITEM 18.

FINANCIAL STATEMENTS

See pages F-1 to F-35 below.

ITEM 19.

EXHIBITS

Articles of Association

4.1

Form of Indemnification Agreement between Check Point and its officers and directors

4.2

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

4.3

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

4.4

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

4.5

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

4.6

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

4.7

2005 Israel Equity Incentive Plan, adopted by our board of directors on September 27, 2005

4.8

2005 United States Equity Incentive Plan, adopted by our board of directors on September 27, 2005

4.9

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

4.10

Employee Stock Purchase Plan, adopted by our board of directors on November 24, 1996

4.11

Agreement and Plan of Merger by and among Check Point Software Technologies Ltd., Check Point Software Technologies, Inc., Seyfert Acquisition Corporation, and Sourcefire, Inc., dated as of October 5, 2005

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

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

12.1

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

12.2

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

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

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2005

IN U.S. DOLLARS

INDEX


	Page


Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3 - F-4

Consolidated Statements of Income	F-5

Statements of Changes in Shareholders’ Equity	F-6 - F-7

Consolidated Statements of Cash Flows	F-8

Notes to Consolidated Financial Statements	F-9 - F-35

(ERNST & YOUNG LOGO)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

We have audited the accompanying consolidated balance sheets of Check Point Software Technologies Ltd. (the “Company”) and its subsidiaries as of December 31, 2004 and 2005, 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, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and 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 the Company and its subsidiaries as of December 31, 2004 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.


Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
January 29, 2006	A Member of Ernst & Young Global

F - 2

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands (except share and per share amounts)


	December 31,

	2004		2005

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	162,444	$	298,531
Marketable securities		791,799		1,044,312
Trade receivables (net of allowances for doubtful accounts and product returns of $ 7,041 and $ 5,597 as of December 31, 2004 and 2005, respectively)		96,006		127,129
Other current assets		22,180		24,006


Total current assets		1,072,429		1,493,978


LONG-TERM ASSETS:
Marketable securities		623,045		382,500
Property and equipment, net		8,144		7,665
Severance pay fund		5,237		5,644
Deferred tax asset, net		8,704		7,323
Intangible assets, net		25,857		20,215
Goodwill		175,536		174,295
Other assets		867		875


Total long-term assets		847,390		598,517


Total assets	$	1,919,819	$	2,092,495

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

F - 3

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands (except share and per share amounts)


	December 31,

	2004			2005


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Trade payables	$	6,046		$	5,726
Employee and payroll accruals		38,043			34,677
Deferred revenues		141,114			168,998
Accrued expenses and other liabilities		95,771			98,458


Total current liabilities		280,974			307,859



ACCRUED SEVERANCE PAY		8,021			8,915


Total liabilities		288,995			316,774


SHAREHOLDERS’ EQUITY:
Share capital -
Preferred shares, NIS 0.01 par value, 5,000,000 shares authorized, no shares issued		-			-
Deferred shares, NIS 1 par value, 10 shares authorized, 1 share issued and outstanding		-			-
Ordinary shares, NIS 0.01 par value, 500,000,000 shares authorized, 260,191,598 and 261,223,970 shares issued as of December 31, 2004 and 2005, respectively; 248,217,798 and 244,309,929 shares outstanding as of December 31, 2004 and 2005, respectively		771			774
Additional paid-in capital		369,246			386,529
Deferred stock-based compensation		(10,342	)		(2,831	)
Treasury shares at cost - 11,973,800 and 16,914,041 Ordinary shares as of December 31, 2004 and 2005, respectively		(244,586	)		(380,834	)
Accumulated other comprehensive income (loss)		206			(8,952	)
Retained earnings		1,515,529			1,781,035


Total shareholders’ equity		1,630,824			1,775,721


Total liabilities and shareholders’ equity	$	1,919,819		$	2,092,495

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

F - 4

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

U.S. dollars in thousands (except share and per share amounts)


		Year ended December 31,

		2003		2004		2005

Revenues:
Products and licenses		$	230,096	$	275,677	$	281,364
Software subscriptions			161,690		196,327		239,319
Support, training and consulting			40,786		43,356		58,667


Total revenues			432,572		515,360		579,350


Operating expenses: *)
Cost of revenues			18,923		27,750		30,540
Research and development			29,314		44,483		50,542
Selling and marketing			111,007		135,712		142,336
General and administrative			17,644		24,098		24,244
Acquired in-process research and development			-		23,098		-


Total operating expenses			176,888		255,141		247,662


Operating income			255,684		260,219		331,688
Financial income, net			43,506		44,777		54,177


Income before taxes on income			299,190		304,996		385,865
Taxes on income			55,311		56,603		66,181


Net income		$	243,879	$	248,393	$	319,684


Earnings per share:

Basic earnings per Ordinary share		$	0.98	$	0.99	$	1.30


Diluted earnings per Ordinary share		$	0.96	$	0.95	$	1.27


*)	Includes amortization of deferred stock-based compensation in conjunction with the acquisition of Zone Labs to employees in the following items:

	Cost of revenues			$	137	$	408
	Research and development				1,297		1,252
	Selling and marketing				2,745		1,825
	General and administrative				441		260


	Total stock-based compensation expenses			$	4,620	$	3,745

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

F - 5

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY

U.S. dollars in thousands (except share and per share amounts)


	Share capital		Additional paid-in capital			Deferred stock-based compensation			Treasury shares at cost			Accumulated other comprehensive income (loss)			Retained earnings		Total comprehensive income			Total shareholders’ equity


Balance as of January 1, 2003	$	740	$	163,235		$	-		$	-		$	(190	)	$	1,023,257				$	1,187,042

Tax benefit related to exercise of stock options		-		12,566			-			-			-			-					12,566
Issuance of shares under stock purchase plan and upon exercise of options (3,367,231 Ordinary shares), net		7		17,703			-			-			-			-					17,710
Comprehensive income -							-			-
Realized loss on hedging derivative instruments		-		-			-			-			190			-	$	190			190
Unrealized gain on hedging derivative instruments		-		-			-			-			158			-		158			158
Net income		-		-			-			-			-			243,879		243,879			243,879

Total comprehensive income																	$	244,227


Balance as of December 31, 2003		747		193,504			-			-			158			1,267,136					1,461,545

Tax benefit related to exercise of stock options		-		1,160			-			-			-			-					1,160
Issuance of shares under stock purchase plan and upon exercise of options (5,577,172 Ordinary shares), net		12		34,469			-			-			-			-					34,481
Issuance of shares in conjunction with the acquisition of Zone Labs, net (5,338,368 Ordinary shares)		12		91,352			-			-			-			-					91,364
Stock options assumed in conjunction with the acquisition of Zone Labs (2,847,365 options for Ordinary shares)		-		50,393			(16,594	)		-			-			-					33,799
Reversal of deferred stock-based compensation upon forfeiture of options issued to employees in conjunction with the acquisition of Zone Labs		-		(1,632	)		1,632			-			-			-					-
Treasury shares at cost (11,973,800 Ordinary shares)		-		-			-			(244,586	)		-			-					(244,586	)
Amortization of deferred stock-based compensation in conjunction with the acquisition of Zone Labs		-		-			4,620			-			-			-					4,620
Comprehensive income -
Realized gain on hedging derivative instruments		-		-			-			-			(158	)		-	$	(158	)		(158	)
Unrealized gain on hedging derivative instruments		-		-			-			-			206			-		206			206
Net income		-		-			-			-			-			248,393		248,393			248,393

Total comprehensive income																	$	248,441


Balance as of December 31, 2004	$	771	$	369,246		$	(10,342	)	$	(244,586	)	$	206		$	1,515,529				$	1,630,824

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

F - 6

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands (except share and per share amounts)


	Share capital		Additional paid-in capital			Deferred stock-based compensation			Treasury shares at cost			Accumulated other comprehensive income (loss)			Retained earnings			Total comprehensive income			Total shareholders’ equity


Balance as of December 31, 2004	$	771	$	369,246		$	(10,342	)	$	(244,586	)	$	206		$	1,515,529					$	1,630,824

Tax benefit related to exercise of stock options		-		12,613			-			-			-			-						12,613
Issuance of shares under stock purchase plan and upon exercise of options (1,030,741 Ordinary shares) and Issuance of shares in conjunction with the acquisition of Zone Labs (1,631 Ordinary shares)		3		8,436			-			-			-			-						8,439
Issuance of treasury shares under stock purchase plan and upon exercise of options (5,675,259 Ordinary shares)		-		-			-			100,681			-			(54,178	)					46,503
Reversal of deferred stock-based compensation upon forfeiture of options issued to employees in conjunction with the acquisition of Zone Labs		-		(3,766	)		3,766			-			-			-						-
Treasury shares at cost (10,615,500 Ordinary shares)		-		-			-			(236,929	)		-			-						(236,929	)
Amortization of deferred stock-based compensation in conjunction with the acquisition of Zone Labs		-		-			3,745			-			-			-						3,745
Comprehensive income, net of tax -
Realized gain on hedging derivative instruments		-		-			-			-			(206	)		-		$	(206	)		(206	)
Unrealized gain on hedging derivative instruments		-		-			-			-			15			-			15			15
Unrealized losses on marketable securities, net of $ 3,044 tax		-		-			-			-			(8,967	)		-			(8,967	)		(8,967	)
Net income		-		-			-			-			-			319,684			319,684			319,684

Total comprehensive income																		$	310,526


Balance as of December 31, 2005	$	774	$	386,529		$	(2,831	)	$	(380,834	)	$	(8,952	)	$	1,781,035					$	1,775,721

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

F - 7

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands (except share and per share amounts)


		Year ended December 31,

		2003			2004			2005

Cash flows from operating activities:
Net income		$	243,879		$	248,393		$	319,684
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment			6,030			5,519			5,352
Amortization of marketable securities premium and accretion of discount, net			17,652			17,528			11,066
Acquisition of in-process research and development			-			23,098			-
Amortization of intangible assets			-			4,232			5,642
Stock-based compensation			-			4,620			3,745
Deferred income taxes, net			(556	)		257			2,789
Decrease (increase) in trade receivables, net			411			(20,636	)		(31,123	)
Increase in other current assets and other assets			(1,935	)		(8	)		(328	)
Increase (decrease) in trade payables			(365	)		922			(320	)
Increase (decrease) in employees and payroll accruals			1,299			5,620			(3,366	)
Increase (decrease) in accrued expenses and other liabilities			4,849			(15,906	)		3,867
Increase in deferred revenues			6,662			26,613			27,884
Tax benefit related to exercise of stock options			12,566			1,160			12,613
Increase in accrued severance pay, net			309			619			487
Other			84			9			-


Net cash provided by operating activities			290,885			302,040			357,992


Cash flows from investing activities:
Cash paid in conjunction with the acquisition of Zone Labs, net (a)			-			(95,343	)		-
Proceeds from short-term bank deposits			24,279			16,888			-
Proceeds from marketable securities			736,159			904,377			774,883
Investment in marketable securities			(1,183,323	)		(1,078,101	)		(809,928	)
Purchase of property and equipment			(2,971	)		(4,500	)		(4,873	)


Net cash used in investing activities			(425,856	)		(256,679	)		(39,918	)


Cash flows from financing activities:
Proceeds from issuance of shares under stock purchase plan and upon exercise of options, net of expenses			17,710			34,481			54,942
Purchase of treasury shares at cost			-			(244,586	)		(236,929	)


Net cash provided by (used in) financing activities			17,710			(210,105	)		(181,987	)


Increase (decrease) in cash and cash equivalents			(117,261	)		(164,744	)		136,087
Cash and cash equivalents at the beginning of the year			444,449			327,188			162,444


Cash and cash equivalents at the end of the year		$	327,188		$	162,444		$	298,531


Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes		$	31,913		$	68,133		$	46,418

(a)	Acquisition of Zone Labs:
	Fair value of net assets acquired (excluding cash) and liabilities assumed at the acquisition date				$	238,011
	Amount paid in Ordinary shares and options					142,668


	Amount paid in cash (net of $ 19,141 acquired cash)				$	95,343

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

F - 8

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 1: –	GENERAL

	a.	Check Point Software Technologies Ltd. (“Check Point Ltd.”), an Israeli corporation, and its subsidiaries (collectively the “Company” or “Check Point”), are engaged in developing, marketing and supporting Internet security solutions for enterprise networks and service providers.

		The Company operates in one reportable segment and its revenues are mainly derived from the sales of its network security products, packaged and marketed mostly under the VPN-1 product family 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”).

		At the end of 2002, the Company established a wholly-owned Singapore resident subsidiary to manage most of its financial assets. The financial management is performed by the subsidiary’s U.S. branch.

	b.	In October 2005 the Company announced that it has signed a definitive agreement to acquire privately held Sourcefire Inc. (“Sourcefire”) for a total consideration of approximately $ 225 million. The Company anticipates this consideration will consist of approximately $ 215 million in cash and the assumption of the Sourcefire stock option plan. In addition, the Company will assume the cost of additional options issued by Sourcefire after February 15, 2006. The agreement has been approved by the boards of directors of both companies and by the stockholders of Sourcefire. The closing of the acquisition is subject to regulatory approval. Two U.S. regulatory applications have been submitted. The Company received the United States anti-trust approval and is waiting for a determination on its pending application with the Committee on Foreign Investment in the United States (CFIUS) under the Exon-Florio legislation. The Exon-Florio legislation provides for a 30-day review following notification of a potential acquisition. CFIUS has the option to extend the review period for an additional 45-day investigation. Refer to Note 12, subsequent event, for further information.

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

F - 9

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 1: –	GENERAL (Cont.)


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


Cash paid	$	113,571
Fair value of Ordinary shares issued		92,275
Fair value of options assumed		50,393
Acquisition related costs		913


Total purchase price	$	257,152


	The fair value of the Ordinary shares issued was determined using the average closing price of the Company’s Ordinary shares in the period of two trading days before and after the announcement date, December 15, 2003. The Company issued 5,338,368 Ordinary shares based upon the number of shares of Zone Labs outstanding as of December 15, 2003 and the exchange ratio in accordance with the acquisition agreement. The Company also issued options to purchase approximately 2.8 million Ordinary shares in exchange for all Zone Labs employees stock options outstanding as of March 26, 2004. The fair value of the Company’s options issued was determined using the Black-Scholes option-pricing model with the following assumptions: volatility of 44%; risk-free interest of 2%; dividend yield of 0%; and expected life of 0.7 years after the option is vested.

	The Company has allocated the purchase price of Zone Labs’ acquisition as of March 26, 2004 as follows:


Cash	$	19,141
Tangible assets		4,806
Deferred tax asset		15,566
Liabilities assumed		(15,642	)
Deferred tax liability		(12,036	)
In-process research and development		23,098
Core technology		21,659
Contracts		910
Trademarks		7,520
Goodwill		175,536
Deferred stock-based compensation		16,594


Total purchase price	$	257,152


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

	Trademarks value represents the recognition value of Zone Labs’ brand name as a result of advertising expenditures for customer relations and the technological development to provide consistent, leading edge products and a strong research and development commitment by the Company. The value of the trademarks was determined using the discounted cash flow approach at a discount rate of 20%. Trademarks will not be amortized and will be tested for impairment at least annually.

F - 10

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 1: –	GENERAL (Cont.)


	Goodwill of $ 175,536 represents the excess of the purchase price over the fair market value of the net tangible and intangible assets acquired. Goodwill will not be amortized and will be tested for impairment at least annually.

	At the acquisition date, the Company recorded a $ 23,098 charge for acquired in-process research and development (“IPR&D”) in conjunction with projects which have not yet reached technological feasibility and which have no alternative future use. The value of IPR&D was determined using the discounted cash flow approach. The expected future cash flow attributable to the in-process technology was discounted at 25%. At the time of the acquisition it was estimated that these IPR&D projects were 32% complete, and will be completed over the next 3 years.

	In conjunction with the acquisition of Zone Labs, the Company recorded deferred stock-based compensation in the amount of $ 16,594, which represents the intrinsic value of approximately 2.8 million options to purchase the Company’s Ordinary shares that the Company issued in exchange for Zone Labs’ unvested stock options. This amount is included in the total fair value of the Zone Labs’ options assumed of $ 50,393. Deferred stock-based compensation is amortized over the remaining vesting period of the related options on a straight-line basis. The estimated amortization of deferred stock-based compensation is $ 1,909 for 2006, $ 883 for 2007 and $ 39 for 2008.

	The results of operations of Zone Labs are included in the Company’s consolidated financial statements from March 26, 2004. The following table presents pro forma results of operations and gives effect to the acquisition of Zone Labs as if the acquisition had been consummated at the beginning of each year. The unaudited pro forma results of operations are not necessarily indicative of what would have occurred had the acquisition been made as of the beginning of each period or of the results that may occur in the future. Net income for each period presented excludes the write-off of acquired IPR&D of $ 23,098 and includes amortization of intangible assets related to the acquisition of $ 1,410 per quarter and amortization of deferred stock-based compensation of $ 1,540 per quarter. The unaudited pro forma information is as follows:


	Year ended December 31,

	2003		2004

	Unaudited


Revenues	$	457,247	$	526,236


Net income	$	210,723	$	244,123


Basic earnings per share	$	0.83	$	0.97


Diluted earnings per share	$	0.81	$	0.93

F - 11

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 1: –	GENERAL (Cont.)


	d.	During 2003 and 2004, approximately 13% of revenues in each year were derived from a single channel partner. During 2005, approximately 24% of the Company’s revenues were derived from two channel partners, 12% each. Trade receivable balance from the largest channel partner was $ 8,300 as of December 31, 2004 and from the two largest channel partners was $ 28,516 as of December 31, 2005.


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES


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

	a.	Use of estimates:

		U.S. GAAP requires 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. To the extent that there are material differences between these estimates and actual results, the financial statements may be affected.

	b.	Financial statements in United States dollars:

		Most of the Company’s revenues are denominated in United States dollars (“dollars”). In addition, most of the Company’s costs are incurred in dollars, Euro and Israeli shekel. The Company’s management believes that the dollar is the primary currency of the economic environment in which Check Point Ltd. and each of its subsidiaries operate. Thus, the dollar is their functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52 “Foreign Currency Translation. Changes in currency exchange rates between the Company’s functional currency and the currency in which a transaction is denominated are included in the Company’s results of operations as financial income (expense) in the period in which the currency exchange rates change.

	c.	Principles of consolidation:

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

	d.	Cash equivalents:

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

F - 12

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	e.	Investments in marketable securities:

		The Company accounts for investments in marketable securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

		Management determines the appropriate classification of its investments in government and corporate marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date.

		Until 2005, debt securities were classified as held-to-maturity as the Company had the positive intent and ability to hold the securities to maturity and were stated at amortized cost.

		In 2005, debt securities are classified as available for sale. Available for sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income.

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

		Interest income resulting from investments in structured notes that are classified as held to maturity is accounted for under the provision of Emerging Issue Task Force No. 96-12, “Recognition of Interest Income and Balance Sheet Classification of Structured Notes” (“EITF No. 96-12”). Under EITF No. 96-12, the retrospective interest method should be used for recognizing interest income.

		Auction rate securities are classified as available for sale and are carried at fair value.

		In 2005, in the connection with the expected acquisition of Sourcefire the Company sold $ 41,971 of its securities.

	f.	Property and equipment:

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


			%


	Computers and peripheral equipment		33-50
	Office furniture and equipment		10-20
	Leasehold improvements		The shorter of term of the lease or the useful life of the asset

F - 13

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	g.	Impairment of long-lived assets:

		The Company’s long-lived assets are reviewed for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. During 2003, 2004 and 2005, no impairment was recorded.

	h.	Goodwill and other intangible assets:

		Goodwill, indefinite-lived intangible assets and certain other purchased intangible assets have been recorded as a result of the acquisition of Zone Labs. Goodwill and indefinite-lived intangible assets are not amortized, but rather are subject to an annual impairment test. Other intangible assets are amortized using the straight-line basis over the estimated useful lives of four years.

		SFAS No. 142 requires goodwill and indefinite-lived intangible assets to be tested for impairment at least annually or between annual tests if certain events or indicators of impairment occur. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Goodwill is tested for impairment at the reporting unit level by a comparison of the fair value of a reporting unit with its carrying amount. During 2003, 2004 and 2005, no impairment losses were identified.

	i.	Research and development costs:

		Research and development costs are charged to the statement of income as incurred. SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

		Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general release have been insignificant. Therefore, all research and development costs have been expensed.

F - 14

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	j.	Revenue recognition:

		The Company derives its revenues from products and licenses, software subscriptions, support, training and consulting. The Company sells its products primarily through channel partners including distributors, resellers, OEMs, system integrators and MSPs, all of whom are considered end-users. The Company also sells its products directly to end users through its Web site.

		The Company accounts for software sales in accordance with Statement of Position No. 97-2, “Software Revenue Recognition (“SOP No. 97-2”), as amended. In addition, the Company has adopted Statement of Position No. 98-9, “Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions” (“SOP No. 98-9”). SOP No. 98-9 requires that revenue be recognized under the “residual method” when Vendor Specific Objective Evidence (“VSOE”) of Fair Value exists for all undelivered elements and VSOE does not exist for all of the delivered elements. In 2005, the Company reported license related revenue, which related to sale of the right to use one of the Company’s patents for unlimited period. Such revenues were recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”.

		Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. Arrangements with payment terms extending beyond customary payment terms are considered not to be fixed or determinable. If the fee is considered not to be 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 and support 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 consulting and training services are performed. Revenues earned on software arrangements involving multiple-elements are allocated to each undelivered element based on VSOE of fair value. The VSOE of fair value of the undelivered elements (software subscription, support, consulting services and training) is determined based on the price charged for the undelivered element when sold separately or renewed.

		The Company maintains certain provisions for product returns, in accordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists”, based on its experience with historical sales returns, analysis of credit memo data and other known factors. Such provisions amounted to $ 1,531 and $ 1,051 as of December 31, 2004 and 2005, respectively.

		Deferred revenue includes unearned amounts billed under software subscription and support contracts.

F - 15

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	k.	Severance pay:

		The Company’s liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. The Company records as expenses the net increase in its funded or unfunded severance liability. Employees are entitled to one month’s salary for each year of employment, or a portion thereof. The Company’s liability is partially provided by monthly payments deposited with insurers; any unfunded amounts would be paid from operating funds and are covered by a reserve established by the Company.

		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, 2003, 2004 and 2005, were $ 1,437, $ 2,240 and $ 2,570, respectively.

	l.	Employee benefit plan:

		The Company has a 401(K) defined contribution plan covering certain employees in the U.S. All eligible employees may elect to contribute up to 50%, but generally not greater than $ 14 per year, of their annual compensation to the plan through salary deferrals, subject to IRS limits. From January 1, 1996 (inception) to December 31, 2005, the Company made no matching contributions to the plan. In December 2005, the Company amended its 401(K) contribution plan to include a fixed matching contribution program. Effective from January 1, 2006 the Company will match 50% of employee contributions to the plan up to a limit of 3% of their eligible compensation.

	m.	Income taxes:

		The Company accounts for income taxes in accordance with Statement of SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

	n.	Advertising expenses:

		Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2003, 2004 and 2005, were $ 8,371, $ 12,317 and $ 11,355, respectively.

F - 16

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	o.	Concentrations of credit risk:

		Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and trade receivables. The majority of the Company’s cash and cash equivalents and marketable securities is held by the Company’s Singapore resident subsidiary, invested in dollar and dollar-linked investments, and is deposited in major banks in the U.S. and Europe. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

		The Company’s marketable securities consist of investment-grade corporate bonds, mortgage and asset-backed, structured notes, U.S. government agency securities and sovereign bonds. The Company’s investment policy, approved by the Investment Committee, limits the amount the Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations.

		The Company’s trade receivables are geographically diversified and derived from sales to channel partners mainly in the United States, Europe and Asia. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its channel partners and establishes an allowance for doubtful accounts for specific debts that are doubtful of collection amounting to $ 5,510 and $ 4,546 as of December 31, 2004 and 2005, respectively. The Company charges off receivables when they are deemed uncollectible. If market declines actual collection, experience may not meet expectations and may result in decreased cash flow and increased bad debt expense. Bad debt expense amounted to $ 927, $ 940 and $ 648 in 2003, 2004 and 2005, respectively.

	p.	Derivatives and hedging:

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

		The Company hedges the exposure of assets and anticipated revenues denominated in the Japanese Yen as well as anticipated expenses denominated in Euros 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 adopted a foreign currency cash flow hedging program with zero-cost collar contracts. The net gains (losses) recognized in revenues during 2003, 2004 and 2005 were $ (173), $ 0 and $ 1,109, respectively. During 2003 and 2004, the Company entered into a foreign currency cash flow hedging programs with option contracts designated to hedge expenses in Euros. The net gain (loss) which offset expenses during 2003, 2004 and 2005 amounted to $ 655, $ 360 and $ (22), respectively.

F - 17

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

		Also, the Company entered 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 2003, 2004 and 2005, representing the foreign exchange forward contract gains (losses), were $ 166, $ (144) and $ 113, respectively.

		In 2003 and 2004, the Company entered into forward rate agreements (“FRA”), in the amount of $ 25,000 and $ 125,000, respectively, 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 settled in 2004 and 2005, respectively, resulting in a total gain (loss) of $ 204 and $ (95), respectively, presented in the statement of income as financial income.

		As of December 31, 2005, the Company’s management believed that since the abovementioned activities were transacted with well-established institutions, the obligations owed to the Company will be fulfilled.

	q.	Basic and diluted earnings per share:

		Basic earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares outstanding during the year, in accordance with SFAS No. 128, “Earnings Per Share” .

		The total weighted average number of shares related to the outstanding options excluded from the calculations of diluted earnings per share, since they would have an anti-dilutive effect, were 8,859,208, 7,277,352 and 10,879,154 for 2003, 2004 and 2005, respectively.

	r.	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” 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.

		The Company adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation - transition and disclosure”, which amended certain provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of 2003. The Company continues to apply the provisions of APB No. 25 in accounting for stock-based compensation.

F - 18

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

		Pro forma information regarding the Company’s net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123.

		The fair value for options granted in 2003, 2004 and 2005 is amortized over their vesting period and is estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:


	Year ended December 31,

Employee Stock Options	2003		2004		2005


Expected volatility	44.0	%	52.6	%	50.84	%
Risk-free interest	2.5	%	4.0	%	4.4	%
Dividend yield	0.0	%	0.0	%	0.0	%
Expected life after the option is vested (years)	0.7		0.7		2.77

Employee Stock Purchase Plan


Expected volatility	44.0	%	41.0	%	33.2	%
Risk-free interest	1.0	%	1.9	%	2.0	%
Dividend yield	0.0	%	0.0	%	0.0	%
Expected life (years)	0.5		0.5		0.5


		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 No. 123 on its stock-based employee compensation:


	Year ended December 31,

	2003		2004		2005


Net income as reported	$	243,879	$	248,393	$	319,684

Add: Stock-based compensation expense included in reported net income in conjunction with the acquisition of Zone Labs		-		4,620		3,745
Deduct: Stock-based compensation expense determined under fair value method for all awards		37,262		48,022		50,237


Pro forma net income	$	206,617	$	204,991	$	273,192


Earnings per share:
Basic earnings per Ordinary share, as reported	$	0.98	$	0.99	$	1.30


Diluted earnings per Ordinary share, as reported	$	0.96	$	0.95	$	1.27


Basic pro forma earnings per Ordinary share	$	0.83	$	0.82	$	1.11


Diluted pro forma earnings per Ordinary share	$	0.82	$	0.80	$	1.11

F - 19

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	s.	Fair value of financial instruments:

		The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

		1.	The carrying amount of cash and cash equivalents, trade receivables and trade payables approximates their fair values due to the short-term maturities of these instruments.

		2.	The fair value of short and long-term marketable securities and bank deposits with quoted market prices is based on quoted market prices (see Note 3).

		3.	The fair value of derivative instruments is estimated by obtaining quotes from brokers.

	t.	Reclassification:

		Certain reclassifications have been made in the prior years consolidated financial statements and related note disclosures to conform to the current year’s presentation.

	u.	Comprehensive income

		The Company accounts for comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of comprehensive income relates to gain and loss on hedging derivative instruments and unrealized gains and losses on available for sale securities.

	v.	Impact of recently issued accounting standards:

		In December 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which replaces SFAS 123 and supersedes APB 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options and shares issued under the ESPP to be recognized in the financial statements based upon their fair values, beginning with the first interim or annual period after December 15, 2005, with early adoption encouraged. The Company has the option to choose either the modified prospective or modified retrospective method. The Company currently expects to adopt SFAS No. 123(R), using the modified retrospective method of adoption which requires that compensation expense be recorded over the expected remaining life of all unvested stock options and restricted stock and for any new grants thereof at the beginning of the first quarter of adoption of SFAS No. 123(R) and prior periods will be restated to recognize compensation cost in the amount previously reported in the pro forma footnote disclosures under SFAS No. 123(R). The Company is currently evaluating the impact SFAS No. 123(R) will have on the Company’s financial statements, and based on its preliminary analysis, expects that the adoption of the SFAS No. 123(R) fair value method will have a significant impact on the consolidated results of operations, although it will have no impact on the Company’s overall consolidated financial position or consolidated cash flows.

F - 20

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 2: –	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

		Had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 2(r) above. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on when employees exercise stock options, among other things), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $12.6 million in 2003, $1.2 million in 2004 and $12.6 in 2005.

		In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income for the period of the change, the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retroactive application to prior periods’ financial statements of a voluntary change in accounting principles unless it is impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. As of December 31, 2005, adoption of SFAS No. 154 will not have a material impact on the Company’s financial position or results of operation.

		In November 2005, the FASB issued FSP FAS 115-1. The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of other than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity. The FSP replaces the impairment evaluation guidance of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” with references to the existing other-than-temporary impairment guidance. The FSP clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made. The guidance in this FSP is to be applied to reporting periods beginning after December 15, 2005. As of December 31, 2005, adoption of FSP FAS 115-1 will not have a material impact on the Company’s financial position or results of operations.

F - 21

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 3: –	MARKETABLE SECURITIES

	Marketable securities with contractual maturities of less than 1 year are as follows:


	December 31,

	2004									2005

	Amortized Cost / Cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized Cost / Cost		Gross unrealized gains		Gross unrealized losses			Fair value


Government and corporate debentures – fixed interest rate	$	403,835	$	1,175	$	(1,524	)	$	403,486	$	636,767	$	49	$	(6,154	)	$	630,662
Structured products (*)		181,495		4,428		(3,465	)		182,458		211,200		3,125		(7,364	)		206,961
Government and corporate debentures – floating interest rate		21,135		2		(9	)		21,128		26,101		17		(8	)		26,110
Mortgage and asset backed securities (**)		65,278		6		(1,277	)		64,007		51,720		3,018		(441	)		54,297
Auction rate securities		120,056		321		(2	)		120,375		126,282		-		-			126,282


	$	791,799	$	5,932	$	(6,277	)	$	791,454	$	1,052,070	$	6,209	$	(13,967	)	$	1,044,312


	(*)	The structured notes include mainly inverse floating interest rate bonds and range accrual bonds. Range accrual bonds are bonds where interest is paid only if a specified interest rate stays within a pre-established range, otherwise the bond pays no interest. Inverse floating rate bonds are bonds where the coupon varies inversely with changes in specified interest rates or indices (for example, LIBOR).

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

	The unrealized losses on the Company’s investments in all types of securities are due to interest rate increases. Since the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2005.

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


	December 31,

	2004									2005

	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair value


Government and corporate debentures – fixed interest rate	$	485,911	$	789	$	(3,617	)	$	483,083	$	353,076	$	13	$	(4,314	)	$	348,775
Government and corporate debentures – floating interest rate		44,950		29		(26	)		44,953		22,400		11		-			22,411
Mortgage and asset backed securities (*)		92,184		77		(844	)		91,417		11,277		118		(81	)		11,314

	$	623,045	$	895	$	(4,487	)	$	619,453	$	386,753	$	142	$	(4,395	)	$	382,500


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

F - 22

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 3: –	MARKETABLE SECURITIES (Cont.)

		The unrealized losses on the Company’s investments in all types of securities are due to interest rate increases. Since the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2005.

NOTE 4: –	PROPERTY AND EQUIPMENT, NET


	December 31,

	2004		2005

Cost:
Computers and peripheral equipment	$	33,595	$	36,851
Office furniture and equipment		5,130		5,347
Leasehold improvement and other		3,241		3,363


		41,966		45,561
Accumulated depreciation		33,822		37,896


Property and equipment, net	$	8,144	$	7,665


	During 2004 and 2005, the U.S. subsidiary of the Company recorded a reduction of approximately $ 900 and $ 1,278, respectively, to the cost and accumulated depreciation of fully depreciated equipment no longer in use.

NOTE 5: –	GOODWILL AND INTANGIBLE ASSETS, NET

	a.	Goodwill

		Changes in Goodwill for the years ended December 31, 2004 and 2005 is as follows:


	Year ended December 31,

	2004		2005


Goodwill, beginning of year	$	-	$	175,536
Acquisition of Zone Labs		175,536		-
Other		-		(1,241	)


Goodwill, end of year	$	175,536	$	174,295

F - 23

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 5: –	GOODWILL AND INTANGIBLE ASSETS, NET (Cont.)

	b.	Intangible assets, net

		Net intangible assets, as of December 31, 2005 consisted of the following:


	Original amount		Accumulated amortization		Net balance


Core technology	$	21,659	$	9,476	$	12,183
Trademarks		7,520		-		7,520
Contracts		910		398		512


	$	30,089	$	9,874	$	20,215


		Amortization expense for the year ended December 31, 2005 amounted to $ 5,642. The estimated total amortization expense associated with acquired intangible assets is $ 5,642 for each of the years 2006 and 2007 and $ 1,411 for 2008.

NOTE 6: –	ACCRUED EXPENSES AND OTHER LIABILITIES


	December 31,

	2004		2005


Income taxes payable and reserve	$	71,211	$	74,386
Marketing expenses payable		7,017		7,310
Others		17,543		16,762


	$	95,771	$	98,458


NOTE 7: –	COMMITMENTS AND CONTINGENT LIABILITIES

	a.	Lease commitments:

		The facilities of the Company are rented under operating lease agreements that expire on various dates. The company leases vehicles under standard commercial operating leases.

		Aggregate minimum lease commitments under non-cancelable operating leases as of December 31, 2005, were as follows:


2006	$	4,406
2007		1,395
2008		1,324
2009		1,217
2010 and there after		2,086


	$	10,428

F - 24

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 7: –	COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

		Rent expenses for the years ended December 31, 2003, 2004 and 2005, were $ 5,587, $ 6,901 and $ 7,385 respectively.

	b.	Litigation:

		1.	Beginning on August 29, 2003, Check Point received a number of class action complaints filed in the United States District Court for the Southern District of New York by holders of Check Point ordinary shares, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. On November 20, 2003, the court consolidated all of the complaints into one action and appointed a lead plaintiff. On January 14, 2004, the lead plaintiff filed a Consolidated Amended Complaint, purporting to represent a putative class of all purchasers of ordinary shares between July 10, 2001 and April 4, 2002. The complaint generally alleges that Check Point and certain of its senior officers made misrepresentations and omissions regarding, among other things, Check Point’s sales, and future prospects. Check Point retained counsels and filed a motion to dismiss the complaint pursuant to Rule 12(b)(6) and Rule 9(b) of the Federal Rules of Civil Procedure and Section 21D(b)(3) of the Exchange Act. On March 7, 2005 Check Point’s motion to dismiss was granted by the District Court. The issued Order permitted the lead plaintiffs to file an amended complaint to attempt to cure the defects in the dismissed complaint. On April 22, 2005, the lead plaintiffs filed their Consolidated Second Amended Complaint. On September 2, 2005, Check Point filed a motion to dismiss this complaint, and this motion is currently pending before the District Court. Check Point continues to dispute the allegations of wrongdoing and intends to defend the matter vigorously. Check Point maintains applicable insurance as well as a financial reserve in its financial statements as of December 31, 2005.
		2.	On November 16, 2004, a shareholder of SofaWare, a 64% owned subsidiary of the Company, filed a motion in the Tel-Aviv District Court requesting that the court authorize him to conduct a shareholders derivative suit against the Company on behalf of SofaWare in the amount of $ 5,149, not including linkage and interest. The suit relates to discounts, sales commissions and royalties that the plaintiff alleges the Company owes to SofaWare, with respect to products that were sold by or through the Company. Court hearings have taken place with respect to the plaintiff’s request that the court authorize him to conduct a shareholder’s derivative suit against the Company on behalf of SofaWare. The parties submitted written summations and are waiting for the court’s decision on this request. The matter is at a preliminary stage and the Company’s management believes that the claim is without merit and intends to contest the claim vigorously.

F - 25

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 7: –	COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

			On November 22, 2005, the same shareholder also filed an initiating motion against the Company and against SofaWare. The motion alleges that some shareholders of SofaWare, among them the plaintiff, are entitled to exercise veto rights with respect to various actions of SofaWare. The plaintiff also filed a motion to obtain injunctive relief that would prevent SofaWare and the Company from taking certain actions with respect to the issuance of SofaWare’s securities to its employees and the determination of SofaWare’s auditors’ compensation. The Company has submitted a motion to dismiss the initiating motion, to convert it to a regular claim or to stay the proceedings as long as the shareholder’s first suit is pending. The Company has responded to the motion to obtain injunctive relief. The matter is at a very preliminary stage, but the Company’s management believes that the claim is without merit and intends to contest the claim vigorously.

			On December 14, 2004, another shareholder and director of SofaWare filed an initiating motion in the Tel-Aviv District Court against the Company. The motion alleges that the Company is oppressing the plaintiff, who is a minority shareholder of SofaWare. Therefore, the plaintiff is requesting the court to compel the Company to purchase the plaintiff’s shares in SofaWare, based upon a valuation to be determined by an independent expert. The plaintiff is also seeking disclosure of information and documents relating to the business plans of the Company and SofaWare, and to the inter-company balances between the two companies. The Company has submitted a motion to dismiss the initiating motion or to convert it to a regular claim, and a motion to stay the proceedings as long as the other shareholder first suit is pending. As also requested by the plaintiff, the court has stayed all proceedings in this case until after the court renders its decision with respect to the other shareholder’s request that he be authorized to conduct a shareholder’s derivative suit against the Company on behalf of SofaWare. The matter is at a preliminary stage and the Company’s management believes that the claim is without merit and intends to contest the claim vigorously.

NOTE 8: –	TAXES ON INCOME

	a.	Israeli taxation:

		1.	Corporate tax structure:

			Taxable income of Israeli companies is subject to tax at the rate of 34% in 2005, 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.

		2.	Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Law”):

			Practically all of Check Point Ltd.’s production facilities have been granted the status of “Approved Enterprises”, under the Law, in six investment programs (the “Programs”).

F - 26

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 8: –	TAXES ON INCOME (Cont.)

		In accordance with the Law, Check Point Ltd. 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 eight years, based on the percentage of foreign investment in Check Point Ltd. The abovementioned tax benefits are scheduled to gradually expire by 2013.

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

		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, 2005 approximately $ c661,000 are tax-exempt. If such tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the reduced corporate tax rate applicable to such profits (between 10%-25%) and an income tax liability of up to approximately $ 165,000 would be incurred as of December 31, 2005. The Company’s board of directors has determined that it will not distribute any amounts of its undistributed tax exempt income as dividend. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s “Approved Enterprise” as the undistributed tax exempt income is essentially permanent in duration.

		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 statutory Israeli corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such programs.

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

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

F - 27

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 8: –	TAXES ON INCOME (Cont.)


		In addition, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Check Point Ltd’s existing Approved Enterprise will generally not be subject to the provisions of the Amendment. As a result of the amendment, tax-exempt income generated under the provisions of the new law, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income.

	3.	Check Point Ltd has final tax assessments through the year 2001. As of December 31, 2004 and 2005, the Company has recorded an accrual of approximately $ 59,000 and $ 70,000, respectively, in respect of potential exposures related to tax years for which final assessment has not been received.

b.	Deferred tax assets and liabilities:

	Deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2004 and 2005, the Company’s deferred taxes were in respect of the following:


	December 31,

	2004			2005

U.S. carryforward tax losses	$	265,543		$	297,834
Reserves and allowances		9,696			7,440
Research and development tax credit		6,579			7,204

Deferred tax assets before valuation allowance		281,818			312,478
Valuation allowance		(263,066	)		(298,742	)
Unrealized losses on marketable securities, net		-			3,044

Deferred tax asset		18,752			16,780


Intangible assets		(10,313	)		(8,086	)


Deferred tax liability		(10,313	)		(8,086	)


Deferred tax asset, net	$	8,439		$	8,694


Domestic:
Current deferred tax assets	$	1,625		$	1,478
Non current deferred tax asset		746			565

		2,371			2,043

Foreign:
Current deferred tax assets, net		38			1,882
Current deferred tax liability, net		(1928	)		(1,989	)
Non current deferred tax asset		7,958			6,758

		6,068			6,651


	$	8,439		$	8,694

F - 28

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 8: –	TAXES ON INCOME (Cont.)


		Current deferred tax assets, net, is included within other current assets in the balance sheets. Current deferred tax liability, net, is included within accrued expenses and other liabilities in the balance sheets.

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

		Through December 31, 2005, the U.S. subsidiaries had a U.S. federal loss carryforward of approximately $ 746,000 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 2012 -2025. Tax benefits related to employee stock option exercises will be credited to additional paid-in capital when realized.

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

	c.	Income before taxes on income is comprised as follows:


	Year ended December 31,

	2003		2004		2005


Domestic	$	255,282	$	282,408	$	299,867
Foreign		43,908		*) 22,588		85,998


	$	299,190	$	304,996	$	385,865


	*)	Net of acquired in-process research and development of $ 23,098.

d.	Taxes on income are comprised as follows:


	Year ended December 31,

	2003			2004		2005


Current	$	55,867		$	56,346	$	63,392
Deferred		(556	)		257		2,789


	$	55,311		$	56,603	$	66,181


Domestic	$	49,638		$	45,159	$	37,287
Foreign		5,673			11,444		28,894


	$	55,311		$	56,603	$	66,181

F - 29

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 8: –	TAXES ON INCOME (Cont.)


	e.	Reconciliation of the theoretical tax expenses:

		A reconciliation between the theoretical tax expenses, assuming all income is taxed at the statutory rate applicable and the actual income tax as reported in the statements of income, is as follows:


		Year ended December 31,

		2003			2004			2005


Income before taxes as reported in the statements of income		$	299,190		$	304,996		$	385,865


Statutory tax rate in Israel			36	%		35	%		34	%


Decrease in taxes resulting from:
Effect of “Approved Enterprise” status (*)			(17	%)		(17	%)		(16	%)
Others, net			(1	%)		1	%		(1	%)


Effective tax rate			18	%		19	%		17	%


(*)	Basic earnings per share amounts of the benefit resulting from the “Approved Enterprise” status	$	0.20		$	0.21		$	0.25


	Diluted earnings per share amounts of the benefit resulting from the “Approved Enterprise” status	$	0.20		$	0.20		$	0.24


NOTE 9: –	SHAREHOLDERS’ EQUITY


	a.	General:

		Ordinary shares confer upon their holders the right to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends if declared.

		Dividends declared on Ordinary shares will be paid in NIS. Dividends paid to shareholders outside Israel will be converted into U.S. dollars, on the basis of the exchange rate prevailing at the date of payment. The Company’s board of directors has determined that it will not distribute any amounts of its undistributed tax exempt income as dividend.

	b.	Deferred share:

		The Deferred share is not entitled to any rights other than the right to receive its nominal value upon liquidation of the Company.

F - 30

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 9: –	SHAREHOLDERS’ EQUITY (Cont.)

	c.	Employee Stock Purchase Plan (“ESPP”):

		The Company reserved a total of 6,000,000 Ordinary shares for issuance under the ESPP. Eligible employees use up to 15% of their salaries to purchase Ordinary shares but no more than 1,250 shares per participant on any purchase date. The ESPP is implemented through an offering every six months. The price of an Ordinary share purchased under the ESPP is equal to 85% of the lower of the fair market value of the Ordinary share on the subscription date of each offering period or on the purchase date.

		During 2003, 2004 and 2005 employees purchased 254,889, 261,008 and 331,170 Ordinary shares at average prices of $12.29, $15.80 and $17.89 per share, respectively.

		As of December 31, 2005, 4,241,349 Ordinary shares were available for future issuance under the ESPP.

	d.	Stock options:

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

		Under the Company’s 2005 equity incentive plans (the “2005 Plans”), options are granted to employees, officers and directors at an exercise price equal to at least the fair market value at the date of grant and are granted for periods not to exceed seven years. Options granted under the 2005 Plans generally vest over a period of four to five years of employment. Any options that are cancelled or forfeited before expiration become available for future grants. The Company can also issue a variety of other equity incentives under the 2005 Plans, but no such other equity incentives were outstanding at December 31, 2005.

		In connection with its acquisition of Zone Labs in March 2004, the Company assumed all of the outstanding Zone Labs stock options under the Zone Labs 1998 Stock Option Plan (the “Zone Labs Plan”), which were converted into options to purchase approximately 2.8 million shares of the Company’s Ordinary shares. These stock options generally have terms of between five and ten years and generally vest over a four-year period. Options that are cancelled or forfeited before expiration do not become available for future grant.

F - 31

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 9: –	SHAREHOLDERS’ EQUITY (Cont.)

	Under the terms of the 2005 Plans, options to purchase 50,000,000 Ordinary shares were reserved for issuance (increasing by 5,000,000 Ordinary Shares on January 1 of each year beginning January 1, 2006), out of which as of December 31, 2005, 48,381,670 options were available for future grant under the 2005 Plans. As of December 31, 2005, 1,618,330 options were outstanding under the 2005 Plans and 28,267,886 options were outstanding under the 1996 United States Stock Option Plan and 1996 Israel Stock Option Plan and 365,215 were outstanding under the Zone Labs plan.

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



	Options (in thousands)									Weighted average exercise price

	2003			2004			2005			2003		2004		2005


Outstanding at beginning of year		28,769			29,437			31,839		$	17.34	$	17.88	$	19.26
Granted		5,370			9,476			6,676		$	17.14	$	18.26	$	22.68
Exercised		(3,112	)		(5,316	)		(6,375	)	$	4.73	$	5.71	$	7.75
Forfeiture		(1,590	)		(1,758	)		(1,889	)	$	31.28	$	31.81	$	25.80


Outstanding as of December 31,		29,437			31,839			30,251		$	17.88	$	19.26	$	22.03


Exercisable as of December 31,		17,710			18,214			15,922		$	15.36	$	17.92	$	22.65



The options outstanding as of December 31, 2005, have been separated into ranges of exercise price, as follows:


Exercise price	Options outstanding at December 31, 2005 (in thousands)		Weighted average remaining contractual life (years)		Weighted average exercise price		Options exercisable at December 31, 2005 (in thousands)		Weighted average exercise price of exercisable options

$					$				$


1.66 - 1.66		5		3.66		1.66		5		1.66
2.99 - 9.83		3,734		1.23		9.19		3,555		9.35
10.33 - 13.00		2,634		3.45		12.98		1,933		12.97
13.02 - 17.64		7,339		3.87		16.82		4,407		16.94
17.68 - 23.82		9,199		6.31		22.33		916		22.40
27.00 - 30.54		4,262		4.73		27.30		2,116		27.52
31.75 - 36.72		175		1.58		34.51		170		34.55
40.09 - 44.42		1,823		2.47		42.30		1,745		42.30
44.96 - 51.21		438		1.35		47.50		438		47.50
65.58 - 65.58		11		1.41		65.58		11		65.58
68.42 - 70.02		281		1.73		69.11		280		69.11
70.19 - 75.08		73		1.54		71.48		72		71.44
79.79 - 86.54		277		2.33		84.74		274		84.72

1.66 - 86.54		30,251		4.20		22.03		15,922		22.65

F - 32

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 9: –	SHAREHOLDERS’ EQUITY (Cont.)

		The weighted average fair values at grant date of options granted for the years ended December 31, 2003, 2004 and 2005 with an exercise price equal to the market value at the date of grant were $ 5.44, $ 9.50 and $ 11.05, respectively. The weighted average fair values at grant date of options assumed in the Zone Lab’s acquisition with an exercise price lower than the market value at the date of grant was $ 17.89.

	e.	In October 2003, the Company announced that its Board of Directors has authorized the repurchase of up to $ 200,000 of its outstanding Ordinary shares in the open market or through privately negotiated transactions. In October 2004, after the Company had completed the repurchase of $ 200,000 of its Ordinary shares, the Company announced that its Board of Directors had authorized additional repurchases of up to $ 200,000 of its outstanding Ordinary shares in the open market or through privately negotiated transactions. In July 2005, after the Company had completed the repurchase of $ 400,000 of its Ordinary shares, the Company announced that its Board of Directors had authorized additional repurchases of up to $ 200,000 for a total of $ 600,000. Under the repurchase programs, share purchases may be made from time to time depending on market conditions, share price, trading volume and other factors and will be funded from available working capital. The repurchase programs have no time limit and may be suspended from time to time or discontinued. Under the above programs, the Company purchased during 2004 and 2005 approximately 12 and 10.6 million shares, respectively, at a total cost of $ 244,586 and $ 236,929, respectively. The average purchase price was $ 20.40 and $ 22.38, respectively.

		As of December 31, 2005, the Company reissued 5,675,259 of its purchased Ordinary shares in consideration for the exercise of stock options by employees and for shares issued under the ESPP. Such purchases of Ordinary shares are accounted for as treasury stock and result in a reduction of shareholders’ equity. When treasury stock is reissued, the Company accounts for the re-issuance in accordance with Accounting Principles Board No. 6, “Status of Accounting Research Bulletins” (“APB No. 6”) and charges the excess of the purchase cost over the re-issuance price (loss) to retained earnings. The purchase cost is calculated based on the specific identification method. In case the purchase cost is lower than the re-issuance price, the Company credits the difference to additional paid-in capital.

F - 33

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 10: –	EARNINGS PER SHARE

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


	Year ended December 31,

	2003		2004		2005


Net income	$	243,879	$	248,393	$	319,684

Weighted average Ordinary shares outstanding (in thousands)		247,691		251,244		245,520

Dilutive effect:
Employee stock options (in thousands)		7,392		9,364		6,227

Diluted weighted average Ordinary shares outstanding (in thousands)		255,083		260,608		251,747

Basic earnings per Ordinary share	$	0.98	$	0.99	$	1.30

Diluted earnings per Ordinary share	$	0.96	$	0.95	$	1.27


NOTE 11: –	GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA

	a.	Summary information about geographical areas:

		The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). The total revenues are attributed to geographic areas based on the location of the Company’s channel partners which are considered as end customers.

		The following present total revenues for the years ended December 31, 2003, 2004 and 2005 and long-lived assets as of December 31, 2004 and 2005:

		1.	Revenues based on the channel partners’ location:


	Year ended December 31,

	2003		2004		2005


Americas	$	185,186	$	226,125	$	269,432
Europe, Middle East and Africa		175,887		213,411		236,605
Japan		39,622		37,938		34,334
Asia Pacific		31,877		37,886		38,979


	$	432,572	$	515,360	$	579,350


	It is impracticable to provide revenues by product lines for the years ended December 31, 2003, 2004 and 2005.

F - 34

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share amounts)


NOTE 11: –	GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA (Cont.)

		2.	Long-lived assets:


	December 31

	2004		2005


Americas	$	205,024	$	197,477
Israel		4,037		4,173
Other		476		525


	$	209,537	$	202,175


	b.	Financial income, net:


	Year ended December 31,

	2003		2004		2005


Financial income:
Interest income	$	60,695	$	64,027	$	65,884
Foreign currency remeasurement gain and others, net		1,006		-		412

		61,701		64,027		66,296

Financial expense:
Amortization of marketable securities premium and accretion of discount, net		17,652		17,528		11,066
Foreign currency remeasurement loss, net		-		531		-
Others		543		1,191		1,053

		18,195		19,250		12,119


	$	43,506	$	44,777	$	54,177


NOTE 12: –	SUBSEQUESNT EVENT – Unaudited

	In February 2006, the CFIUS notified the Company that the 30-day review provided by the Exon-Florio legislation has expired and the pending acquisition moved into the investigative stage for an additional 45-day investigation.

F - 35

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 Shwed
Chief Executive Officer and Chairman of the Board

BY: /S/ Eyal Desheh
——————————————
Eyal Desheh
Executive Vice President and Chief Financial Officer

Date: March 13, 2006

Exhibit 1

THE COMPANIES ORDINANCE

A COMPANY LIMITED BY SHARES

ARTICLES OF ASSOCIATION

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
(the “Company”)

PRELIMINARY

1.	Table “A” Excluded

The regulations contained in the second schedule to the Companies Ordinance (New Version), 5743-1983 (the “Companies Ordinance”) shall not apply to the Company.

2.	Public Company

This Company is a Public Company, as such term is defined in the Companies Ordinance.

SHARE CAPITAL

3.	Share Capital

(a) The authorized share capital of the Company is NIS 5,050,010 , divided into 5,000,000 (five million) Preferred Shares, nominal value NIS 0.01 per share, 500,000,000 (five hundred million) Ordinary Shares, nominal value NIS 0.01 per share, and 10 (ten) Deferred Shares, nominal value NIS 1.00 per share.

(b) The Preferred Shares may be issued from time to time as shares of one or more series, with such distinctive serial designations as may be stated or expressed in the resolution or resolutions providing for the issuance of such shares from time to time adopted by the Board of Directors of the Company. In the resolution or resolutions providing for the issuance of such shares, the Board of Directors of the Company is expressly authorized, without the need for shareholder action, to fix the terms and preferences of the shares of such series, including without limitation the dividend rate, the redemption price, the voting rights, the right or obligation of the Company to redeem the shares, and the terms upon which the shares are convertible into or exchangeable for shares of any other class or classes.

(d) The Deferred Shares shall not entitle the holders thereof to any rights, whether voting rights, the rights to dividends or other distributions, or otherwise, except the right to receive, upon the dissolution, liquidation or winding-up of the Company, the paid-up portion of the par value of such shares.

4.	Increase of Authorized Share Capital

(a) The Company may, from time to time, by Special Resolution, whether or not all the shares then authorized have been issued, and whether or not all the shares previously issued have been called up for payment, increase its authorized share capital. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such Special Resolution shall provide.

(b) Except to the extent otherwise provided in such Special Resolution, any new shares included in the authorized share capital so increased shall be subject to all the provisions of these Articles which are applicable to shares of such class included in the existing share capital without regard to class (and, if such new shares are of the same class as a class of shares included in the existing share capital, to all of the provisions which are applicable to shares of such class included in the existing share capital).

5.	Special Rights; Modification of Rights

(a) Subject to the provisions of the Memorandum of Association of the Company, and without prejudice to any special rights previously conferred upon the holders of existing shares in the Company, the Company may, from time to time, by Special Resolution, provide for shares with such preferred or deferred rights or rights of redemption, or other special rights and/or such restrictions, whether in regard to dividends, voting repayment of share capital or otherwise, as may be stipulated in such Special Resolution.

(b) (i) If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by these Articles, may be modified or abrogated by the Company, by Special Resolution, subject to the consent in writing of the holders of seventy-five percent (75%) of the issued shares of such class.

(ii) The provisions of these Articles relating to General Meetings shall, mutatis mutandis , apply to any separate General Meeting of the holders of the shares of a particular class; provided, however, that the requisite quorum at any such separate General Meeting shall be two or more members present in person or proxy and holding not less than seventy-five percent (75%) of the issued shares of such class.

(iii) Unless otherwise provided by these Articles, the enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed, for purposes of this Article 5(b), to modify or abrogate the rights attached to previously issued shares of such class or of any other class.

6.	Consolidation, Subdivision, Cancellation and Reduction of Share Capital

(a) The Company may, from time to time, by Special Resolution (subject, however, to the provisions of Article 5(b) hereof and to applicable law):

(i) consolidate and divide all or any part of its issued or unissued authorized share capital into shares of a per share nominal value which is larger than the per share nominal value of its existing shares;

(ii) subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by the Memorandum of Association (subject, however, to the provisions of Section 144(4) of the Companies Ordinance);

(iii) cancel any shares which, at the date of the adoption of such Special Resolution, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled; or

(iv) reduce its share capital in any manner, subject to any consent required by law.

(b) With respect to any consolidation of issued shares of a larger nominal value per share, and with respect to any other action which may result in fractional shares, the Board of Directors may settle any difficulty which may arise with regard thereto, as it deems fit, and in connection with any such consolidation or other action which would result in fractional shares may, without limiting its power:

(i) determine, as to the holder of the shares so consolidated, which issued shares shall be consolidated into a share of a larger nominal value per share;

(ii) allot, in contemplation of or subsequent to such consolidation or other action, shares or fractional shares sufficient to preclude or remove fractional share holdings;

(iii) redeem, in the case of redeemable preference shares and subject to applicable law, such fractional shares sufficient to preclude or remove fractional share holdings;

(iv) cause the transfer of fractional shares by certain shareholders of the Company to other shareholders so as to most expediently preclude or remove any fractional shareholdings, and cause the transferees of such fractional shares to pay the transferors thereof the fair value thereof, and the Board of Directors is hereby authorized to act in connection with such transfer as agent for the transferors and transferees of any such fractional shares, with full power of substitution, for the purposes of implementing the provisions of this sub-Article 6(b)(iv).

7.	Issuance of Share Certificates; Replacement of Lost Certificates

(a) Share certificates shall be issued under the corporate seal of the Company and shall bear the signature of one Director, or of any other person or persons authorized by the Board of Directors.

(b) Each member shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if the Board of Directors so approves, to several certificates, each for one or more of such shares. Each certificate shall specify the serial numbers of the shares represented thereby and may also specify the amount paid up thereon.

(c) A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Register of Members in respect of such co-ownership.

(d) A share certificate which has been defaced, lost or destroyed may be replaced, and the Company shall issue a new certificate to replace such defaced, lost or destroyed certificate, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board of Directors in its discretion deems fit.

8.	Registered Holder

Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of each share as the absolute owner thereof, and accordingly shall not, except as ordered by a court of competent jurisdiction or as required by statute, be obligated to recognize any equitable or other claim to, or interest in, such share on the part of any other person.

9.	Allotment of Shares

The unissued shares from time to time shall be under the control of the Board of Directors. The Board of Directors shall have the power to allot, issue or otherwise dispose of shares to such persons, on such terms and conditions (including terms relating to calls as set forth in Article 11(f) hereof), and either at par or at a premium, or, subject to the provisions of the Companies Ordinance, at a discount and/or with payment of commission, and at such times, as the Board of Directors deems fit. The Board of Directors shall also have the power to give to any person the option to acquire from the Company any shares, either at par or at a premium, or, subject as aforesaid, at a discount and/or with payment of commission, during such time and for such consideration as the Board of Directors deems fit.

10.	Payment in Installments

If, pursuant to the terms of the allotment or issue of any share, all or any portion of the price thereof shall be payable in installments, every such installment shall be paid to the Company on the due date thereof by the then registered holder(s) of the share or the person(s) then entitled thereto.

11.	Calls on Shares

(a) The Board of Directors may, from time to time, as it in its discretion deems fit, make calls for payment upon members in respect of any sum which has not been paid up in respect of shares held by such members and which is not, pursuant to the terms of allotment or issue of such shares or otherwise, payable at a fixed time, and each member shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments) to the person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may be thereafter extended and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice hereafter referred to), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all the shares in respect of which such call was made.

(b) Notice of any call for payment by a member shall be given in writing to such member not less than fourteen (14) days prior to the time of payment fixed in such notice, and shall specify the time and place of payment, and the person to whom such payment is to be made. Prior to the time for any such payment fixed in a notice of a call given to a member, the Board of Directors may in its absolute discretion, by notice in writing to such member, revoke such call in whole or in part, or stipulate different place of payment or person to whom payment is to be made. In the event of a call payable in installments, only one notice thereof need be given.

(c) If, pursuant to the terms of allotment or issue of a share or otherwise, an amount is made payable at a fixed time (whether on account of such share or by way of premium), such amount shall be payable at such time as if it were payable by virtue of a call made by the Board of Directors and for which notice was given in accordance with paragraphs (a) and (b) of this Article 11, and the provisions of these Articles with regard to calls (and the non-payment thereof) shall be applicable to such amount (and the non-payment thereof).

(d) Joint holders of a share shall be jointly and severally liable to pay all calls for payment in respect of such share and all interest payable thereon.

(e) Any amount called for payment which is not paid when due shall bear interest from the date fixed for payment until actual payment thereof, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel) and payable at such time(s) as the Board of Directors may prescribe.

(f) Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amounts and times for payment of calls for payment in respect of such shares.

12.	Prepayment

With the approval of the Board of Directors, any member may pay to the Company any amount not yet payable in respect of his shares, and the Board of Directors may approve the payment by the Company of interest on any such amount until the same would be payable if it had not been paid in advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or any part of the money so advanced, without premium or penalty. Nothing in this Article 12 shall derogate from the right of the Board of Directors to make any call for payment before or after receipt by the Company of any such advance.

13.	Forfeiture and Surrender

(a) If any member fails to pay an amount payable by virtue of a call, or interest thereon as provided for in these Articles, on or before the day fixed for payment of the same, the Board of Directors may, at any time after the day fixed for such payment, so long as such amount (or any portion thereof) or interest thereon (or any portion thereof) remains unpaid, forfeit all or any of the shares in respect of which such payment was called. All expenses incurred by the Company in attempting to collect any such amount or interest thereon, including without limitation attorneys’ fees and costs of legal proceedings, shall be added to, and shall for all purposes (including the accrual of interest thereon) constitute a part of, the amount payable to the Company in respect of such call.

(b) Upon the adoption of a resolution as to the forfeiture of a member’s share, the Board of Directors shall cause notice thereof to be given to such member, which notice shall state that, in the event of the failure to pay the entire amount so payable by a date specified in the notice (which date shall be not less than fourteen (14) days after the date such notice is given and which may be extended by the Board of Directors), such shares shall be ipso facto forfeited; provided, however, that prior to such date, the Board of Directors may nullify such resolution of forfeiture, but no such nullification shall stop the Board of Directors from adopting a further resolution of forfeiture in respect of the non-payment of the same amount.

(c) Without derogating from Articles 54 and 59 hereof, whenever shares are forfeited as herein provided, all dividends, if any, previously declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time.

(d) The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share.

(e) Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors deems fit.

(f) Any member whose shares have been forfeited or surrendered shall cease to be a member in respect of the forfeited or surrendered shares, but shall nevertheless be liable to pay, and shall immediately pay to the Company, all calls, interest and expenses owing on or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 11(e) above. The Board of Directors in its discretion may, but shall not be obligated to, enforce the payment of such moneys or any part thereof. In the event of such forfeiture or surrender, the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing to the Company by the member in question (but not yet due) in respect of all shares owned by such member, solely or jointly with another.

(g) The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it deems fit, but no such nullification shall stop the Board of Directors from re-exercising its powers of forfeiture pursuant to this Article 13.

14.

Lien

(a) Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares registered in the name of each member (without regard to any equitable or other claim or interest in such shares on the part of any other person), and upon the proceeds of the sale thereof, for his debts, liabilities and obligations to the Company arising from any amount payable by such member in respect of any unpaid or partly paid share, whether or not such debt, liability or obligation has matured. Such lien shall extend to all dividends from time to time declared or paid in respect of such share. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of the lien (if any) existing on such shares immediately prior to such transfer.

(b) The Board of Directors may cause the Company to sell a share subject to such a lien when the debt, liability or obligation giving rise to such lien has matured, in such manner as the Board of Directors deems fit, but no such sale shall be made unless such debt, liability or obligation has not been satisfied within fourteen (14) days after written notice of the intention to sell shall have been served on such member, his executors or administrators.

(c) The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or obligations of such member in respect of such share (whether or not the same have matured), and the residue (if any) shall be paid to the member, his executors, administrators or assigns.

15.	Sale after Forfeiture or Surrender or in Enforcement of Lien

Upon any sale of a share after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint any person to execute an instrument of transfer of the share so sold and cause the purchaser’s name to be entered in the Register of Members in respect of such share. The purchaser shall be registered as the shareholder and shall not be bound to see to the regularity of the sale proceedings, or to the application of the proceeds of such sale, and after his name has been entered in the Register of Members in respect of such share the validity of the sale shall not be impeached by any person and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively.

16.	Redeemable Shares

The Company may, subject to applicable law, issue redeemable shares and redeem the same.

17.	Conversion of Shares into Stock

(a) The Board of Directors may, with the sanction of the members previously given by Special Resolution, convert any paid-up shares into stock, and may with like sanction reconvert any stock into paid-up shares of any denomination.

(b) The holders of stock may transfer the same, or any part thereof, in the same manner and subject to the same regulations as the shares from which the stock arose might have been transferred prior to conversion, or as near thereto as circumstances admit; provided, however, that the Board of Directors may from time to time fix the minimum amount of stock so transferable, and restrict or forbid the transfer of fractions of such minimum, but the minimum shall not exceed the nominal value of each of the shares from which such stock arose.

(c) The holders of stock shall, in accordance with the amount of stock held by them, have the same rights and privileges as regards the minimum amount of stock so transferable, and restrict or forbid the transfer of fractions of such minimum, but the minimum shall not exceed the nominal value of each of the shares from which such stock arose.

(d) The holders of stock shall, in accordance with the amount of stock held by them, have the same rights and privileges as regards dividends, voting at meetings of the Company and other matters as if they held the shares from which such stock arose, but no such right or privilege except participation in the dividends and profits of the Company shall be conferred by any such aliquot part of such stock as would not, if existing in shares, have conferred that right or privilege.

(e) Such of the Articles of the Company as are applicable to paid-up shares shall apply to stock, and the words “share” and “shareholder” (or “member”) therein shall include “stock” and “stockholder.”

TRANSFER OF SHARES

18.	Registration of Transfer

(a) No transfer of shares shall be registered unless a proper writing or instrument of transfer (in any customary form or any other form satisfactory to the Board of Directors) has been submitted to the Company (or its transfer agent), together with the share certificate(s) and such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Register of Members in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof.

(b) The Board of Directors may, in its discretion to the extent it deems necessary, close the Register of Members for registrations of transfers of shares during any year for a period determined by the Board of Directors, and no registrations of transfers of shares shall be made by the Company during any such period during which the Register of Members is so closed.

19.	Record Date for Notices of General Meetings

Notwithstanding any other contrary provision of these Articles, the Board of Directors may fix a date, not exceeding ninety (90) days prior to the date of any General Meeting, as the date as of which shareholders entitled to notice of and to vote at such meetings shall be determined, and all persons who were holders of record of voting shares on such date and no others shall be entitled to notice of and to vote at such meeting.

TRANSMISSION OF SHARES

20.	Decedent’s Shares

(a) In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof unless and until the provisions of Article 21(b) have been effectively invoked.

(b) Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient), shall be registered as a member in respect of such share, or may, subject to the regulations as to transfer contained in these Articles, transfer such share.

21.	Receivers and Liquidators

(a) The Company may recognize any receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate a corporate member, and a trustee, manager, receiver, liquidator or similar official appointed in bankruptcy or in connection with the reorganization of, or similar proceeding with respect to, a member or its properties, as being entitled to the shares registered in the name of such member.

(b) Such receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate a corporate member and such trustee, manager, receiver, liquidator, or similar official appointed in bankruptcy or in connection with the reorganization of, or similar proceedings with respect to, a member or its properties, upon producing such evidence as the Board of Directors may deem sufficient to his authority to act in such capacity or under this Article, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a member in respect of such shares, or may, subject to the regulations as to transfer contained in these Articles, transfer such shares.

BUSINESS COMBINATIONS

22.	Business Combinations with Interested Shareholders

(a) Notwithstanding any other provision of these Articles, the Company shall not engage in any business combination with any interested shareholder for a period of three years following the time that such shareholder became an interested shareholder, unless:

(1) prior to such time the Board of Directors of the Company approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder, or

(2) upon consummation of the transaction which resulted in the shareholder 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.

(b) As used in this Article only, the term:

(1) “affiliate” means a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with another person.

(2) “associate,” when used to indicate a relationship with any person, means (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting share, (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.

(3) “business combination,” when used in reference to the Company and any interested shareholder of the Company, means:

(i) any merger or consolidation of the Company or any direct or indirect majority owned subsidiary of the Company with (A) an interested shareholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by an interested shareholder and as a result of such merger or consolidation subsection (a) of this Article is not applicable to the surviving entity;

(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a shareholder of such Company to or with the interested shareholder, whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority owned subsidiary of the Company, which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all of the outstanding shares of the Company;

(iii) any transaction which results in the issuance or transfer by the Company or by any direct or indirect majority-owned subsidiary of the Company of any shares of the Company or of such subsidiary to the interested shareholder, except (A) pursuant to the exercise, exchange or conversion of securities exercisable for or convertible into shares of the Company or any such subsidiary, which securities were outstanding prior to the time that the interested shareholder became such, (B) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into shares of the Company or any such subsidiary, which security is distributed pro rata to all holders of a class or series of shares of the Company subsequent to the time the interested shareholder became such, (C) pursuant to an exchange offer by the Company to purchase shares made on the same terms to all holders of said shares or, (D) any issuance or transfer of shares by the Company; provided , that in no case under (B)-(D) above shall there be an increase in the interested shareholder’s proportionate share of the shares of any class or series of the Company or of the voting shares of the Company;

(iv) any transaction involving the Company or any direct or indirect majority owned subsidiary of the Company which has the effect directly or indirectly of increasing the proportionate share of the shares of any class or series or securities convertible into the shares of any class or series of the Company or of any such subsidiary which is owned by the interested shareholder except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares not caused, directly or indirectly, by the interested shareholder; or

(v) any receipt by the interested shareholder of the benefit, directly or indirectly (except proportionately as a shareholder of such Company), of any loans, advances, guarantees, pledges or any other financial benefits (other than those expressly permitted in subparagraphs (i)-(iv) above) provided by or through the Company or any direct or indirect majority owned subsidiary.

(4) “control” including the term “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract or otherwise. A person who is the owner of 20% or more of the outstanding voting shares of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting shares in good faith and not for the purpose of circumventing this Article as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.

(5) “interested shareholder” means any person (other than the Company and any direct or indirect majority owned subsidiary of the Company) that (i) is the owner of 15% or more of the outstanding voting shares of the Company, or (ii) is an affiliate or associate of the Company and was the owner of 15% or more of the outstanding voting shares of the Company at any time within the three year period immediately prior to that date on which it is sought to be determined whether such person is an interested shareholder and the affiliates and associates of such person. For the purpose of determining whether a person is an interested shareholder, the voting shares of the Company deemed to be outstanding shall include shares deemed to be owned by the person through application of paragraph (8) of this subsection but shall not include any other unissued shares of the Company which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

(6) “person” means any individual, corporation, partnership, unincorporated association or other entity.

(7) “share” means with respect to any corporation shares of its capital and with respect to any other entity any equity interest.

(8) “voting shares” means with respect to any corporation shares of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity.

(9) “owner,” including the terms “own” and “owned,” when used with respect to any share, means a person that individually or with or through any of its affiliates or associates:

(i) beneficially owns such share, directly or indirectly: or

(ii) has (A) the right to acquire such share (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the owner of share tendered pursuant to a tender or exchange; or (B) the right to vote such share pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any share because of such person’s right to vote such share if the agreement, arrangement, or understanding to vote such share arises solely from a recoverable proxy or consent given in response to a proxy or consent solicitation made to 10 or more persons: or

(iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (B) of clause (ii) of this paragraph) or disposing of such share with any other person that beneficially owns or whose affiliates or associates beneficially own, directly or indirectly, such share.

GENERAL MEETINGS

23.	Annual General Meeting

An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place, either within or out of the State of Israel, as may be determined by the Board of Directors.

24.	Extraordinary General Meetings

All General Meetings other than Annual General Meetings shall be called “Extraordinary General Meetings.” The Board of Directors may, whenever it thinks fit, convene an Extraordinary General Meeting, at such time and place, within or out of the State of Israel, as may be determined by the Board of Directors, and shall be obliged to do so upon a request in writing in accordance with Section 109 of the Companies Ordinance.

25.	Notice of General Meetings; Omission to Give Notice

(a) Not less than seven (7) days’ prior notice shall be given of every General Meeting; provided, however, that a Special Resolution shall not be passed unless at least twenty-one (21) days’ prior notice shall have been given of the meeting at which it is proposed to pass the same. Each such notice shall specify the place and the day and hour of the meeting and the general nature of each item to be acted upon, such notice to be given to all members who would be entitled to attend and vote at such meeting. Anything herein to the contrary notwithstanding, with the consent of all members entitled to vote thereon a resolution may be proposed and passed at such meeting although a lesser notice than prescribed above has been given.

(b) The accidental omission to give notice of a meeting to any member, or the non-receipt of notice sent to such member, shall not invalidate the proceedings at such meeting.

PROCEEDINGS AT GENERAL MEETINGS

26.

Quorum

(a) No business shall be transacted at a General Meeting, or at any adjournment thereof, unless the quorum required under these Articles for such General Meeting or such adjourned meeting, as the case may be, is present when the meeting proceeds to business.

(b) In the absence of contrary provisions in these Articles, two or more members (not in default in payment of any sum referred to in Article 32(a) hereof), present in person or by proxy and holding shares conferring in the aggregate more than fifty percent of the voting power of the Company, shall constitute a quorum of General Meetings.

(c) If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon request under Section 109 of the Companies Ordinance, shall be dissolved, but in any other case it shall be adjourned to the same day in the next week, at the same time and place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the shares present in person or by proxy and voting on the question of adjournment. No business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called. At such adjourned meeting (other than an adjourned separate meeting of a particular class of shares as referred to in Article 5 of these Articles), any two (2) members (not in default as aforesaid) present in person or by proxy shall constitute a quorum.

27.

Chairman

The Chairman, if any, of the Board of Directors shall preside as Chairman at every General Meeting of the Company. If at any meeting the Chairman is not present within fifteen (15) minutes after the time fixed for holding the meeting or is unwilling to act as Chairman, the Co-Chairman shall preside at the meeting. If at any such meeting both the Chairman and the Co-Chairman are not present or are unwilling to act as Chairman, members present shall choose someone of their number to be Chairman. The office of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote (without derogating, however from the rights of such Chairman to vote as a shareholder or proxy of a shareholder if, in fact, he is also a shareholder or such proxy).

28.	Adoption of Resolutions at General Meetings

(a) (i) An Ordinary Resolution 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.

(ii) A Special or Extraordinary Resolution shall be deemed adopted if approved by the holders of not less then seventy-five per cent (75%) of the voting power represented at the meeting in person or by proxy and voting thereon.

(b) Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any member present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be demanded before the proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may be withdrawn at any time before the same is conducted, in which event another member may then demand such written ballot. The demand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which the written ballot has been demanded.

(c) A declaration by the Chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or lost, and an entry to that effect in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution.

29.	Resolutions in Writing

A resolution in writing signed by all members of the Company then entitled to attend and vote at General Meetings or to which all such members have given their written consent (by letter, telegram, telex, facsimile or otherwise) shall be deemed to have been unanimously adopted by a General Meeting duly convened and held.

30.	Power to Adjourn

The Chairman of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called.

31.	Voting Power

Subject to the provisions of Articles 3(b) and 32(a) and subject to any other provision conferring special rights as to voting, or restricting the right to vote, every member shall have one vote for each share held by him of record, on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means.

32.	Voting Rights

(a) No member shall be entitled to vote at any General Meeting (or be counted as a part of the quorum) unless all calls then payable by him in respect of his shares in the Company have been paid, but this Article 32(a) shall not apply to separate General Meetings of the holders of a particular class of shares pursuant to Article 5(b).

(b) A company or other corporate body being a member of the Company may duly authorize any person to be its representative at any meeting of the Company or to execute or deliver a proxy on its behalf. Any person so authorized shall be entitled to exercise on behalf of such member all the power which the latter could have exercised if it were an individual shareholder. Upon the request of the Chairman of the meeting, written evidence of such authorization (in form acceptable to the Chairman) shall be delivered to him.

(c) Any member entitled to vote may vote either in person or by proxy (who need not be a member of the Company) or, if the member is a company or other corporate body, by a representative authorized pursuant to Article 32(b).

(d) If two or more persons are registered as joint holders of any shares, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s). For the purpose of this Article 32(d), seniority shall be determined by the order of registration of the joint holders in the Register of Members.

PROXIES

33.	Instrument of Appointment

(a) An instrument appointing a proxy shall be in writing and shall be substantially in the following form:

"I_______________________ of
______________________________________
(Name of Shareholder) (Address of Shareholder)

being a member of Check Point Software Technologies Ltd. hereby
appoint
_______________________ of _____________________________
(Name of Proxy)                                   (Address of Proxy)
as my Proxy to vote for me and on my behalf at the General Meeting of the
Company to be held on the _________ day of ___________, ________
and at any adjournment(s) thereof.

Signed this _____________ day of _______________, ____________.

                                              _______________________
                                              (Signature of Appointor)"

or in any usual or common form or in such other form as may be approved by the Board of Directors. Such proxy shall be duly signed by the appointor or such person’s duly authorized attorney or, if such appointor is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s).

(b) The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall either be delivered to the Company (at its registered office, at its principal place of business, at the offices of its registrar or transfer agent, or at such place as the Board of Directors may specify) not less than 24 hours before the time fixed for the meeting at which the person named in the instrument proposes to vote, or presented to the Chairman at such meeting.

34.	Effect of Death of Appointor or Transfer of Shareand/or Revocation of Appointment

(a) A vote cast in accordance with an instrument appointing a proxy shall be valid notwithstanding the prior death or bankruptcy of the appointing member (or of his attorney-in-fact, if any, who signed such instrument), or the transfer of the share in respect of which the vote is cast, unless written notice of such matters shall have been received by the Company or by the Chairman of such meeting prior to such vote being cast.

(b) An instrument appointing a proxy shall be deemed revoked (i) upon receipt by the Company or the Chairman, subsequent to receipt by the Company of such instrument, of written notice signed by the person signing such instrument or by the member appointing such proxy cancelling the appointment thereunder (or the authority pursuant to which such instrument was signed) or of an instrument appointing a different proxy (and such other documents, if any, required under Article 33(b) for such new appointment), provided such notice of cancellation or instrument appointing a different proxy were so received at the place and within the time for delivery of the instrument revoked thereby as referred to in Article 33(b) hereof, or (ii) if the appointing member is present in person at the meeting for which such instrument of proxy was delivered, upon receipt by the Chairman of such meeting of written notice from such member of the revocation of such appointment, or if and when such member votes at such meeting. A vote cast in accordance with an instrument appointing a proxy shall be valid notwithstanding the revocation or purported cancellation of the appointment, or the presence in person or vote of the appointing member at a meeting for which it was rendered, unless such instrument of appointment was deemed revoked in accordance with the foregoing provisions of this Article 34(b) at or prior to the time such vote was cast.

BOARD OF DIRECTORS

35.	Powers of Board of Directors

(a)

In General

The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company by action of its members at a General Meeting. The authority conferred on the Board of Directors by this Article 35 shall be subject to the provisions of the Companies Ordinance, these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company by action of its members at a General Meeting; provided, however, that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors which would have been valid if such regulation or resolution had not been adopted.

(b)

Borrowing Power

The Board of Directors may from time to time, at its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being.

(c)

Reserves

The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board of Directors, in its absolute discretion, shall deem fit, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may from time to time think fit.

(d)

Charitable Contributions

To the extent permitted by the Companies Law, the Company may elect to contribute reasonable amounts to worthy causes. The Board of Directors may determine the causes to which the Company should contribute and the amounts of any such contributions.

36.	Exercise of Powers of Board of Directors

(a) A meeting of the Board of Directors at which a quorum is present shall be competent to exercise all the authorities, powers and discretion vested in or exercisable by the Board of Directors.

(b) A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the Directors present when such resolution is put to a vote and voting thereon.

(c) A resolution in writing signed by the majority of Directors then in office and lawfully entitled to vote thereon or to which a majority of the Directors have given their written consent (by letter, telegram, telex, facsimile, electronic mail or otherwise) shall be deemed to have been unanimously adopted by a meeting of the Board of Directors duly convened and held.

37.	Delegation of Powers

(a) The Board of Directors may, subject to the provisions of the Companies Ordinance, delegate any or all of its powers to committees, each consisting of one or more persons (who are Directors), and it may from time to time revoke such delegation or alter the composition of any such committee. Any Committee so formed (in these Articles referred to as a “Committee of the Board of Directors”), shall, in the exercise of the powers so delegated, conform to any regulations imposed on it by the Board of Directors. The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis mutandis , be governed by the provisions contained in these Articles for regulating the meetings of the Board of Directors, so far as not superseded by any regulations adopted by the Board of Directors under this Article. Unless otherwise expressly provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers.

(b) Without derogating from the provisions of Article 50, the Board of Directors may from time to time appoint a Secretary to the Company, as well as officers, agents, employees and independent contractors, as the Board of Directors deems fit, and may terminate the service of any such person. The Board of Directors may, subject to the provisions of the Companies Ordinance, determine the powers and duties, as well as the salaries and emoluments, of all such persons, and may require security in such cases and in such amounts as it deems fit.

(c) The Board of Directors may from time to time, by power of attorney or otherwise, appoint any person, company, firm or body of persons to be the attorney or attorneys of the Company at law or in fact for such purpose (s) and with such powers, authorities and discretion, and for such period and subject to such conditions, as it deems fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board of Directors deems fit, and may also authorize any such attorney to delegate all or any of the powers, authorities and discretions vested in him.

38.	Number of Directors

The Board of Directors of the Company shall consist of such number of Directors (not less than 6 nor more than 12) as may be fixed, from time to time, by Ordinary Resolution of the Company.

39.	Election and Removal of Directors

Directors shall be elected at the Annual General Meeting by the vote of the holders of a majority of the voting power represented at such meeting in person or by proxy and voting on the election of directors, and each Director shall serve, subject to Article 42 hereof, and with respect to a Director appointed pursuant to Article 41 hereof subject to such Article, until the Annual General Meeting next following the Annual General Meeting or General Meeting at which such Director was elected pursuant to this Article or Article 41 hereof and until his successor is elected, or until his earlier removal pursuant to this Article 39. The holders of a majority of the voting power represented at a General Meeting in person or by proxy and voting thereon at such Meeting shall be entitled to remove any Director(s) from office, to elect Directors instead of Directors so removed or to fill any vacancy, however created, in the Board of Directors.

40.	Qualification of Directors

No person shall be disqualified to serve as a Director by reason of his not holding shares in the Company or by reason of his having served as a Director in the past.

41.	Continuing Directors in the Event of Vacancies

In the event of one or more vacancies in the Board of Directors, the continuing Directors may continue to act in every matter and, pending the filling of any vacancy pursuant to the provisions of Article 39, may appoint Directors to temporarily fill any such vacancy; provided, however, that if they number less than a majority of the number provided for pursuant to Article 38 hereof, they may only act in an emergency or to fill the office of director which has become vacant up to the minimum number or in order to call a General Meeting of the Company for the purpose of electing Directors to fill any or all vacancies, so that at least a majority of the number of Directors provided for pursuant to Article 38 hereof are in office as a result of said meeting.

42.	Vacation of Office

(a) The office of a Director shall be vacated, ipso facto , upon his death, or if he be found lunatic or become of unsound mind, or if he becomes bankrupt, or if the Director is a company upon its winding-up.

(b) The office of a Director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.

43.	Remuneration of Directors

A Director shall be paid remuneration by the Company for his services as Director to the extent such remuneration shall have been approved by a General Meeting of the Company and in accordance with the Companies Ordinance.

44.	Conflict of Interests

Subject to the provisions of the Companies Ordinance, no Director shall be disqualified by virtue of his office from holding any office or place of profit under the Company or under any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the Company as vendor, purchaser or otherwise, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which any Director shall be in any way interested, be avoided, nor, other than as required under the Companies Ordinance, shall any Director be liable to account to the Company for any profit arising from any such office or place of profit or realized by any such contract or arrangement by reason only of such Director’s holding that office or of the fiduciary relations thereby established, but the nature of his interest, as well as any material fact or document, must be disclosed by him at the meeting of the Board of Directors at which the contract or arrangement is first considered, if his interest then exists, or, in any other case, no later than at the first meeting of the Board of Directors after the acquisition of his interest.

45.	Alternate Directors

(a) A Director may, by written notice to the Company given in the manner set forth in Article 45(b) below, appoint any individual (whether or not such person is then a member of the Board of Directors) as an alternate for himself (in these Articles referred to as “Alternate Director”), remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. Unless the appointing Director, by the instrument appointing an Alternative Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Board of Directors, or otherwise restricts its scope, the appointment shall be for all purposes, and for a period of time concurrent with the term of the appointing Director.

(b) Any notice to the Company pursuant to Article 45(a) shall be given in person to, or by sending the same by mail to the attention of, the General Manager of the Company at the principal office of the Company, to such other persons or place as the Board of Directors shall have determined for such purpose, and shall become effective on the date fixed therein or upon the receipt thereof by the Company, whichever is later.

(c) An Alternate Director shall have all the rights and obligations of the Director who appointed him; provided, however, that (i) he may not in turn appoint an alternate for himself (unless the instrument appointing him otherwise expressly provides), (ii) an Alternate Director shall have no standing at any meeting of the Board of Directors or any committee thereof while the Director who appointed him is present, and (iii) the Alternate Director is not entitled to remuneration.

(d) Any individual, whether or not he be a member of the Board of Directors, may act as an Alternate Director. One person may act as Alternate Director for several Directors, and in such event he shall have a number of votes (and shall be treated as the number of persons for purposes of establishing a quorum) equal to the number of Directors for whom he acts as Alternative Director. If an Alternate Director is also a Director in his own right, his rights as an Alternate Director shall be in addition to his rights as a Director.

(e) An Alternate Director shall alone be responsible for his own acts and defaults, and he shall not be deemed the agent of the Director(s) who appointed him.

(f) The office of an Alternate Director shall be vacated under the circumstances, mutatis mutandis , set forth in Article 42, and such office shall ipso facto be vacated if the Director who appointed such Alternate Director ceases to be a Director.

PROCEEDINGS OF THE BOARD OF DIRECTORS

46.

Meetings

(a) The Board of Directors may meet and adjourn its meeting and otherwise regulate such meetings and proceedings as the Directors think fit.

(b) Any Director may at any time, and the Secretary, upon the request of such Director, shall, convene a meeting of the Board of Directors, but not less than seven (7) days’ notice shall be given of any meeting so convened. Notice of any such meeting may be given orally, by telephone, in writing or by mail, electronic mail, telex, cablegram or facsimile. Notwithstanding anything to the contrary herein, failure to deliver notice to a Director of any such meeting in the manner required hereby may be waived by such Director, and a meeting shall be deemed to have been duly convened notwithstanding such defective notice if such failure or defect is waived prior to action being taken at such meeting by all Directors entitled to participate at such meeting to whom notice was not duly given as aforesaid.

47.

Quorum

Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence in person or by telephone conference of a majority of the Directors then in office who are lawfully entitled to participate in the meeting. No business shall be transacted at a meeting of the Board of Directors unless the requisite quorum is present (in person or by telephone conference) when the meeting proceeds to business.

48.	Chairman of the Board of Directors

The Board of Directors may from time to time elect one of its members to be the Chairman of the Board of Directors and another of its members to be the Co-Chairman, remove such Chairman and Co-Chairman from office, and appoint others in their place. The Chairman of the Board of Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting or if he is unwilling to take the chair, the Co-Chairman shall preside. If both the Chairman and the Co-Chairman are not present or are unwilling to take the chair, the Directors present shall choose one of their number to be the chairman of such meeting.

49.	Validity of Acts Despite Defects

All acts done bona fide at any meeting of the Board of Directors, or of a Committee of the Board of Directors, or by any person (s) acting as Director (s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meetings or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect of disqualification.

CHIEF EXECUTIVE OFFICER AND PRESIDENT

50.	Chief Executive Officer and President

The Board of Directors may from time to time appoint one or more persons, whether or not Directors, as Chief Executive Officer or Officers, General Manager or Managers, or President of the Company and may confer upon such person(s), and from time to time modify or revoke, such title(s) and such duties and authorities of the Board of Directors as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe. Unless otherwise determined by the Board of Directors, the Chief Executive Officer shall have authority with respect to the management of the Company in the ordinary course of business. Such appointment (s) may be either for a fixed term or without any limitation of time, and the Board of Directors may from time to time (subject to the provisions of the Companies Ordinance and of any contract between any such person and the Company) fix his or their salaries and emoluments, remove or dismiss him or them from office and appoint another or others in his or their place or places.

MINUTES

51.

Minutes

(a) Minutes of each General Meeting and of each meeting of the Board of Directors shall be recorded and duly entered in books provided for that purpose, and shall be held by the Company at its registered office or such other place as shall have been determined by the Board of Directors. Such minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat.

(b) Any minutes as aforesaid, if purporting to be signed by the chairman of the meeting or by the chairman of the next succeeding meeting, shall constitute prima facie evidence of the matters recorded therein.

DIVIDENDS

52.	Declaration of Dividends

The Board of Directors may from time to time declare, and cause the Company to pay, such interim dividend as may appear to the Board of Directors to be justified by the profits of the Company. The final dividend in respect of any fiscal period shall be proposed by the Board of Directors and shall be payable only after the same has been approved by Ordinary Resolution of the Company, but no such resolution shall provide for the payment of an amount exceeding that proposed by the Board of Directors for the payment of such final dividend, and no such resolution or any failure to approve a final dividend shall affect any interim dividend previously declared and paid. The Board of Directors shall determine the time for payment of such dividends, both interim and final, and the record date for determining the shareholders entitled thereto.

53.	Funds Available for Payment of Dividends

No dividend shall be paid otherwise than out of the profits of the Company.

54.	Amount Payable by Way of Dividends

(a) Subject to the rights of the holders of shares as to dividends, any dividend paid by the Company shall be allocated among the members entitled thereto in proportion to the sums paid up or credited as paid up on account of the nominal value of their respective holdings of the shares in respect of which such dividend is being paid, without taking into account the premium paid up for the shares. The amount paid up on account of a share which has not yet been called for payment or fallen due for payment and upon which the Company pays interest to the shareholder shall not be deemed, for the purposes of this Article, to be a sum paid on account of the share.

(b) Whenever the rights attached to any shares or the terms of issue of the share do not provide otherwise, shares which are fully paid up or which are credited as fully or partly paid within any period in respect of which dividends are paid shall entitle the holders thereof to a dividend in proportion to the amount paid up or credited as paid up in respect of the nominal value of such shares and to the date of payment thereof ( pro rata temporis ).

55.

Interest

No dividend shall carry interest as against the Company.

56.	Payment in Specie

Upon the recommendation of the Board of Directors, ratified by Ordinary Resolution of the Company if (but only if) required by law, the Company (i) may cause any moneys, investments, or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve fund, to the credit of a reserve fund for the redemption of capital or in the hands of the Company and available for dividends, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportion, on the footing that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf of such shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures or debenture stock of the Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any issued shares or debentures or debenture stock; and (ii) may cause such distribution or payment to be accepted by such shareholders in full satisfaction of their interest in the said capitalized sum.

57.	Implementation of Powers under Article 56

For the purpose of giving full effect to any resolution under Article 56, and without derogating from the provisions of Article 6(b) hereof, the Board of Directors may settle any difficulty which may arise in regard to the distribution as it thinks expedient, and, in particular, may issued fractional certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any member upon the footing of the value so fixed, or that fractions of less value than the nominal value of one share may be disregarded in order to adjust the right of all parties, and may vest any such cash, shares, debentures, debenture stock or specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board of Directors. Where requisite, a proper contract shall be filed in accordance with Section 130 of the Companies Ordinance, and the Board of Directors may appoint any person to sign such contract on behalf of the persons entitled to the dividend or capitalized fund.

58.	Dividends on Unpaid Shares

Without derogating from Article 54 hereof, the Board of Directors may give an instruction which shall prevent the distribution of a dividend to the holders of shares whose full nominal amount has not been paid up.

59.	Retention of Dividends

(a) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share on which the Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities or obligations in respect of which the lien exists.

(b) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of which any person is, under Articles 20 or 21, entitled to become a member, or which any person is, under said Articles, entitled to transfer, until such person shall become a member in respect of such share or shall transfer the same.

60.	Unclaimed Dividends

All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors for the benefit of the Company until claimed. The payment by the Directors of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof. The principal (and only the principal) of an unclaimed dividend or such other moneys shall be, if claimed, paid to a person entitled thereto.

61.	Mechanics of Payment

Any dividend or other moneys payable in cash in respect of a share may be paid by check or warrant sent through the post to, or left at, the registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to the joint holder whose name is registered first in the Register of Members of his bank account or the person who the Company may then recognize as the owner thereof or entitled thereto under Article 20 or 21 hereof, as applicable, or such person’s bank account), or to such person and at such other address as the person entitled thereto may be writing direct. Every such check or warrant shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto as aforesaid may direct, and payment of the check or warrant by the banker upon whom it is drawn shall be a good discharge to the Company.

62.	Receipt from a Joint Holder

If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable in respect of such shares.

ACCOUNTS

63.	Books of Account

(a) The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Ordinance and of any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors may think fit, and they shall always be open to inspection by all Directors. No member, not being a Director, shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of Directors or by Ordinary Resolution of the Company.

(b) The Company shall make copies of its annual financial statements available for inspection by the Shareholders at the principal offices of the Company. The Company shall not be required to send copies of its annual financial statements to Shareholders, except upon request.

64.

Audit

At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors.

65.

Auditors

The appointment, authorities, rights and duties of the auditor(s) of the Company shall be regulated by applicable law; provided, however, that in exercising its authority to fix the remuneration of the auditor(s), the members in General Meeting may, by Ordinary Resolution, act (and in the absence of any action in connection therewith shall be deemed to have so acted) to authorize the Board of Directors to fix such remuneration subject to such criteria or standards, if any, as may be provided in such Ordinary Resolution, and if no such criteria or standards are so provided, such remuneration shall be fixed in an amount commensurate with the volume and nature of the services rendered by such auditor(s).

BRANCH REGISTERS

66.	Branch Registers

Subject to and in accordance with the provisions of Sections 71 to 80, inclusive, of the Companies Ordinance and to all orders and regulations issued thereunder, the Company may cause branch registers to be kept in any place outside Israel as the Board of Directors may think fit, and, subject to all applicable requirements of law, the Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such branch registers.

67.	Audit Committee

(a) For purposes of these Articles the terms “Office Holder,” “Personal Interest” and “Relative” shall be defined as set forth in Section 96(24) of the Companies Ordinance.

(b) The Board of Directors shall appoint an Audit Committee which shall be composed of three members, none of whom shall be Chairman or Co-Chairman of the Board of Directors, the Chief Executive Officer, Controller, Secretary or any other Office Holder who is an employee of the Company, and the majority of whom shall not be shareholders of the Company holding more than 5% (five percent) of the issued and outstanding share capital of the Company, or their relatives.

(c) All of the following matters shall be brought before the Audit Committee, and no action in respect thereof shall be taken prior to receiving the Audit Committee’s and the Board of Director’s approval. Approval of the Board of Directors may be given only following the Audit Committee’s approval:

(i) proposed transactions to which the Company intends to be a party in which an Officer Holder has a direct or indirect Personal Interest;

(ii) actions which may otherwise be deemed to constitute a breach of fiduciary duty or the duty of care, as defined in Section 96(27) of the Companies Ordinance, of an Office Holder of the Company;

(iii) agreements with directors as to the terms of their services; and

(iv) indemnification of Office Holders.

(d) Approval by the majority of the Members of the Audit Committee shall be deemed approval of the Audit Committee for the purposes of this Article.

(e) The Audit Committee shall meet upon receiving at least seven days’ prior written notice from the Board of Directors of a meeting. Such prior written notice shall contain details of the action in respect of which the meeting will be convened.

(f) Should a majority of the Audit Committee of the Board of Directors have a Personal Interest in any of the matters detailed in Section 67(c) above, the action shall be raised at the next General Meeting, and shall be subject to approval of the General Meeting.

(g) Any Office Holder whose interest is brought before the Audit Committee and the Board of Directors for approval shall not be present nor shall he have a vote at any meeting at which his interest shall be discussed or voted upon.

INDEMNITY AND INSURANCE

68.	Insurance, Indemnification and Exculpation

The Company may insure, indemnify and exculpate its Office Holders to the fullest extent permitted by law, from time to time. Without limiting the generality of the foregoing:

(a) Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of its Office Holders, for act or omissions in their capacity as Office Holders, in whole or in part, against any of the following:

(i) breach of the duty of care owed to the Company or a third party;

(ii) breach of the fiduciary duty owed to the Company, provided that the Office Holder acted in good faith and had reasonable grounds to believe that his action would not harm the Company’s interests; and

(iii) monetary liability imposed on the Office Holder in favor of a third party.

(b) Subject to the provisions of the Companies Law, the Company is entitled retroactively to indemnify any Office Holder, or to provide a prior undertaking to indemnify an Office Holder where such prior undertaking is limited (1) to categories of events that the Board believes are foreseeable in light of the Company’s activities on the date of grant of the undertaking to indemnify, and (2) to an amount or in accordance with guidelines determined by the Board to be reasonable in the circumstances (and such undertaking includes the categories of events that the Board believes are foreseeable in light of the Company’s activities on the date of grant of the undertaking to indemnify and to an amount or in accordance with guidelines determined by the Board to be reasonable in the circumstances), for an act that such Office Holder performed by virtue of being an Office Holder of the Company, for monetary liability imposed on the Office Holder in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court.

(c) Subject to the provisions of the Companies Law, the Company is entitled retroactively to indemnify any Office Holder, or to provide a prior undertaking to indemnify an Office Holder for:

(i) reasonable legal costs, including attorney’s fees, expended by an Office Holder as a result of an investigation or proceeding instituted against the Office Holder by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the Office Holder and either (A) no financial liability was imposed on the Office Holder in lieu of criminal proceedings, or (B) financial liability was imposed on the Office Holder in lieu of criminal proceedings but the alleged criminal offense does not require proof of criminal intent; and

(ii) reasonable legal costs, including attorneys’ fees, expended by the Office Holder or for which the Office Holder is charged by a court, (a) in an action brought against the Office Holder by or on behalf of the Company or a third party, or (b) in a criminal action in which the Office Holder is found innocent, or (c) in a criminal action in which the Office Holder is convicted and in which a proof of criminal intent is not required.

(d) Subject to the provisions of the Companies Law, the Company may exculpate an Office Holder in advance from liability, or any part of liability, for damages sustained by virtue of a breach of duty of care to the Company.

WINDING UP

69.	Winding up

If the Company is wound up, then, subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the assets of the Company available for distribution among the members shall be distributed to them in proportion to the nominal value of their respective holdings of the shares in respect of which such distribution is being made.

RIGHTS OF SIGNATURE, STAMP AND SEAL

70.	Rights of Signature, Stamp and Seal

(a) The Board of Directors shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company, and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the scope of his or their authority.

(b) The Board of Directors may provide for a seal. If the Board of Directors so provides, it shall also provide for the safe custody thereof. Such seal shall not be used except by the authority of the Board of Directors and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed.

(c) The Company may exercise the powers conferred by Section 102 of the Companies Ordinance regarding a seal for use abroad, and such powers shall be vested in the Board of Directors.

NOTICES

71.

Notices

(a) Any written notice or other document may be served by the Company upon any member either personally or by sending it by prepaid mail (airmail if sent internationally) addressed to such member at his address as described in the Register of Members or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice or other document may be served by any member upon the Company by tendering the name in person to the Secretary or the General Manager of the Company at the principal office of the Company or by sending it by prepaid registered mail (airmail if posted outside Israel) to the Company at its registered office. Any such notice or other document shall be deemed to have been served forty-eight (48) hours after it has been posted (seven (7) business days if sent internationally), or when actually received by the addressee if sooner than forty-eight hours or seven days, as the case may be, after it has been posted, or when actually tendered in person, to such member (or to the Secretary) or the General Manager). Notice sent by cablegram, telex, facsimile or electronic mail shall be deemed to have been served when actually received by such member (or by the Company). If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served when received, notwithstanding that it was defectively addressed or failed, in some other respect, to comply with the provisions of this Article 71(a).

(b) All notices to be given to the members shall, with respect to any share to which persons are jointly entitled, be given to whichever of such persons is named first in the Register of Members, and any notice so given shall be sufficient notice to the holders of such share.

(c) Any member whose address is not described in the Register of Members, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company.

(d) Notwithstanding anything to the contrary contained herein, notice by the Company of a General Meeting which is published in at least two daily newspapers in the State of Israel within the time otherwise required for giving notice of such meeting under Article 25 hereof and containing the information required to be set forth in such notice under such Article shall be deemed to be a notice of such meeting duly given, for purposes of these Articles, to any member whose address as registered in the Register of Members is located in the State of Israel.

Exhibit 4.1

DIRECTOR INSURANCE, INDEMNIFICATION
AND EXCULPATION AGREEMENT

Director Insurance, Indemnification and Exculpation Agreement, dated as of September 27, 2005, between Check Point Software Technologies Ltd., an Israeli company (the “Company”), and ___________________, a director of the Company (the “Indemnitee”).

WHEREAS,

the Indemnitee is a director of the Company; and

WHEREAS,

both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors of public companies; and

WHEREAS,

the Articles of Association of the Company authorize the Company to insure, indemnify and exculpate directors; and

WHEREAS,

in recognition of Indemnitee's need for substantial protection against personal liability in order to assure Indemnitee's continued service to the Company in an effective manner and Indemnitee's reliance on the aforesaid Articles of Association and, in part, to provide Indemnitee with specific contractual assurance that the protection afforded by the Articles of Association will be available to Indemnitee (regardless of, among other things, any change in the composition of the Company's Board of Directors or any acquisition of the Company), the Company wishes to provide in this Agreement for the insurance, indemnification and exculpation of Indemnitee to the fullest extent permitted by law from time to time and as set forth in this Agreement.

NOW, THEREFORE , in consideration of the foregoing premises and of the Indemnitee’s continuing to serve the Company directly or, at its request, with another entity, and intending to be legally bound hereby, the parties hereto agree as follows:

1.	CERTAIN DEFINITIONS

1.1.

Change in Control : shall be deemed to have occurred if: (i) any “person” (as such term is used in Section 13(d) and 14(d) of the United States Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 20% or more of the total voting power represented by the Company’s then outstanding voting securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company’s shareholders was approved by a majority of the directors then still in office who either were directors at the beginning of the period of whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.

1.2.

Expenses : includes reasonable legal costs, including attorneys’ fees, expended by the Indemnitee or for which the Indemnitee has been charged by a court, or in connection with an investigation or other proceeding by a competent authority. Expenses shall also include any security or bond that the Indemnitee may be required to post in connection with an Indemnifiable Event (as defined below).

1.3.

Office Holder : as such term is defined in the Israeli Companies Law, 5759-1999.

2.	INDEMNIFICATION AND ADVANCEMENT OF EXPENSES

2.1.

The Company hereby undertakes to indemnify the Indemnitee to the fullest extent permitted by applicable law from time to time, for any liability and Expense that may be imposed on Indemnitee due to an act performed or failure to act by him in his capacity as an Office Holder of the Company or any subsidiary of the Company or any entity in which Indemnitee serves as an Office Holder at the request of the Company either prior to or after the date hereof, for any event against which indemnification is available by law from time to time (“Indemnifiable Events”), including without limitation the following:

2.1.1.

monetary liability imposed on the Indemnitee in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court;

2.1.2.

reasonable legal costs, including attorney’s fees, expended by the Indemnitee as a result of an investigation or proceeding instituted against the Indemnitee by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the Indemnitee and either (A) no financial liability was imposed on the Indemnitee in lieu of criminal proceedings, or (B) financial liability was imposed on the Indemnitee in lieu of criminal proceedings but the alleged criminal offense does not require proof of criminal intent; and

2.1.3.

reasonable legal costs, including attorneys’ fees, expended by the Indemnitee or for which the Indemnitee is charged by a court, (a) in an action brought against the Indemnitee by or on behalf of the Company or a third party, or (b) in a criminal action in which the Indemnitee is found innocent, or (c) in a criminal action in which the Indemnitee is convicted and in which a proof of criminal intent is not required.

2.2.

The indemnification undertaking made by the Company shall be only with respect to such events as are described in Schedule A hereto. The maximum amount payable by the Company under this Agreement shall not exceed one-half of the shareholders’ equity of the Company, measured by the balance sheet of the Company last published prior to the time that notice is provided to the Company pursuant to Section 8 below.

2.3.

If so requested by the Indemnitee, the Company shall advance an amount (or amounts) estimated by it to cover Indemnitee’s reasonable litigation Expenses, with respect to which the Indemnitee is entitled to be indemnified under Section 2.1 above.

2.4.

The Company’s obligation to indemnify the Indemnitee and advance Expenses in accordance with this Agreement shall be for such period as the Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding or any inquiry or investigation, whether civil, criminal or investigative, arising out of the Indemnitee’s service in the foregoing positions, whether or not the Indemnitee is still serving in such positions.

2.5.

The Company undertakes that as long as it may be obligated to provide indemnification and advance Expenses under this Agreement, the Company will purchase and maintain in effect directors and officers liability insurance to cover the liability of the Indemnitee to the fullest extent permitted by law.

3.	GENERAL LIMITATIONS ON INDEMNIFICATION

3.1.

If, when and to the extent that the Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by the Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid (unless the Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that the Indemnitee should be indemnified under applicable law, in which event the Indemnitee shall not be required to so reimburse the Company until a final judicial determination is made with respect thereto as to which all rights of appeal therefrom have been exhausted or lapsed) and shall not be obligated to indemnify or advance any additional amounts to the Indemnitee (unless there has been a determination by a court or competent jurisdiction that the Indemnitee would be permitted to be so indemnified under this Agreement).

3.2.

Change in Control of Company . The Company undertakes that in the event of a Change in Control of the Company, the Company’s obligations under this Agreement shall continue to be in effect following such Change in Control, and the Company shall take all necessary action to ensure that the party acquiring control of the Company shall independently undertake to continue in effect such Agreement, to maintain the provisions of the Articles of Association allowing indemnification and to indemnify Indemnitee in the event that the Company shall not have sufficient funds or otherwise shall not be able to fulfill its obligations hereunder.

4.	NO MODIFICATION .

No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Any waiver shall be in writing.

5.	SUBROGATION.

In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.

6.	REIMBURSEMENT.

The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee to the extent the Indemnitee has otherwise actually received payment (under any insurance policy or otherwise) of the amounts otherwise indemnifiable hereunder. Any amounts paid to the Indemnitee under such insurance policy or otherwise after the Company has indemnified the Indemnitee for such liability or Expense shall be repaid to the Company promptly upon receipt by Indemnitee.

7.	EFFECTIVENESS.

Subject to the receipt of all the required approvals in accordance with Israeli Law, including the approvals of the audit committee, the Board of Directors and, to the extent required, by the shareholders of the Company, this Agreement shall be in full force and effect as of the date hereof.

8.	NOTIFICATION AND DEFENSE OF CLAIM .

Promptly after receipt by the Indemnitee of notice of the commencement of any action, suit or proceeding, the Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement hereof; but the omission so to notify the Company will not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which the Indemnitee notifies the Company of the commencement thereof and without derogating from Section 2.1:

8.1.

The Company will be entitled to participate therein at its own expense; and

8.2.

Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense thereof, the Company will not be liable to the Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Indemnitee shall have the right to employ his or her own counsel in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of the Indemnitee, unless: (i) the employment of counsel by Indemnitee has been authorized by the Company; (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of such action; or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which the Indemnitee shall have reached the conclusion specified in (ii) above.

8.3.

The Company shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner that would impose any penalty or limitation on the Indemnitee without the Indemnitee’s written consent. Neither the Company nor the Indemnitee will unreasonably withhold their consent to any proposed settlement.

9.	EXCULPATION

The Company hereby exempts the Indemnitee, to the fullest extent permitted by law, from any liability for damages caused as a result of the Indemnitee’s breach of the duty of care to the Company, provided that the Indemnitee shall not be exempt with respect to any action or omission as to which, under applicable law, the Company is not entitled to exculpate the Indemnitee.

10.	NON-EXCLUSIVITY .

The rights of the Indemnitee hereunder shall not be deemed exclusive of any other rights he or she may have under the Company’s Articles of Association or applicable law or otherwise, and to the extent that during the indemnification period the rights of the then existing directors and Office Holders are more favorable to such directors or Office Holders than the rights provided thereunder or under this Agreement to the Indemnitee, the Indemnitee shall be entitled to the full benefits of such more favorable rights.

11.	BINDING EFFECT .

This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an Office Holder or director of the Company or of any other enterprise at the Company’s request, provided that the claim for indemnification relates to an Indemnifiable Event.

12.	SEVERABILITY.

The provisions of this Agreement shall be severable in the event that any provision hereof (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law.

13.	GOVERNING LAW, JURISDICTION .

This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Israel. The parties hereto irrevocably submit to the exclusive jurisdiction of the courts of Tel-Aviv in any action related to this Agreement

14.	ENTIRE AGREEMENT AND TERMINATION .

This Agreement represents the entire agreement between the parties; and there are no other agreements, contracts or understandings between the parties with respect to the subject matter of this Agreement. No termination or cancellation of this Agreement shall be effective unless in writing and signed by both parties hereto.

IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first above written.


CHECK POINT SOFTWARE TECHNOLOGIES LTD	DIRECTOR INDEMNITEE

By: ___________________________	______________________________
Name:
Title:

SCHEDULE A

1.	Negotiations, execution, delivery and performance of agreements on behalf of the Company

2.	Anti-competitive acts and acts of commercial wrongdoing

3.	Acts in regard to invasion of privacy including with respect to databases and acts in regard of slander

4.	Acts in regard to copyrights, patents, designs and any other intellectual property rights, and acts in regard to defects in the Company’s products or services

5.	Acts in regard to “Y2K” malfunctions

6.	Approval of corporate actions including the approval of the acts of the Company’s management, their guidance and their supervision

7.	Claims of failure to exercise business judgment and a reasonable level of proficiency, expertise and care in regard to the Company’s business

Claims relating to the offering of securities, claims relating to violations of securities laws of any jurisdiction and claims arising out of the Company’s status as a publicly-traded company, including, without limitation, fraudulent disclosure claims, failure to comply with SEC disclosure rules and other claims relating to relationships with investors and the investment community

9.	Violations of laws requiring the Company to obtain regulatory and governmental licenses, permits and authorizations in any jurisdiction

10.	Claims in connection with publishing or providing any information, including any filings with governmental authorities, on behalf of the Company in the circumstances required under applicable laws

11.	Violations of any law or regulation governing domestic and international telecommunications in any jurisdiction

12.	Claims in connection with employment relationships with the Company’s or its subsidiaries’ employees.

Exhibit 4.7

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

2005 ISRAEL EQUITY INCENTIVE PLAN

1. Purposes of the Plan . The purposes of this Israel Equity Incentive Plan are:

—

to attract and retain the best available personnel for positions of substantial responsibility,

—

to provide additional incentive to Service Providers, and

—

to promote our employees' interest in the success of the Company's business.

Awards granted under the Plan may be Options, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Deferred Stock Units or Dividend Equivalents, as determined by the Administrator at the time of grant.

Furthermore, the Plan is designed to benefit from, and is made pursuant to, the provisions of Section 102 of the Ordinance, with respect to Awards granted to Employees pursuant to the Plan.

2. Definitions . As used herein, the following definitions shall apply:

(a) “ Administrator ” means the Board or any of its Committees as shall be administering the Plan, in accordance with Section ý4 of the Plan.

(b) “ Affiliate ” means an “employing company” as such term is defined in Section 102(a) of the Ordinance, other than the Company itself.

(c) “ Applicable Laws ” means the requirements relating to the administration of, or otherwise affecting, equity compensation plans under the Companies Law, the Securities Law, other applicable laws of Israel, U.S. federal and state securities laws, any stock exchange or quotation system on which the Shares are listed or quoted, U.S. state corporate laws, and any other country or jurisdiction where Awards are granted under the Plan or a sub-plan or addendum hereto.

(d) “ Approved 102 Award ” means an Award granted pursuant to Section 102(b) of the Ordinance and held in trust by a Trustee for the benefit of the Participant.

(e) “ Award ” means, individually or collectively, a grant under the Plan of Options, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Deferred Stock Units or Dividend Equivalents.

(f) “ Award Agreement ” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.

(g) “ Awarded Stock ” means the Shares subject to an Award.

(h) “ Board ” means the Board of Directors of the Company.

(i) “ Capital Gains Award (CGA) ” means an Approved 102 Award elected and designated by the Company to qualify for capital gains tax treatment in accordance with Section 102(b)(2) of the Ordinance.

(j) “ Change of Control ” means the occurrence of any of the following events, in one or a series of related transactions:

(i) any individual or entity, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner”, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

(ii) a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(iii) the sale or disposition by the Company of all or substantially all the Company’s assets.

(k) “ Committee ” means a Committee appointed by the Board in accordance with Section ý4 of the Plan.

(l) “ Companies Law ” means the Israeli Companies Law, 5759-1999.

(m) “ Company ” means Check Point Software Technologies Ltd.

(n) “ Consultant ” means any person, other than an Employee, engaged by the Company or any Affiliate to render services and who is compensated for such services.

(o) “ Continuous Status as a Director ” means that the Director relationship is not interrupted or terminated.

(p) “ Controlling Shareholder ” shall have the meaning ascribed to such term in Section 32(9) of the Ordinance.

(q) “ Deferred Stock Unit ” means a deferred stock unit Award granted to a Participant pursuant to Section ý13.

(r) “ Director ” means a member of the Board.

(s) “ Disability ” means total and permanent disability as determined by the Administrator.

(t) “ Dividend Equivalent ” means a credit, payable in cash, made at the discretion of the Administrator, to the account of a Participant in an amount equal to the cash dividends paid on one Share for each Share represented by an Award held by such Participant. The Dividend Equivalent for each Share subject to an Award shall only be paid to a Participant on the vesting date for such Share.

(u) “ Election ” means the Company’s election of the type of Approved 102 Awards as set forth in Section ý19(b)(iii).

(v) “ Employee ” means any person employed by the Company or any Affiliate of the Company, and includes Officers and Directors. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, any Subsidiary, or any successor.

(w) “ Fair Market Value ” means, as of any date, the value of Shares determined as follows:

(i) If the Shares are listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation (“Nasdaq”) System, the Fair Market Value of a Share shall be the closing sales price for such shares (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Shares) on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Shares are quoted on the Nasdaq System (but not on the Nasdaq National Market thereof) or are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share shall be the mean between the high bid and low asked prices for the Shares on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(iii) In the absence of an established market for the Shares, the Fair Market Value shall be determined in good faith by the Administrator.

(x) “ ITA ” means the Israeli Tax Authorities.

(y) “ Non-approved 102 Award ” means an Award granted pursuant to Section 102(c) of the Ordinance and not held in trust by a Trustee.

(z) “ Non-employee Director ” means a Director who is neither an Employee nor a Consultant, and who is a resident of Israel.

(aa) “ Notice of Grant ” means a written or electronic notice evidencing certain terms and conditions of an individual Award. The Notice of Grant is part of the Award Agreement.

(bb) “ Officer ” means, with respect to the Company and Affiliates that are Israeli companies, a person who is a “ nosei misra ” within the meaning of the Companies Law but is not a Director, and with respect to Affiliates that are not Israeli companies means a person who is an officer within the meaning of the applicable corporate law of the jurisdiction of incorporation of such Affiliate.

(cc) “ Option ” means an option to purchase Shares granted pursuant to the Plan.

(dd) “ Option Agreement ” means a written or electronic agreement between the Company and a Participant evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(ee) “ Ordinance ” means the Israeli Income Tax Ordinance (New Version), 1961 as now in effect and as hereafter amended.

(ff) “ Ordinary Income Award (OIA) ” means an Approved 102 Award elected and designated by the Company to qualify for ordinary income tax treatment in accordance with Section 102(b)(1) of the Ordinance.

(gg) “ Ordinary Shares ” shall mean the Ordinary Shares of the Company, NIS 0.01 nominal value.

(hh) “ Participant ” means the holder of an outstanding Award granted under the Plan.

(ii) “ Performance Share ” means a performance share Award granted to a Participant pursuant to Section ý11.

(jj) “ Performance Unit ” means a performance unit Award granted to a Participant pursuant to Section ý12.

(kk) “ Plan ” means this 2005 Israel Equity Incentive Plan.

(ll) “ Restricted Stock ” means Shares granted pursuant to Section ý9 of the Plan.

(mm) “ Restricted Stock Unit ” means an Award granted pursuant to Section ý10 of the Plan.

(nn) “ Section 3(i) Award ” means an Award granted to a Consultant or a Controlling Shareholder in accordance with Section 3(i) of the Ordinance.

(oo) “ Section 102 ” means Section 102 of the Ordinance and any regulations, rules, and orders of procedures promulgated thereunder as now in effect or as hereafter amended.

(pp) “ Section 102 Shares ” means Shares issued under a Section 102 Award pursuant to Section ý19(c)(i) below.

(qq) “ Section 102 Period ” shall have the meaning ascribed to such term in Section ý19(c)(i) below.

(rr) “ Securities Law ” means the Israeli Securities Law, 5728–1968.

(ss) “ Service Provider ” means an Employee or Consultant.

(tt) “ Share ” means one Ordinary Share, as adjusted in accordance with Section ý21 of the Plan.

(uu) “ Trustee ” means a trustee designated by the Board and approved by the ITA, pursuant to the requirements of Section 102 and a trust agreement to be entered into and between the Company and such Trustee and approved by the ITA.

3. Shares Subject to the Plan .

(a) Subject to the provisions of Section ý21 of the Plan, the maximum aggregate number of Shares which may be issued under the Plan is 30,000,000 Shares, increased annually on the first day of each of the Company’s fiscal years during the term of the Plan by 3,000,000 Shares.

(b) The Shares may be authorized but unissued, or reacquired, Shares.

(c) Any Shares subject to Options shall be counted against the numerical limits of this Section ý3 as one Share for every Share subject thereto. Any Shares subject to Restricted Stock, Performance Shares or Restricted Stock Units with a per share or unit purchase price lower than 100% of Fair Market Value on the date of grant shall be counted against the numerical limits of this Section 3 as two Shares for every one Share subject thereto. To the extent that a Share that was subject to an Award that counted as two Shares against the Plan reserve pursuant to the preceding sentence is recycled back into the Plan under the next paragraph of this Section ý3, the Plan shall be credited with two Shares.

(d) If an Award expires or becomes unexercisable without having been exercised in full, or, with respect to Restricted Stock, Performance Shares or Restricted Stock Units, is forfeited to or repurchased by the Company at its original purchase price due to such Award failing to vest, the unpurchased Shares (or for Awards other than Options, the forfeited or repurchased shares) which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan under any Award shall not be returned to the Plan and shall not become available for future distribution under the Plan; provided, however, that if Shares of Restricted Stock, Performance Shares or Restricted Stock Units are repurchased by the Company at their original purchase price or are forfeited to the Company due to such Awards failing to vest, such Shares shall become available for future grant under the Plan. Shares used to pay the exercise price of an Option shall not become available for future grant or sale under the Plan. Shares used to satisfy tax withholding obligations shall not become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than shares, such cash payment shall not reduce the number of Shares available for issuance under the Plan. Any payout of Dividend Equivalents or Performance Units, because they are payable only in cash, shall not reduce the number of Shares available for issuance under the Plan. Conversely, any forfeiture of Dividend Equivalents or Performance Units shall not increase the number of Shares available for issuance under the Plan.

4. Administration of the Plan .

(a) Procedure. The Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. The Plan may be administered by different Committees with respect to different groups of Service Providers.

(b) Powers of the Administrator . Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i) to determine the Fair Market Value of the Shares, in accordance with Section ý2(w) of the Plan;

(ii) to select the Service Providers to whom Awards may be granted hereunder;

(iii) to determine whether and to what extent Awards or any combination thereof, are granted hereunder;

(iv) to determine the number of Shares or equivalent units to be covered by each Award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised or other Awards vest (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or Shares relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vii) to construe and interpret the terms of the Plan and Awards;

(viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans or Plan addendums, established for the purpose of qualifying for preferred tax treatment (e.g., Section 102);

(ix) to modify or amend each Award (subject to Section ý23(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan;

(x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

(xi) to allow Participants to satisfy withholding tax obligations by electing to have the Company and/or its Affiliates and/or the Trustee withhold taxes in accordance with the Applicable Laws. The Fair Market Value of any Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares or cash withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(xii) to determine whether Dividend Equivalents will be granted in connection with another Award;

(xiii) to determine the terms and restrictions applicable to Awards;

(xiv) to determine the price per each Share to be issued under the Awards (excluding the Option exercise price to be set in accordance with Section ý8(b) below). Shares to be issued under grants of Restricted Stock, RSUs, Performance Shares and Performance Units may be issued upon payment of their nominal value;

(ix) to make an election as to the type of 102 Approved Award; and

(xv) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator’s Decision . The Administrator’s decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Awards.

5. Eligibility . Awards may be granted to Service Providers, provided that Section 102 Awards may be granted only to Employees.

6. No Employment Rights . Neither the Plan nor any Award shall confer upon a Participant any right with respect to continuing the Participant’s employment with the Company or its Affiliates, nor shall they interfere in any way with the Participant’s right or the Company’s or Affiliate’s right, as the case may be, to terminate such employment at any time, with or without cause or notice.

7. Term of Plan . The Plan shall continue in effect for a term of ten (10) years following the date upon which the Board approved the Plan in 2005.

8. Options .

(c) Waiting Period and Exercise Dates . At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period or until performance milestones are satisfied. In any event, no Option granted hereunder shall vest until at least six months following the Option grant date.

(d) Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of a Section 102 Award, the Administrator shall determine the acceptable form of consideration at the time of grant. Subject to Applicable Laws, such consideration may consist entirely of:

(i) cash;

(ii) check;

(iii) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Participant for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised;

(iv) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company or Affiliate of the sale proceeds required to pay the exercise price;

(v) any combination of the foregoing methods of payment; or

(vi) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

(e) Exercise of Option; Rights as a Shareholder . Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant, provided however that Shares issued following the exercise of Options granted under Section 102(b) to the Ordinance shall be issued under the name of the Trustee for the benefit of the Participant and shall be held in trust by the Trustee. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the optioned stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 21 of the Plan.

Exercising an Option in any manner shall decrease the number of Shares thereafter available for sale under the Option, by the number of Shares as to which the Option is exercised.

9. Restricted Stock .

(a) Grant of Restricted Stock . Subject to the terms and conditions of the Plan, Restricted Stock may be granted to Participants at any time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine (i) the number of Shares subject to a Restricted Stock award granted to any Participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on continued provision of services but may include a performance-based component, upon which is conditioned the grant, vesting or issuance of Restricted Stock; provided, however that no Restricted Stock Award shall vest until at least one year following the grant date.

(b) Other Terms . The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of Restricted Stock granted under the Plan. Restricted Stock grants shall be subject to the terms, conditions, and restrictions determined by the Administrator at the time the stock or the restricted stock unit is awarded. The Administrator may require the recipient to sign a Restricted Stock Award agreement as a condition of the award. Any certificates representing the Shares of stock awarded shall bear such legends as shall be determined by the Administrator.

(c) Restricted Stock Award Agreement . Each Restricted Stock grant shall be evidenced by an agreement that shall specify the purchase price (if any) and such other terms and conditions as the Administrator, in its sole discretion, shall determine; provided; however, that if the Restricted Stock grant has a purchase price, such purchase price must be paid no more than ten (10) years following the date of grant.

10. Restricted Stock Units .

(a) Grant . Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. The Administrator shall have complete discretion to determine (i) the number of Shares subject to a Restricted Stock Unit award granted to any Participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on continued service but may include a performance-based component, upon which is conditioned the grant or vesting of Restricted Stock Units. Restricted Stock Units shall be granted in the form of units to acquire Shares. Each such unit shall be the equivalent of one Share for purposes of determining the number of Shares subject to an Award. Until the Shares are issued, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the units to acquire Shares.

(b) Vesting Criteria and Other Terms . The Administrator shall set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of Company-wide, Affiliate-wide, business unit, or individual goals (including, but not limited to, continued employment), or any other basis determined by the Administrator in its discretion; provided, however that no Restricted Unit Award shall vest until at least one year following the grant date.

(c) Earning Restricted Stock Units . Upon meeting the applicable vesting criteria, the Participant shall be entitled to receive a payout as specified in the Restricted Stock Unit Award Agreement. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.

(d) Form and Timing of Payment . Payment of earned Restricted Stock Units shall be made as soon as practicable after the date(s) set forth in the Restricted Stock Unit Award Agreement. The Administrator shall pay earned Restricted Stock Units in Shares.

(e) Cancellation . On the date set forth in the Restricted Stock Unit Award Agreement, all unearned Restricted Stock Units shall be forfeited to the Company.

11. Performance Shares .

(a) Grant of Performance Shares . Subject to the terms and conditions of the Plan, Performance Shares may be granted to Participants at any time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine (i) the number of Shares subject to a Performance Share award granted to any Participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Shares. Performance Shares shall be granted in the form of units to acquire Shares. Each such unit shall be the equivalent of one Share for purposes of determining the number of Shares subject to an Award. Until the Shares are issued, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the units to acquire Shares.

(b) Other Terms . The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of Performance Shares granted under the Plan. Performance Share grants shall be subject to the terms, conditions, and restrictions determined by the Administrator at the time the stock is awarded, which may include such performance-based milestones as are determined appropriate by the Administrator; provided, however that no Performance Share Award shall vest until at least one year following the grant date. The Administrator may require the recipient to sign a Performance Shares agreement as a condition of the award. Any certificates representing the Shares of stock awarded shall bear such legends as shall be determined by the Administrator.

(c) Performance Share Award Agreement . Each Performance Share grant shall be evidenced by an agreement that shall specify such other terms and conditions as the Administrator, in its sole discretion, shall determine.

12. Performance Units .

(a) Grant of Performance Units . Performance Units are similar to Performance Shares, except that they shall be settled in a cash equivalent to the Fair Market Value of the underlying Shares, determined as of the vesting date. Subject to the terms and conditions of the Plan, Performance Units may be granted to Participants at any time and from time to time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Units. Performance Units shall be granted in the form of units to acquire Shares. Each such unit shall be the cash equivalent of one Share. No right to vote or receive dividends or any other rights as a shareholder shall exist with respect to Performance Units or the cash payable thereunder.

(b) Number of Performance Units . The Administrator will have complete discretion in determining the number of Performance Units granted to any Participant.

(c) Other Terms . The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of Performance Units granted under the Plan. Performance Unit grants shall be subject to the terms, conditions, and restrictions determined by the Administrator at the time the grant is awarded, which may include such performance-based milestones as are determined appropriate by the Administrator. The Administrator may require the recipient to sign a Performance Unit agreement as a condition of the award. Any certificates representing the units awarded shall bear such legends as shall be determined by the Administrator.

(d) Performance Unit Award Agreement . Each Performance Unit grant shall be evidenced by an agreement that shall specify such terms and conditions as the Administrator, in its sole discretion, shall determine.

13. Deferred Stock Units . Deferred Stock Units shall consist of a Restricted Stock, Restricted Stock Unit, Performance Share or Performance Unit Award that the Administrator, in its sole discretion permits to be paid out in installments or on a deferred basis, in accordance with rules and procedures established by the Administrator. Deferred Stock Units shall remain subject to the claims of the Company’s general creditors until distributed to the Participant.

14. Automatic Stock Option Grants to Non-employee Directors .

(a) Procedure for Grants . All grants of Options to Non-employee Directors under this Section ý14 shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions:

(i) Each Non-employee Director shall be automatically granted an Option to purchase 50,000 Shares, or a lesser amount determined by the Board, in its sole discretion (the “First Option”), upon the date on which such person first becomes a Director, whether through election by the shareholders of the Company or appointment by the Board of Directors to fill a vacancy; provided, however, that a Non-employee Director who has previously been employed by the Company (or any Affiliate) shall not be eligible to receive a First Option.

(ii) At each of the Company’s annual shareholder meetings, and commencing in 2005, each Non-employee Director shall be automatically granted an Option to purchase 25,000 Shares, or a lesser amount determined by the Board, in its sole discretion (the “Annual Option”), provided that such individual has served as an Non-Employee Director for at least six months prior to the date of such annual meeting.

(iii) Notwithstanding the provisions of subsections (i) and (ii) hereof, in the event that an automatic grant hereunder would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the number of Shares available for issuance under the Plan, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Non-employee Directors on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan.

(iv) The terms of an Option granted hereunder shall be as follows:

(A) The term of the Option shall be seven (7) years.

(B) The Option shall be exercisable only while the Non-employee Director remains a Director of the Company, except as set forth in subsection (c) hereof.

(D) The First Option shall become exercisable as to ¼ of the covered Shares each year on the day prior to each year’s normally scheduled annual shareholders’ meeting, so as to become 100% vested on the day prior to the normally scheduled annual shareholders’ meeting occurring approximately four years following the grant date, subject to the Participant maintaining Continuous Status as a Director on each vesting date.

(E) The Subsequent Option shall become exercisable as to 50% of the covered Shares six months following the grant date, and as to an additional 25% of the covered Shares each three months thereafter, so as to be 100% vested on the first anniversary of the grant date, subject to the Participant maintaining Continuous Status as a Director on each vesting date.

(b) Consideration for Exercising Non-employee Director Stock Options . The consideration to be paid for the Shares to be issued upon exercise of an automatic Non-employee Director Option shall consist of any consideration permitted under Section ý8(d) hereof and as set forth in the Award Agreement.

(c) Post-Directorship Exercisability . If a Non-employee Director ceases to serve as a Director, he or she may, but only within one year after the date he or she ceases to be a Director, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise an Option at the date of such termination, or if he or she does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate.

(d) Limitation on Automatic Stock Option Grants . The Directors serving immediately prior to the appointment or election of a new Non-employee Director, or prior to an annual shareholders’ meeting, as the case may be, shall determine as to each new Non-employee Director whether he or she shall be granted an Award under this Section ý14 or under the comparable provisions of another incentive plan of the Company. A new Non-employee Director who receives an Award of a First Option under this Plan shall not be eligible to receive a comparable automatic stock option grant under any other incentive plan of the Company. A Non-employee Director who receives an Award of a Subsequent Option under this Plan shall not be eligible to receive a comparable automatic stock option grant under any other incentive plan of the Company with respect to such fiscal year of the Company.

15. Termination of Relationships, Death or Disability .

(a) Termination of Relationship as a Service Provider . If a Participant ceases to be a Service Provider, other than upon the Participant’s death or Disability, then (i) in the case of an Award that is an Option, the Participant may exercise any Options within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement), and (ii) in the case of any Award other than an Option, the Participant shall be entitled to the benefit conferred by such Award during such period of time as is specified in the Award Agreement to the extent that the Award is vested on the date of termination (but in no event later than the expiration of the term of such Award, if any, as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, an Option shall remain exercisable, and the Participant shall be entitled to the benefit conferred by an Award other than an Option, for three months following the Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire Award, the Shares covered by the unvested portion of the Award shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option, or receive the benefit conferred by an Award other than an Option, within the time specified herein, the Award shall terminate, and the Shares covered by such Award shall revert to the Plan.

(b) Disability . If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, then (i) in the case of an Award that is an Option, the Participant may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement), and (ii) in the case of any Award other than an Option, the Participant shall be entitled to the benefit conferred by such Award during such period of time as is specified in the Award Agreement to the extent that the Award is vested on the date of termination (but in no event later than the expiration of the term of such Award, if any, as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, an Option shall remain exercisable, and the Participant shall be entitled to the benefit conferred by an Award other than an Option, for twelve (12) months following the Participant’s termination due to Disability. If, on the date of termination, the Participant is not vested as to his or her entire Award, the Shares covered by the unvested portion of the Award shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option, or receive the benefit conferred by an Award other than an Option, within the time specified herein, the Award shall terminate, and the Shares covered by such Award shall revert to the Plan.

(c) Death of Participant . If a Participant dies while a Service Provider, then (i) in the case of an Award that is an Option, the Option may be exercised following the Participant’s death within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Option Agreement), by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to Participant’s death in a form acceptable to the Administrator, and (ii) in the case of any Award other than an Option, the Participant’s designated beneficiary, provided such beneficiary has been designated prior to Participant’s death in a form acceptable to the Administrator, shall be entitled to the benefit conferred by such Award during such period of time as is specified in the Award Agreement to the extent that the Award is vested on the date of death (but in no event later than the expiration of the term of such Award, if any, as set forth in the Award Agreement). If no such beneficiary has been designated by the Participant, then such Option may be exercised by, or the benefit conferred by such Award shall be provided to, the personal representative of the Participant’s estate or by the person(s) to whom the Award is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option shall remain exercisable, or the benefit conferred by such Award shall be provided, for twelve (12) months following Participant’s death. If the Option is not so exercised or the benefit conferred by such Award is not provided within the time specified herein, the Award shall terminate, and the Shares covered by such Award shall revert to the Plan.

16. Leaves of Absence . Unless the Administrator provides otherwise or except as otherwise required by Applicable Laws, vesting of Awards granted hereunder shall cease commencing on the first day of any unpaid leave of absence and shall only recommence upon return to active service.

17. Part-Time Service . Unless the Administrator provides otherwise or except as otherwise required by Applicable Laws, any service-based vesting of Awards granted hereunder shall be extended on a proportionate basis in the event an Employee transitions to a work schedule under which they are customarily scheduled to work on less than a full-time basis, or if not on a full-time work schedule, to a schedule requiring fewer hours of service. Such vesting shall be proportionately re-adjusted prospectively in the event that the Employee subsequently becomes regularly scheduled to work additional hours of service.

18. Non-Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the recipient, only by the recipient. If the Administrator makes an Award transferable, it may only be transferable for no consideration to transferees permitted pursuant to a Form S-8 Registration Statement (such as family members or pursuant to a settlement of marital property rights) and such Award shall contain such additional terms and conditions as the Administrator deems appropriate.

19. Grant of Approved 102 Awards and Non-approved 102 Awards .

(a) Participants . Approved 102 Awards may only be granted to Employees who are residents of the State of Israel. Except as otherwise specifically approved by the ITA, a Controlling Shareholder or a Consultant shall not be eligible for grant of Approved 102 Awards or Non-approved 102 Awards, and shall only be eligible for grant of Section 3(i) Awards.

(b) Grant of Section 102 Awards.

(i) The Company may designate Awards granted to Employees pursuant to Section 102 as Non-approved 102 Awards or Approved 102 Awards.

(ii) The grant of Approved 102 Awards under the Plan shall be conditioned upon the approval of the Plan by the ITA.

(iii) Approved 102 Awards may either be classified as Capital Gains Awards (CGAs) or Ordinary Income Awards (OIAs). No Approved 102 Award may be granted under the Plan unless and until the Company’s election of the type of Approved 102 Awards as CGA or OIA granted to Employees (the “ Election ”) is appropriately filed with the ITA. Such Election shall become effective beginning the first date of grant of an Approved 102 Award and shall remain in effect until the end of the year following the year during which Employees were first granted Approved 102 Awards. The Election shall obligate the Company to grant only the type of Approved 102 Awards it has elected, and shall apply to all Participants who were granted such Approved 102 Awards during the period indicated herein, all in accordance with the provisions of Section 102(g) of the Ordinance. For the avoidance of doubt, such Election shall not prevent the Administrator from granting Employees Approved 102 Awards and Non-approved 102 Awards simultaneously.

(iv) All Approved 102 Awards must be held in trust by a Trustee, as described in subsection (c) below.

(v) For the avoidance of doubt, the designation of Non-approved 102 Awards and Approved 102 Awards shall be subject to the terms and conditions of Section 102.

(vi) With respect to Non-approved 102 Award, if the Employee ceases to be employed by the Company or any Affiliate, the Employee shall extend to the Company and/or its Affiliate a security or guarantee for the payment of tax due at the time of sale of Shares, all in accordance with the provisions of Section 102.

(i) All Approved 102 Awards granted under the Plan and any Shares allocated or issued upon exercise of such Approved 102 Awards (“ Section 102 Shares ”) or other shares received subsequently following any realization of rights, including bonus shares, shall be allocated or issued to the Trustee, and shall be held by the Trustee for the benefit of the Participants for such period of time as required by Section 102 (the “ Section 102 Period ”). In case the requirements for Approved 102 Awards are not met, then the Approved 102 Awards shall be regarded as Non-approved 102 Awards, all in accordance with the provisions of Section 102.

(ii) Notwithstanding anything to the contrary, the Trustee shall not release any Section 102 Shares or other Shares received subsequently following any realization of the Participant’s rights prior to the full payment of the Participant’s tax liabilities arising from the grant, exercise, release or transfer of the Approved 102 Award and any Section 102 Shares or other Shares received subsequently following any realization of rights.

(iii) With respect to any Approved 102 Awards, subject to the provisions of Section 102, a Participant shall not sell or release from trust any Section 102 Shares or any Shares received subsequently following any realization of rights, including bonus shares, until the lapse of the Section 102 Period. Notwithstanding the above, if any such sale or release occurs during the Section 102 Period, the sanctions under Section 102 shall apply to, and be borne by, such Participant.

(iv) Upon receipt of an Approved 102 Award, the Participant will sign an Award Agreement under which the Participant will agree to be subject to the trust agreement between the Company and the Trustee, stating, among others, that the Trustee will be released from any liability in respect of any action or decision duly taken and bona fide executed in relation with the Plan, or any Approved 102 Award or Section 102 Share granted to him or her thereunder.

(v) As long as Approved 102 Awards granted, or Section 102 Shares are held by the Trustee, then all rights the Participant possesses over such Awards or Shares may not be transferred, assigned, pledged or mortgaged by the Participant, other than by will or laws of descent and distribution.

(vi) If dividends, whether cash, property or stock dividends, are declared on Section 102 Shares held by the Trustee, such dividends shall also be subject to the provisions of Section 102 and the provisions of this Section ý19. The Section 102 Period for any such additional shares shall be equal to the Section 102 Period for the original Section 102 Shares.

(vii) At any time after the end of the Section 102 Period with respect to any Section 102 Awards or Section 102 Shares, the Participant may order (but shall not be obligated to order) the Trustee to sell or transfer to the Participant such Section 102 Awards or Section 102 Shares, provided that no securities shall be sold or transferred until all required payments have been fully made: (i) such Participant has deposited with the Trustee an amount of money which, in the Trustee’s opinion, is necessary to discharge such Participant’s tax obligations with respect to such Section 102 Awards or Section 102 Shares, or (ii) the receipt by the Trustee of an acknowledgment from the ITA that the Participant has paid any applicable tax due pursuant to the Ordinance, or (iii) the Company has made other arrangements for the deduction of tax at source acceptable to the Trustee, or (iv) upon the sale by the Trustee of any securities held in trust from the proceeds of which the Company or the Trustee has withheld all applicable taxes and has remitted the amount withheld to the appropriate Israeli tax authorities, has paid the balance thereof directly to such Participant, and has reported to such Participant the amount so withheld and paid to such tax authorities.

(d) Integration of Section 102 and Tax Assessing Officer’s Permit .

With regards to Approved 102 Awards, the provisions of the Plan and the Award Agreement shall be subject to the provisions of Section 102 of the Ordinance and the Tax Assessing Officer’s permit, and the said provisions and permit shall be deemed an integral part of the Plan and of the Award Agreement.

(e) Tax Consequences .

(i) Any and all tax consequences arising from the grant, exercise transfer, or sale of an Award or from the payment for Shares covered thereby or from any other event or act under the Plan (whether of a Participant and/or of the Company and/or a Affiliate and/or the Trustee) shall be borne solely by the Participant. The Company and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Participant shall agree to indemnify the Company and the Trustee, if applicable, and hold them harmless against and from any and all liability for any tax or interest or penalty thereon, including (without limitation) liabilities relating to the necessity to withhold, or to have withheld, any tax from any payment made to the Participant.

(ii) The Company, or where applicable, the Trustee, shall not be required to release any share certificate to a Participant until all requirement payment have been fully made.

(iii) Without derogating from Section ý2 above and solely for the purpose of determining the tax liability pursuant to Section 102(b)(3) of the Ordinance, if at the date of grant the Company’s shares are listed on any established stock exchange or a national market system or if the Company’s shares will be registered for trading within ninety (90) days following the date of grant of the Approved 102 Award, the Fair Market Value of the Shares at the date of grant shall be determined in accordance with the average value of the Company’s Shares on the thirty trading days preceding the date of grant or the thirty trading days following the date of registration for trading, as the case may be.

20. Grant of Section 3(i) Awards . In the event that grants are made under Section 3(i) of the Ordinance, the Company may elect to enter into an agreement with a trustee concerning the administration of the exercise of Options, the purchase and sale of Shares, and the arrangements for payment of or withholding of taxes due in connection with such exercise, purchase and sale. The trust agreement may provide that the Company will issue the Shares to such trustee for the benefit of the Participants. The type of Section 3(i) Awards to be granted under the Plan shall be subject to the provisions of Section 3(i) to the Ordinance.

21. Adjustments Upon Changes in Capitalization, Dissolution or Liquidation or Change of Control .

(a) Changes in Capitalization . Subject to any required action by the shareholders of the Company, the number of shares of Ordinary Shares covered by each outstanding Award, the number of shares of Ordinary Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted (including the automatic annual replenishment of three million Shares) or which have been returned to the Plan upon cancellation or expiration of an Award, as well as the price per Ordinary Shares covered by each such outstanding Award shall be proportionately adjusted for any increase or decrease in the number of issued Ordinary Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Ordinary Shares, or any other increase or decrease in the number of issued Ordinary Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Ordinary Shares subject to an Award.

(b) Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Awarded Stock covered thereby, including Shares as to which the Award would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option or forfeiture rights applicable to any Award shall lapse 100%, and that any Award vesting shall accelerate 100%, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised (with respect to Options) or vested (with respect to other Awards), an Award will terminate immediately prior to the consummation of such proposed action.

(i) Options . In the event of a Change of Control, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a parent or Affiliate of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Administrator, in its sole discretion, may provide that either (i) all Options shall terminate immediately prior to the consummation of the Change of Control, or (ii) Participants shall fully vest in and have the right to exercise their Options as to all of the Awarded Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a Change of Control, the Administrator shall notify the Participant in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the Change of Control, the option confers the right to purchase or receive, for each Share of Awarded Stock subject to the Option immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Ordinary Shares for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Ordinary Shares); provided, however, that if such consideration received in the Change of Control is not solely stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Awarded Stock subject to the Option, to be solely stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Ordinary Shares in the Change of Control.

(ii) Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units and Deferred Stock Units . In the event of a Change of Control, each outstanding Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit and Deferred Stock Unit award (and any related Dividend Equivalent), shall be assumed or an equivalent Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit and Deferred Stock Unit award substituted by the successor corporation or a parent or Affiliate of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit or Deferred Stock Unit award, the Administrator, in its sole discretion, may provide either that (i) such Awards shall terminate immediately prior to the consummation of the Change of Control, or (ii) Participants shall fully vest in the Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit or Deferred Stock Unit Awards including as to Shares (or with respect to Performance Units, the cash equivalent thereof) which would not otherwise be vested. For the purposes of this paragraph, a Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit and Deferred Stock Unit award shall be considered assumed if, following the Change of Control, the award confers the right to purchase or receive, for each Share (or with respect to Performance Units, the cash equivalent thereof) subject to the Award immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Ordinary Shares for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Ordinary Shares); provided, however, that if such consideration received in the Change of Control is not solely stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received, for each Share and each unit/right to acquire a Share subject to the Award, to be solely stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Ordinary Shares in the Change of Control.

22. Date of Grant . The date of grant of an Award shall be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Participant within a reasonable time after the date of such grant.

23. Amendment and Termination of the Plan .

(a) Amendment and Termination . The Board may at any time amend, alter, suspend or terminate the Plan.

(b) Shareholder Approval . The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with the Applicable Laws and in such a manner and to such a degree as is required by the Applicable Laws.

(c) Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing (or electronic format) and signed by the Participant and the Company or its Affiliate.

24. Conditions Upon Issuance of Shares .

(a) Legal Compliance . Shares shall not be issued pursuant to the exercise of an Award unless the exercise of the Award or the issuance and delivery of such Shares (or with respect to Performance Units, the cash equivalent thereof) shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations . As a condition to the exercise or receipt of an Award, the Company may require the person exercising or receiving such Award to represent and warrant at the time of any such exercise or receipt that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

(c) Tax Consequences . Any and all tax consequences arising from the grant or exercise, or otherwise relating to, an Award or from the payment for Shares covered thereby or from any other event or act under the Plan (whether of the Participant or of the Company or of a Affiliate) shall be borne solely by the Participant. The Company or its Affiliates shall withhold taxes according to the requirements under the Applicable Laws, including withholding taxes at source. Furthermore, the Participant shall agree to indemnify the Company and its Affiliates, if applicable, and hold them harmless from and against any and all liability for any tax, or interest or penalty thereon, including liabilities relating to the necessity to withhold, or to have withheld, any tax from any payment made to the Participant.

25. Liability of Company .

(a) Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

(b) Grants Exceeding Allotted Shares . If the Awarded Stock covered by an Award exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Award shall be void with respect to such excess Awarded Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section ý23(b) of the Plan.

26. Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

Exhibit 4.8

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

2005 UNITED STATES EQUITY INCENTIVE PLAN

1. Purposes of the Plan . The purposes of this Unites States Incentive Plan are:

—

to attract and retain the best available personnel for positions of substantial responsibility,

—

to provide additional incentive to Service Providers, and

—

to promote the success of the Company's business.

Awards granted under the Plan may be Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Deferred Stock Units or Dividend Equivalents, as determined by the Administrator at the time of grant.

2. Definitions . As used herein, the following definitions shall apply:

(a) “ Administrator ” means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

(b) “ Applicable Laws ” means the requirements relating to the administration of, or otherwise affecting, equity compensation plans under Israeli corporate laws, U.S. state corporate laws, Israeli securities laws, U.S. federal and state securities laws, the Code and foreign tax laws, any stock exchange or quotation system on which the Shares are listed or quoted and the applicable laws of any other country or jurisdiction where Awards are granted under the Plan or a sub-plan or addendum hereto.

(c) “ Award ” means, individually or collectively, a grant under the Plan of Options, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Deferred Stock Units or Dividend Equivalents.

(d) “ Award Agreement ” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.

(e) “ Awarded Stock ” means the Ordinary Shares subject to an Award.

(f) “ Board ” means the Board of Directors of the Company.

(g) “ Change of Control ” means the occurrence of any of the following events, in one or a series of related transactions:

(i) any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

(iii) the sale or disposition by the Company of all or substantially all the Company’s assets.

(h) “ Code ” means the Internal Revenue Code of 1986, as amended.

(i) “ Committee ” means a Committee appointed by the Board in accordance with Section 4 of the Plan.

(j) “ Company ” means Check Point Software Technologies Ltd.

(k) “ Consultant ” means any person, other than an Employee, engaged by the Company, or any Subsidiary to render services and who is compensated for such services.

(l) “ Continuous Status as a Director ” means that the Director relationship is not interrupted or terminated.

(m) “ Deferred Stock Unit ” means a deferred stock unit Award granted to a Participant pursuant to Section 13.

(n) “ Director ” means a member of the Board.

(o) “ Disability ” means total and permanent disability as defined in Section 22(e)(3) of the Code.

(p) “ Dividend Equivalent ” means a credit, payable in cash, made at the discretion of the Administrator, to the account of a Participant in an amount equal to the cash dividends paid on one Share for each Share represented by an Award held by such Participant. The Dividend Equivalent for each Share subject to an Award shall only be paid to a Participant on the vesting date for such Share.

(q) “ Employee ” means any person, including Officers and Directors, employed by the Company or any Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company or its Subsidiary is not so guaranteed, then three (3) months following the 91 ^st day of such leave any Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option.

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(r) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(s) “ Fair Market Value ” means, as of any date, the value of Ordinary Shares determined as follows:

(i) If the Ordinary Shares are listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation (“Nasdaq”) System, the Fair Market Value of a Share of Ordinary Shares shall be the closing sales price for such shares (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Ordinary Shares) on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Ordinary Shares are quoted on the Nasdaq System (but not on the Nasdaq National Market thereof) or are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of an Ordinary Share shall be the mean between the high bid and low asked prices for the Ordinary Shares on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(iii) In the absence of an established market for the Ordinary Shares, the Fair Market Value shall be determined in good faith by the Administrator.

(t) “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(u) “ Non-Employee Director ” means a Director who is neither an Employee nor a Consultant and who is not a resident of Israel.

(v) “ Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

(w) “ Notice of Grant ” means a written or electronic notice evidencing certain terms and conditions of an individual Award. The Notice of Grant is part of the Award Agreement.

(x) “ Officer ” means a person who is an officer of the Company or a Subsidiary within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(y) “ Option ” means a stock option granted pursuant to the Plan.

(z) “ Option Agreement ” means a written or electronic agreement between the Company and a Participant evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

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(aa) “ Ordinary Shares ” shall mean the Ordinary Shares of the Company., NIS 0.01 nominal value.

(bb) “ Participant ” means the holder of an outstanding Award granted under the Plan.

(cc) “ Performance Share ” means a performance share Award granted to a Participant pursuant to Section 11.

(dd) “ Performance Unit ” means a performance unit Award granted to a Participant pursuant to Section 12.

(ee) “ Plan ” means this 2005 United States Equity Incentive Plan.

(ff) “ Restricted Stock ” means Shares granted pursuant to Section 9 of the Plan.

(gg) “ Restricted Stock Unit ” means an Award granted pursuant to Section 10 of the Plan.

(hh) “ Service Provider ” means an Employee, Consultant or Non-Employee Director.

(ii) “ Share ” means a share of the Ordinary Shares, as adjusted in accordance with Section 19 of the Plan.

(jj) “ Subsidiary ” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan . Subject to the provisions of Section 19 of the Plan, the maximum aggregate number of Shares which may be issued under the Plan is twenty million Shares, increased annually on the first day of each of the Company’s fiscal years during the term of the Plan by two million Shares.

The Shares may be authorized, but unissued, or reacquired Ordinary Shares.

Any Shares subject to Options shall be counted against the numerical limits of this Section 3 as one Share for every Share subject thereto. Any Shares subject to Restricted Stock, Performance Shares or Restricted Stock Units with a per share or unit purchase price lower than 100% of Fair Market Value on the date of grant shall be counted against the numerical limits of this Section 3 as two Shares for every one Share subject thereto. To the extent that a Share that was subject to an Award that counted as two Shares against the Plan reserve pursuant to the preceding sentence is recycled back into the Plan under the next paragraph of this Section 3, the Plan shall be credited with two Shares.

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If an Award expires or becomes unexercisable without having been exercised in full, or, with respect to Restricted Stock, Performance Shares or Restricted Stock Units, is forfeited to or repurchased by the Company at its original purchase price due to such Award failing to vest, the unpurchased Shares (or for Awards other than Options, the forfeited or repurchased shares) which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan under any Award shall not be returned to the Plan and shall not become available for future distribution under the Plan; provided, however, that if Shares of Restricted Stock, Performance Shares or Restricted Stock Units are repurchased by the Company at their original purchase price or are forfeited to the Company due to such Awards failing to vest, such Shares shall become available for future grant under the Plan. Shares used to pay the exercise price of an Option shall not become available for future grant or sale under the Plan. Shares used to satisfy tax withholding obligations shall not become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than stock, such cash payment shall not reduce the number of Shares available for issuance under the Plan. Any payout of Dividend Equivalents or Performance Units, because they are payable only in cash, shall not reduce the number of Shares available for issuance under the Plan. Conversely, any forfeiture of Dividend Equivalents or Performance Units shall not increase the number of Shares available for issuance under the Plan.

4. Administration of the Plan .

(a) Procedure . The Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. The Plan may be administered by different Committees with respect to different groups of Service Providers.

(i) to determine the Fair Market Value of the Ordinary Shares, in accordance with Section 2(s) of the Plan;

(ii) to select the Service Providers to whom Awards may be granted hereunder;

(iii) to determine whether and to what extent Awards or any combination thereof, are granted hereunder;

(iv) to determine the number of Ordinary Shares or equivalent units to be covered by each Award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised or other Awards vest (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Ordinary Shares relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vii) to construe and interpret the terms of the Plan and Awards;

(viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans or Plan addendums established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

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(ix) to modify or amend each Award (subject to Section 21(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan;

(x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

(xi) to allow Participants to satisfy withholding tax obligations by electing to have the Company or its Subsidiary withhold from the Shares or cash to be issued upon exercise or vesting of an Award (or distribution of a Deferred Stock Unit) that number of Shares or cash having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of any Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares or cash withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(xii) to determine whether Dividend Equivalents will be granted in connection with another Award;

(xiii) to determine the terms and restrictions applicable to Awards; and

(xiv) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator’s Decision . The Administrator’s decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Awards.

5. Eligibility . Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Deferred Stock Units, Dividend Equivalents and Nonstatutory Stock Options may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

6. No Employment Rights . Neither the Plan nor any Award shall confer upon a Participant any right with respect to continuing the Participant’s employment with the Company or its Subsidiaries, nor shall they interfere in any way with the Participant’s right or the Company’s or Subsidiary’s right, as the case may be, to terminate such employment at any time, with or without cause or notice.

7. Term of Plan . The Plan shall continue in effect for a term of ten (10) years following the date upon which the Board approved the Plan in 2005.

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8. Stock Options .

(a) Term . The term of each Option shall be stated in the Notice of Grant; provided, however, that the term shall be no more than seven (7) years from the date of grant or such shorter term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Notice of Grant.

(b) Option Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator and shall be no less than 100% of the Fair Market Value per share on the date of grant; provided, however, that in the case of an Incentive Stock Option granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(d) Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Subject to Applicable Laws, such consideration may consist entirely of:

(i) cash;

(ii) check;

(iv) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company or Subsidiary of the sale proceeds required to pay the exercise price;

(v) any combination of the foregoing methods of payment; or

(vi) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

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(e) Exercise of Option; Rights as a Stockholder . Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the optioned stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 19 of the Plan.

Exercising an Option in any manner shall decrease the number of Shares thereafter available for sale under the Option, by the number of Shares as to which the Option is exercised.

(f) ISO $100,000 Rule . Each Option shall be designated in the Notice of Grant as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value:

(i) of Shares subject to a Participant’s Incentive Stock Options granted by the Company or any Subsidiary, which

(ii) become exercisable for the first time during any calendar year (under all plans of the Company or any Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 8(i), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant.

9. Restricted Stock .

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10. Restricted Stock Units .

(a) Grant . Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. The Administrator shall have complete discretion to determine (i) the number of Shares subject to a Restricted Stock Unit award granted to any Participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on continued service but may include a performance-based component, upon which is conditioned the grant or vesting of Restricted Stock Units. Restricted Stock Units shall be granted in the form of units to acquire Shares. Each such unit shall be the equivalent of one Share for purposes of determining the number of Shares subject to an Award. Until the Shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the units to acquire Shares.

(b) Vesting Criteria and Other Terms . The Administrator shall set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of Company-wide, Subsidiary-wide, business unit, or individual goals (including, but not limited to, continued employment), or any other basis determined by the Administrator in its discretion; provided, however that no Restricted Unit Award shall vest until at least one year following the grant date.

(e) Cancellation . On the date set forth in the Restricted Stock Unit Award Agreement, all unearned Restricted Stock Units shall be forfeited to the Company.

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11. Performance Shares .

(a) Grant of Performance Shares . Subject to the terms and conditions of the Plan, Performance Shares may be granted to Participants at any time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine (i) the number of Shares subject to a Performance Share award granted to any Participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Shares. Performance Shares shall be granted in the form of units to acquire Shares. Each such unit shall be the equivalent of one Share for purposes of determining the number of Shares subject to an Award. Until the Shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the units to acquire Shares.

12. Performance Units .

(a) Grant of Performance Units . Performance Units are similar to Performance Shares, except that they shall be settled in a cash equivalent to the Fair Market Value of the underlying Shares, determined as of the vesting date. Subject to the terms and conditions of the Plan, Performance Units may be granted to Participants at any time and from time to time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Units. Performance Units shall be granted in the form of units to acquire Shares. Each such unit shall be the cash equivalent of one Share of Ordinary Shares. No right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Performance Units or the cash payable thereunder.

(b) Number of Performance Units . The Administrator will have complete discretion in determining the number of Performance Units granted to any Participant.

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14. Automatic Stock Option Grants to Non-Employee Directors .

(a) Procedure for Grants . All grants of Options to Non-Employee Directors under this Section 14 shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions:

(i) Each Non-Employee Director shall be automatically granted an Option to purchase 50,000 Shares, or a lesser amount determined by the Board, in its sole discretion (the “First Option”) upon the date on which such person first becomes a Director, whether through election by the stockholders of the Company or appointment by the Board of Directors to fill a vacancy; provided, however, that an Non-Employee Director who has previously been employed by the Company (or any Subsidiary) shall not be eligible to receive a First Option.

(ii) At each of the Company’s annual stockholder meetings, and commencing in 2005, each Non-Employee Director shall be automatically granted an Option to purchase 25,000 Shares, or a lesser amount determined by the Board, in its sole discretion (the “Subsequent Option”), provided that such individual has served as an Non-Employee Director for at least six months prior to the date of such annual meeting.

(iii) Notwithstanding the provisions of subsections (i) and (ii) hereof, in the event that an automatic grant hereunder would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the number of Shares available for issuance under the Plan, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Non-Employee Directors on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan.

(iv) The terms of an Option granted hereunder shall be as follows:

(A) the term of the Option shall be seven (7) years.

(B) the Option shall be exercisable only while the Non-Employee Director remains a Director of the Company, except as set forth in subsection (c) hereof.

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(D) the First Option shall become exercisable as to 1/4 ^th of the covered Shares each year on the day prior to each year’s normally scheduled annual stockholders’ meeting, so as to become 100% vested on the day prior to the normally scheduled annual stockholders’ meeting occurring approximately four years following the grant date, subject to the Participant maintaining Continuous Status as a Director on each vesting date.

(b) Consideration for Exercising Non-Employee Director Stock Options . The consideration to be paid for the Shares to be issued upon exercise of an automatic Non-Employee Director Option shall consist of any consideration permitted under section 8(e) hereof and as set forth in the Award Agreement.

(c) Post-Directorship Exercisability . If a Non-Employee Director ceases to serve as a Director, he or she may, but only within one year after the date he or she ceases to be a Director, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise an Option at the date of such termination, or if he or she does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate.

(d) Limitation on Automatic Stock Option Grants . The Directors serving immediately prior to the appointment or election of a new Non-Employee Director, or prior to an annual stockholders’ meeting, as the case may be, shall determine as to each new Non-Employee Director whether he or she shall be granted an Award under this Section 14 or under the comparable provisions of another incentive plan of the Company. A new Non-Employee Director who receives a First Option under this Plan shall not be eligible to receive a comparable automatic stock option grant under any other incentive plan of the Company. A new Non-Employee Director who receives a Subsequent Option under this Plan shall not be eligible to receive a comparable automatic stock option grant under any other incentive plan of the Company with respect to such fiscal year of the Company.

15. Termination of Relationships, Death or Disability .

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19. Adjustments Upon Changes in Capitalization, Dissolution or Liquidation or Change of Control .

(a) Changes in Capitalization . Subject to any required action by the stockholders of the Company, the number of Ordinary Shares covered by each outstanding Award, the number of Ordinary Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted (including the automatic annual replenishment of two million Ordinary Shares) or which have been returned to the Plan upon cancellation or expiration of an Award, the number of Ordinary Shares subject to automatic option grants to Non-Employee Directors under Section 14 hereof, as well as the price per Ordinary Share covered by each such outstanding Award shall be proportionately adjusted for any increase or decrease in the number of issued Ordinary Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Ordinary Shares, or any other increase or decrease in the number of issued Ordinary Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Ordinary Shares subject to an Award.

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(i) Stock Options . In the event of a Change of Control, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Administrator, in its sole discretion, may provide that either (i) all Options shall terminate immediately prior to the consummation of the Change of Control, or (ii) Participants shall fully vest in and have the right to exercise their Options as to all of the Awarded Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a Change of Control, the Administrator shall notify the Participant in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the Change of Control, the option confers the right to purchase or receive, for each Share of Awarded Stock subject to the Option immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Ordinary Shares for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Ordinary Shares); provided, however, that if such consideration received in the Change of Control is not solely stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Awarded Stock subject to the Option, to be solely stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Ordinary Shares in the Change of Control.

(ii) Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units and Deferred Stock Units. In the event of a Change of Control, each outstanding Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit and Deferred Stock Unit award (and any related Dividend Equivalent) shall be assumed or an equivalent Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit and Deferred Stock Unit award substituted by the successor corporation or a parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit or Deferred Stock Unit award, the Administrator, in its sole discretion, may provide either that (i) such Awards shall terminate immediately prior to the consummation of the Change of Control, or (ii) Participants shall fully vest in the Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit or Deferred Stock Unit Awards including as to Shares (or with respect to Performance Units, the cash equivalent thereof) which would not otherwise be vested. For the purposes of this paragraph, a Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit and Deferred Stock Unit award shall be considered assumed if, following the Change of Control, the award confers the right to purchase or receive, for each Share (or with respect to Performance Units, the cash equivalent thereof) subject to the Award immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Ordinary Shares for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Ordinary Shares); provided, however, that if such consideration received in the Change of Control is not solely stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received, for each Share and each unit/right to acquire a Share subject to the Award, to be solely stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Ordinary Shares in the Change of Control.

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20. Date of Grant . The date of grant of an Award shall be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Participant within a reasonable time after the date of such grant.

21. Amendment and Termination of the Plan .

(a) Amendment and Termination . The Board may at any time amend, alter, suspend or terminate the Plan.

(b) Stockholder Approval . The Company shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Section 422 of the Code (or any successor rule or statute or other Applicable Law). Such stockholder approval, if required, shall be obtained in such a manner and to such a degree as is required by Applicable Law.

22. Conditions Upon Issuance of Shares .

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23. Liability of Company .

(b) Grants Exceeding Allotted Shares . If the Awarded Stock covered by an Award exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional stockholder approval, such Award shall be void with respect to such excess Awarded Stock, unless stockholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 21(b) of the Plan.

24. Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

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Exhibit 4.10

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
EMPLOYEE STOCK PURCHASE PLAN

as amended and restated at the 2005 annual stockholders’ meeting

I.	PURPOSE OF THE PLAN

This Employee Stock Purchase Plan is intended to promote the interests of Check Point Software Technologies Ltd. by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code.

Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix.

II.

ADMINISTRATION OF THE PLAN

The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan.

III.

SHARES SUBJECT TO PLAN

A. The Shares purchasable under the Plan shall be shares of authorized but unissued or reacquired Ordinary Shares, including Ordinary Shares purchased on the open market. The maximum number of Ordinary Shares which may be issued over the term of the Plan shall not exceed 200,000 (subject to adjustment) shares.

B. Should any change be made to the Ordinary Shares by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Ordinary Shares as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder.

IV.

PURCHASE PERIODS

A. Ordinary Shares shall be offered for purchase under the Plan through a series of purchase periods until such time as (i) the maximum number of Ordinary Shares available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated.

B. Each purchase period shall be of such duration (generally not to exceed six (6) months) as determined by the Plan Administrator prior to the start date. The initial purchase period shall commence on February 1, 1997 and terminate on the last business day in July 1997. The next purchase period shall commence on the first business day in August 1997, and subsequent purchase periods shall commence every six months thereafter or on such other date as designated by the Plan Administrator. In no event may a purchase period have a duration in excess of twenty-seven (27) months.

V.	ELIGIBILITY

A. Each Eligible Employee shall be eligible to enter a purchase period under the Plan on the start date of the Purchase Period, provided he or she remains an Eligible Employee on such start date.

B. To participate in the Plan for a particular purchase period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock purchase agreement and a payroll deduction authorization form) and file such forms with the Plan Administrator (or its designate) on or before the start date for the purchase period.

VI.

PAYROLL DEDUCTIONS

A. The payroll deduction authorized by the Participant for purposes of acquiring Ordinary Shares under the Plan may be any multiple of one percent (1%) of the Cash Compensation paid to the Participant during the Purchase Period, up to a maximum of fifteen percent (15%). The deduction rate so authorized shall continue in effect for each subsequent Purchase Period, except to the extent such rate is changed in accordance with the following guidelines:

(i) The Participant may, at any time during an open trading window of a purchase period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Period. ESPP deductions can be terminated at any time.

(ii) The Participant may, prior to the commencement of any new Purchase Period, increase the rate of his or her payroll deduction by filing the appropriate form with the Plan Administrator. The new rate (which may not exceed the fifteen percent (15%) maximum) shall become effective as of the start date of the Purchase Period following the filing of such form.

B. Payroll deductions shall begin on the first pay day following the start date for the Purchase Period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of that Purchase Period. The amounts so collected shall be credited to the Participant’s book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes.

C. Payroll deductions shall automatically cease upon the termination of the Participant’s purchase right in accordance with the provisions of the Plan.

D. The Participant’s acquisition of Ordinary Shares under the Plan on any Purchase Date shall neither limit nor require the Participant’s acquisition of Ordinary Shares on any subsequent Purchase Date, whether within the same or a different offering period.

VII.

PURCHASE RIGHTS

A. Grant of Purchase Right . A Participant shall be granted a separate purchase right for each Purchase Period in which he or she participates. The purchase right shall be granted on the start date for the Purchase Period and shall provide the Participant with the right to purchase Ordinary Shares on the Purchase Date for such Purchase Period, upon the terms set forth below. The Participant shall execute a share purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable.

Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, Shares possessing five percent (5%) or more of the total combined voting power or value of all classes of Shares of the Corporation or any Corporate Affiliate.

B. Exercise of the Purchase Right . Each purchase right shall be automatically exercised on the Purchase Date and Ordinary Shares shall accordingly be purchased on behalf of each Participant (other than any Participant whose payroll deductions have previously been refunded in accordance with the Termination of Purchase Right provisions below) on each such Purchase Date. The purchase shall be effected by applying the Participant’s payroll deductions for the Purchase Period ending on such Purchase Date (together with any carryover deductions from the preceding Purchase Period) to the purchase of whole Ordinary Shares (subject to the limitation on the maximum number of shares purchasable per Participant on any one Purchase Date) at the purchase price in effect for the Participant for that Purchase Date.

C. Purchase Price . The purchase price per share at which Ordinary Shares will be purchased on the Participant’s behalf on each Purchase Date shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per Ordinary Share on the start date for the Purchase Period or (ii) the Fair Market Value per Ordinary Share on that Purchase Date.

D. Number of Purchasable Shares . The number of Ordinary Shares purchasable by a Participant on each Purchase Date shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Period ending with that Purchase Date (together with any carryover deductions from the preceding Purchase Period) by the purchase price in effect for the Participant for that Purchase Date. However, the maximum number of Ordinary Shares purchasable per Participant on any one Purchase Date shall not exceed 1,250 shares, subject to periodic adjustments in the event of certain changes in the Corporation’s capitalization.

E. Excess Payroll Deductions . Any payroll deductions not applied to the purchase of Ordinary Shares on any Purchase Date because they are not sufficient to purchase a whole Ordinary Share shall be held for the purchase of Ordinary Shares on the next Purchase Date. However, any payroll deductions not applied to the purchase of Ordinary Shares by reason of the limitation on the maximum number of shares purchasable by the Participant on the Purchase Date shall be promptly refunded.

F. Termination of Purchase Right . The following provisions shall govern the termination of outstanding purchase rights:

(i) A Participant may, at any time prior to the next Purchase Date, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the Purchase Period in which such termination occurs shall, at the Participant’s election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time such purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible.

(ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the Purchase Period for which the terminated purchase right was granted. In order to resume participation in any subsequent Purchase Period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before the start date for that Purchase Period.

(iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant’s payroll deductions for the Purchase Period in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the election, exercisable up until the last business day of the Purchase Period in which such leave commences, to (a) withdraw all the funds in the Participant’s payroll account at the time of the commencement of such leave or (b) have such funds held for the purchase of shares at the end of such Purchase Period. In no event, however, shall any further payroll deductions be added to the Participant’s account during such leave. Upon the Participant’s return to active service, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began, provided the Participant returns to service prior to the expiration date of the purchase period in which such leave began.

G. Corporate Transaction . Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the Purchase Period in which such Corporate Transaction occurs to the purchase of whole Ordinary Shares at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per Ordinary Share on the start date for the Purchase Period in which such Corporate Transaction occurs or (ii) the Fair Market Value per Ordinary Share immediately prior to the effective date of such Corporate Transaction. However, the applicable limitation on the number of Ordinary Shares purchasable per Participant shall continue to apply to any such purchase.

The Corporation shall use its best efforts to provide at least ten (10)-days prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction.

H. Proration of Purchase Rights . Should the total number of Ordinary Shares which are to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Ordinary Shares pro-rated to such individual, shall be refunded.

I. Assignability . During the Participant’s lifetime, the purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant.

J. Shareholder Rights . A Participant shall have no shareholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant’s behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares.

VIII.

ACCRUAL LIMITATIONS

A. No Participant shall be entitled to accrue rights to acquire Ordinary Shares pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Ordinary Shares accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than $25,000 worth of Shares of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value of such Shares on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding.

B. For purposes of applying such accrual limitations, the following provisions shall be in effect:

(i) The right to acquire Ordinary Shares under each outstanding purchase right shall accrue in a series of installments on each successive Purchase Date during the offering period on which such right remains outstanding.

(ii) No right to acquire Ordinary Shares under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Ordinary Shares under one (1) or more other purchase rights at a rate equal to $25,000 worth of Ordinary Shares (determined on the basis of the Fair Market Value of such Shares on the date or dates of grant) for each calendar year such rights were at any time outstanding.

C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Period, then the payroll deductions which the Participant made during that Purchase Period with respect to such purchase right shall be promptly refunded.

D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling.

IX.

EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan was adopted by the Board on November 24, 1996 and became effective at the Effective Time.

B. Subject to obtaining approval of the Company’s stockholders at the Company’s 2005 annual stockholder meeting, and unless sooner terminated by the Board, the Plan shall terminate upon the earliest of (i) the last business day in January 2026, (ii) the date on which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following its termination.

X.	AMENDMENT OF THE PLAN

The Board may alter, amend, suspend or discontinue the Plan at any time to become effective immediately following the close of any Purchase Period. However, the Board may not, without the approval of the Corporation’s shareholders, (i) materially increase the number of Ordinary Shares issuable under the Plan or the maximum number of shares purchasable per Participant on any one Purchase Date, except for permissible adjustments in the event of certain changes in the Corporation’s capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the Ordinary Shares purchasable under the Plan, or (iii) materially increase the benefits accruing to Participants under the Plan or materially modify the requirements for eligibility to participate in the Plan.

XI.

GENERAL PROVISIONS

A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation.

B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person’s employment at any time for any reason, with or without cause.

C. The provisions of the Plan shall be governed by the laws of Israel without resort to Israel’s conflict-of-laws rules.

Schedule A

Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time

Check Point Software Technologies, Inc.

APPENDIX

The following definitions shall be in effect under the Plan:

A. Board shall mean the Corporation’s Board of Directors.

B. Cash Compensation shall mean the (i) regular base salary paid to a Participant by one or more Participating Corporations during such individual’s period of participation in the Plan, plus (ii) any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate, plus (iii) all of the following amounts to the extent paid in cash: overtime payments, bonuses, commissions, profit-sharing distributions and other incentive-type payments. However, Eligible Earnings shall not include any contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant’s behalf by the Corporation or any Corporate Affiliate to any deferred compensation plan or welfare benefit program now or hereafter established.

C. Check Point Subsidiary shall mean Check Point Software Technologies, Inc., a Delaware corporation.

D. Code shall mean the Internal Revenue Code of 1986, as amended.

E. Corporate Affiliate shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established.

F. Corporate Transaction shall mean either of the following shareholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation.

G. Corporation shall mean Check Point Software Technologies Ltd., an Israeli corporation, and any corporate successor to all or substantially all of the assets or voting shares of Check Point Software Technologies Ltd. which shall by appropriate action adopt the Plan.

H. Effective Time shall mean February 1, 1997. Any Corporate Affiliate which becomes a Participating Corporation after such Effective Time shall designate a subsequent Effective Time with respect to its employee-Participants.

A-1

I. Eligible Employee shall mean any person who is employed by Check Point Subsidiary and who is engaged, on a regularly-scheduled basis of more than twenty (20) hours per week for more than five (5) months per calendar year, in the rendition of personal services as an employee for earnings considered wages under Code Section 3401(a).

J. Fair Market Value per Ordinary Share on any relevant date shall be determined in accordance with the following provisions:

(i) If the Ordinary Shares are at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per Ordinary Share on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Ordinary Shares on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(ii) If the Ordinary Shares are at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per Ordinary Share on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Ordinary Shares, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Ordinary Shares on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

K. 1933 Act shall mean the Securities Act of 1933, as amended.

L. Ordinary Shares shall mean the Corporation’s Ordinary Shares, NIS 0.01 nominal value.

M. Participant shall mean any Eligible Employee of a Participating Corporation who is actively participating in the Plan.

N. Participating Corporation shall mean the Check Point Subsidiary and such Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan as of the Effective Time are listed in attached Schedule A.

O. Plan Administrator shall mean the committee of two (2) or more Board members appointed by the Board to administer the Plan.

P. Plan shall mean the Corporation’s Employee Stock Purchase Plan, as set forth in this document.

A-2

Q. Purchase Date shall mean the last business day of each Purchase Period.

R. Purchase Period shall mean each successive period within the offering period at the end of which there shall be purchased Ordinary Shares on behalf of each Participant.

S. Stock Exchange shall mean either the Nasdaq National Market or the New York Stock Exchange.

A-3

Exhibit 4.11

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

CHECK POINT SOFTWARE TECHNOLOGIES, LTD.,

CHECK POINT SOFTWARE TECHNOLOGIES, INC.,

SEYFERT ACQUISITION CORPORATION,

AND

SOURCEFIRE, INC.

Dated as of October 5, 2005

TABLE OF CONTENTS






ARTICLE 1. Definitions		2

Section 1.1	Certain Defined Terms	2
Section 1.2	Additional Defined Terms	10

ARTICLE 2. The Merger		12

Section 2.1	The Merger	12
Section 2.2	Effective Time	12
Section 2.3	Effect of the Merger	12
Section 2.4	Certificate of Incorporation and Bylaws of the Surviving Corporation	12
Section 2.5	Board of Directors and Officers of the Surviving Corporation	13
Section 2.6	Conversion of Securities	13
Section 2.7	Escrow	17
Section 2.8	Paying Agent; Distribution of the Transaction Consideration	18
Section 2.9	No Further Ownership Rights in Shares of Company Stock	19
Section 2.10	Lost, Stolen or Destroyed Certificates	19
Section 2.11	Dissenting Shares	19
Section 2.12	Withholding	20
Section 2.13	Employee Loans	20
Section 2.14	Additional Consideration	20

ARTICLE 3. Representations and Warranties of the Company		21

Section 3.1	Organization	21
Section 3.2	Capitalization	21
Section 3.3	Subsidiaries	22
Section 3.4	Authority; No Violation	23
Section 3.5	Financial Statements	24
Section 3.6	Contracts	25
Section 3.7	Intellectual Property	27
Section 3.8	Employee Benefit Matters	33
Section 3.9	Labor and Other Employment Matters	36
Section 3.10	Tax Matters	37
Section 3.11	Legal Proceedings	40
Section 3.12	Compliance with Applicable Law	40
Section 3.13	Environmental Matters	41
Section 3.14	Properties	41
Section 3.15	Insurance	42
Section 3.16	No Broker	42
Section 3.17	Absence of Certain Changes or Events	42
Section 3.18	Sufficiency of and Title to Assets	44
Section 3.19	Potential Conflicts of Interest	44
Section 3.20	Transactions with Affiliates	44
Section 3.21	Governmental Regulation	44
Section 3.22	No Loss of Customers	44
Section 3.23	Books and Records	44
Section 3.24	Takeover Statutes	45






ARTICLE 4. Representations and Warranties of Parent, Buyer and Merger Sub.		45

Section 4.1	Organization	45
Section 4.2	Authority; No Violation	45
Section 4.3	Consents and Approvals	46
Section 4.4	No Broker	46
Section 4.5	Available Funds	46
Section 4.6	Sufficient Shares Reserved for Option Exercise	46

ARTICLE 5. Covenants and Additional Agreements		47

Section 5.1	Conduct of Business	47
Section 5.2	Confidentiality and Announcements	50
Section 5.3	Access by Buyer	50
Section 5.4	Notification of Certain Matters	51
Section 5.5	Acquisition Proposals	51
Section 5.6	Company Stockholder Approval	53
Section 5.7	Takeover Statutes	54
Section 5.8	Further Assurances	54
Section 5.9	Employee Matters	54
Section 5.10	Statement of Closing Expenses	55
Section 5.11	Statement of Closing Consideration	55
Section 5.12	Retention Bonuses	56
Section 5.13	Indemnified Directors and Officers	56
Section 5.14	Tax Matters	57
Section 5.15	Assumed Company Options	58

ARTICLE 6. Conditions to Closing		58

Section 6.1	Conditions to Each Party's Obligations to Effect the Merger	58
Section 6.2	Additional Conditions to the Obligations of the Company to Effect the Merger	59
Section 6.3	Additional Conditions to the Obligations of Parent, Buyer and Merger Sub to Effect the Merger	60

ARTICLE 7. Termination		62

Section 7.1	Termination	62
Section 7.2	Effect of Termination	63

ARTICLE 8. Indemnification		64

Section 8.1	Survival of Representations, Warranties and Covenants	64
Section 8.2	Indemnification Obligations of Company Indemnifying Parties	64
Section 8.3	Indemnification Obligations of Buyer Indemnifying Parties	65
Section 8.4	Third-Party Claims	66
Section 8.5	Limitations on Indemnification Obligations	67






ARTICLE 9. Miscellaneous		70

Section 9.1	Entire Agreement	70
Section 9.2	Interpretation	70
Section 9.3	Severability	71
Section 9.4	Notices	71
Section 9.5	Binding Effect; Persons Benefiting; No Assignment	72
Section 9.6	Counterparts	73
Section 9.7	WAIVER OF JURY TRIAL	73
Section 9.8	Governing Law	73
Section 9.9	Consent to Jurisdiction	73
Section 9.10	Attorneys' Fees	73
Section 9.11	Joint and Several Liability	73

iii

Schedule of Exhibits






Exhibit A	Form of Retention Plan
Exhibit B	Form of Escrow Agreement
Exhibit C	Form of Opinions of Counsels to Parent, Buyer and Merger Sub
Exhibit D	Schedule of Required Closing Consents, Approvals and Notices
Exhibit E	Form of Opinions of Counsel to the Company
Exhibit F	Assignments and Releases

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made and entered into as of October 5, 2005 by and among Check Point Software Technologies, Ltd., an Israeli company (“ Parent ”), Check Point Software Technologies, Inc., a Delaware corporation and an affiliate of Parent (“ Buyer ”), Seyfert Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Buyer (“ Merger Sub ”), and Sourcefire, Inc., a Delaware corporation (the “ Company ”).

RECITALS

WHEREAS, each of the boards of directors of Parent, Buyer, Merger Sub and the Company has approved and declared advisable the merger of Merger Sub with and into the Company (the “ Merger ”) upon the terms and subject to the conditions set forth in this Agreement and in accordance with the General Corporation Law of the State of Delaware (the “ DGCL ”).

WHEREAS, each of the boards of directors of Parent, Buyer, Merger Sub and the Company has determined that the Merger is in furtherance of, and consistent with, their respective business strategies and is fair to, and in the best interest of, their respective stockholders.

WHEREAS, the board of directors of the Company has further determined that this Agreement and the Merger are advisable, has approved this Agreement and the Merger and has recommended that its stockholders adopt and approve this Agreement and approve the Merger.

WHEREAS, promptly following the execution and delivery of this Agreement by each of the parties hereto, the holders of a type and number of shares of capital stock of the Company are executing and delivering written consents sufficient to adopt and approve this Agreement and approve the Merger as required under applicable law, the Company’s certificate of incorporation and bylaws, and any applicable agreements between the Company, on the one hand, and any holders of its capital stock, on the other hand.

WHEREAS, contemporaneously herewith, and as a condition and inducement to the willingness of each of the parties hereto to enter into this Agreement, Parent and Buyer are adopting the Retention Plan attached hereto as Exhibit A (the “ Retention Plan ”) and allocating $2.5 million in cash for distribution to certain employees of the Company in accordance with the terms and conditions set forth therein.

NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE 1.
Definitions

Section 1.1 Certain Defined Terms . As used in this Agreement, the following terms shall have the following meanings:

“ Affiliate ” shall mean any individual, partnership, corporation, entity or other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Person specified.

“ Aggregate Residual Amount ” shall mean an amount equal to (x) the Transaction Consideration, less (y) the sum of (A) the Aggregate Series A Preference, (B) the Aggregate Series B Preference and (C) the Aggregate Series C Preference.

“ Aggregate Series A Preference ” shall mean the product obtained by multiplying (x) the Series A Liquidation Preference and (y) the aggregate number of shares of Series A Preferred Stock (including any rights convertible into or exercisable or exchangeable for, shares of Series A Preferred Stock) issued and outstanding immediately prior to the Effective Time.

“ Aggregate Series B Preference ” shall mean the product obtained by multiplying (x) the Series B Liquidation Preference and (y) the aggregate number of shares of Series B Preferred Stock (including any rights convertible into or exercisable or exchangeable for, shares of Series B Preferred Stock) issued and outstanding immediately prior to the Effective Time.

“ Aggregate Series C Preference ” shall mean the product obtained by multiplying (x) the Series C Liquidation Preference and (y) the aggregate number of shares of Series C Preferred Stock (including any rights convertible into or exercisable or exchangeable for, shares of Series C Preferred Stock) issued and outstanding immediately prior to the Effective Time.

“ Applicable Law ” shall mean, with respect to any Person, any Law applicable to such Person or its properties or assets.

“ Assumed Company Option Exchange Ratio ” shall mean that number of Parent Ordinary Shares derived by dividing (x) the Per Share Residual Amount by (y) the Closing Measurement Price.

“ Benefit Arrangement ” shall mean any employment, consulting, severance or other similar contract, arrangement or policy (written or oral) and each plan, arrangement, program, agreement or commitment (written or oral) providing for insurance coverage (including, without limitation, any self-insured arrangements), workers’ compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health or accident benefits (including, without limitation, any “voluntary employees’ beneficiary association” as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation rights, stock purchases or other forms of equity or incentive compensation or post-retirement insurance, compensation or benefits which (a) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (b) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or any ERISA Affiliate or under which the Company or any ERISA Affiliate has or may incur any liability, and (c) covers any current or former employee, director or consultant of the Company or any ERISA Affiliate (with respect to their relationship with such any entity).

“ Business Day ” shall mean any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in the United States or Israel.

“ Cause ” shall mean (i) an indictment of a felony or a crime involving moral turpitude; (ii) participation in an act or acts of dishonesty in an individual’s capacity as a service provider to Buyer or the Surviving Corporation; (iii) intentional, or grossly negligent action or inaction resulting in, damage to any property of the Buyer or the Surviving Corporation; or (iv) a material and continuing breach of an individual’s obligations to the Buyer or the Surviving Corporation set forth in any written agreement between such individual and the Buyer or the Surviving Corporation or any written policy of the Buyer or the Surviving Corporation applicable to similarly situated employees (including any applicable employee handbook, code of conduct and/or insider trading restrictions) after written notice from the employer specifying the nature of the breach and demanding that such breach be remedied (unless such breach by its nature cannot be cured, in which case notice and an opportunity to cure shall not be required).

“ CERCLA ” shall mean the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.

“ Closing Measurement Price ” shall mean the average of the closing prices for Parent Ordinary Shares on the NASDAQ National Market as reported in The Wall Street Journal for the five (5) consecutive Trading Days ending on the second (2 ^nd ) Trading Day prior to the Closing Date.

“ COBRA ” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

“ Code ” shall mean the Internal Revenue Code of 1986, as amended.

“ Common Stock ” shall mean the common stock, $0.001 par value per share, of the Company.

“ Company ” shall have the meaning set forth in the Preamble to this Agreement.

“ Company Business ” shall mean the business and operations of the Company or any of its Subsidiaries in the manner currently being conducted by the Company or any of its Subsidiaries.

“ Company Business Employee ” shall mean any employee or director of the Company or any of its Subsidiaries.

“ Company Business Independent Contractor ” shall mean any natural person who is an independent contractor of the Company or any of its Subsidiaries.

“ Company Certificate of Incorporation ” shall mean the Company’s certificate of incorporation, as in effect immediately prior to the Effective Time.

“ Company Material Adverse Effect ” shall mean a material adverse effect on the business, assets, liabilities, financial condition, results of operations or prospects of the Company and its Subsidiaries, taken as a whole, or on the ability of the Company to consummate the Merger pursuant to the terms hereof or comply with its obligations hereunder; provided, however , that in no event shall any changes, events, occurrences, violations, inaccuracies, circumstances, developments or effects that are caused by or result from the following, in and of itself, be deemed to have or constitute a Company Material Adverse Effect: (i) conditions affecting the industries in which the Company or its Subsidiaries participates, provided that such changes, events, occurrences, violations, inaccuracies, circumstances, developments or effects do not disproportionately affect the Company or its Subsidiaries in any material respect, (ii) conditions affecting the U.S. economy as a whole or foreign economies as a whole in any countries where the Company or its Subsidiaries have material operations, provided that such changes, events, occurrences, violations, inaccuracies, circumstances, developments or effects do not disproportionately affect the Company or its Subsidiaries in any material respect, (iii) the announcement or pendency of this Agreement or the transactions contemplated hereby, (iv) any action taken (or failure to take any action required by this Agreement) by Parent, Buyer or Merger Sub, or (v) acts of war or terrorism, escalation of hostilities, natural disasters, acts of God or similar calamity or crisis.

“ Company Options ” shall mean any and all options issued by the Company to purchase shares of Common Stock under any Company stock option plan or agreement.

“ Company Stock ” shall mean the Preferred Stock and the Common Stock.

“ Company Warrants ” shall mean any and all warrants issued by the Company to purchase any shares of Series A Preferred Stock.

“ Contracts ” shall mean all written or oral contracts, agreements, evidences of indebtedness, guarantees, leases and executory commitments to which the Company or any of its Subsidiaries is a party or by which any of the Company’s or any of its Subsidiaries’ properties or assets are bound.

“ Court Order ” shall mean any judgment, decision, consent decree, injunction, ruling or order of any federal, state or local court or Governmental Authority that is binding on any Person or its property under any Applicable Law relating to such Person or its property.

“ Employee Plans ” shall mean all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.

“ Encumbrance ” shall mean any lien, pledge, mortgage, security interest, claim, charge, easement, limitation, commitment, encroachment, restriction (other than a restriction on transferability imposed by federal or state securities Laws) or other encumbrance of any kind or nature whatsoever (whether absolute or contingent).

“ Environmental Laws ” shall mean any and all federal, state, local and foreign statutes, laws, regulations, ordinances or rules in existence relating to the effect of the environment or Substances on human health; or emissions, discharges or releases of Substances into the environment, including, without limitation, ambient air, surface water, groundwater or land; or otherwise relating to the handling of Substances or the investigation, clean-up or other remediation or analysis thereof.

“ Environmental Permit ” shall mean any permit, approval, identification number, license and other authorization required under any applicable Environmental Law.

“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“ ERISA Affiliate ” shall mean any entity which is (or at any relevant time was) a member of a “controlled group of corporations” with, under “common control” with, or a member of an “affiliated service group” with, or otherwise required to be aggregated with, the Company as set forth in Section 414(b), (c), (m) or (o) of the Code.

“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder.

“ Exon-Florio Act ” shall mean the Exon-Florio Act of 1988, as amended.

“ Expiration Date ” shall mean the date that is fifteen (15) months after the Closing Date.

“ Fully Diluted Share Number ” shall mean the fully diluted number of shares of Common Stock issued and outstanding immediately prior to the Effective Time after giving full effect to the exercise, conversion or exchange, directly or indirectly, into shares of Common Stock of all then outstanding options, warrants, Preferred Stock and other rights to acquire Common Stock, whether or not then vested and exercisable.

“ GAAP ” shall mean generally accepted accounting principles, as applied in the United States.

“ Goldman Sachs Fee ” shall mean all fees and expenses paid or payable by the Company and its Subsidiaries to Goldman, Sachs & Co. and its Affiliates in connection with any of the transactions contemplated in this Agreement or the Escrow Agreement, including any amounts payable pursuant to that certain engagement letter by and between the Company and Goldman, Sachs & Co. dated August 7, 2005.

“ Governmental Authority ” shall mean any United States or foreign government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including the SEC or any other United States or foreign government authority, agency, department, board, commission or instrumentality of the United States, any state of the United States or any political subdivision thereof or any foreign jurisdiction, and any court, tribunal or arbitrator(s) of competent jurisdiction, and any United States or foreign governmental or non-governmental self-regulatory organization, agency or authority (including the NYSE and the NASD).

“ HSR Act ” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“ Intellectual Property ” shall mean all United States and foreign: (i) trademarks, service marks, trade names and any applications (including intent to use applications) to register, or registrations for, any of the foregoing (collectively, “ Trademarks ”); (ii) patents and patent applications (including any continuations, continuations-in-part, divisionals, reissues, renewals and applications, including provisional applications, for any of the foregoing ) (collectively “ Patents ”); (iii) copyrights, works of authorship, and mask works and any registrations or applications therefor (collectively “ Copyrights ”); (iv) Trade Secrets (as defined in Section 3.7.5); and (v) internet domain names and universal resource locators (URLs) and the rights associated or arising out of either of the foregoing (collectively, “ Domain Names ”).

“ Knowledge ” of the Company shall mean (i) the actual knowledge of Wayne Jackson, Todd Headley, Tom McDonough and Martin Roesch, and (ii) the knowledge that any of the persons listed in the foregoing clause (i) would be reasonably expected to have in the ordinary conduct of their duties and responsibilities assuming that such persons had conducted their respective duties and responsibilities (including, without limitation, in connection with the negotiation and preparation of this Agreement and the Company Disclosure Schedule) in the manner that a reasonable person would conduct such duties and responsibilities under similar circumstances.

“ Law ” shall mean any domestic or foreign federal, state or local statute, law (whether statutory or common law), ordinance, rule, administrative interpretation, regulation, order, writ, injunction, directive, judgment, decree, or other legal requirement or binding arbitration award or finding (including those of the NASD, NYSE or any other self-regulatory organization).

“ Multiemployer Plan ” shall mean any “multiemployer plan,” as defined in Section 4001(a)(3) or 3(37) of ERISA, which (a) the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (b) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with any such entity).

“ NIS ” shall mean New Israeli Shekels.

“ Non-Disclosure Agreement ” shall mean that certain letter agreement dated as of August 25, 2005, by and between Parent and the Company, as the same may be amended from time to time by the parties.

“ Parent Material Adverse Effect ” shall mean a material adverse effect on the ability of Parent, Buyer or Merger Sub to consummate the Merger pursuant to the terms hereof or comply with its obligations hereunder; provided, however , that in no event shall any changes, events, occurrences, violations, inaccuracies, circumstances, developments or effects that are caused by or result from the following, in and of itself, be deemed to have or constitute a Parent Material Adverse Effect: (i) conditions affecting the industries in which Parent or its Subsidiaries participates, provided that such changes, events, occurrences, violations, inaccuracies, circumstances, developments or effects do not disproportionately affect Parent or its Subsidiaries in any material respect, (ii) conditions affecting the U.S. economy as a whole, or foreign economies as a whole in any countries where Parent or its Subsidiaries have material operations, provided that such changes, events, occurrences, violations, inaccuracies, circumstances, developments or effects do not disproportionately affect the Parent or its Subsidiaries in any material respect, (iii) the announcement or pendency of this Agreement or the transactions contemplated hereby, (iv) any action taken (or failure to take any action required by this Agreement) by the Company, or (v) acts of war or terrorism, escalation of hostilities, natural disasters, acts of God or similar calamity or crisis.

“ Parent Ordinary Shares ” shall mean the ordinary shares of Parent, NIS 0.01 nominal value.

“ Pension Plan ” shall mean any “employee pension benefit plan” as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) which (a) the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five (5) years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability (including, without limitation, any contingent liability) and (b) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with any such entity).

“ Per Share Residual Amount ” shall mean the amount derived by dividing (x) the Aggregate Residual Amount by (y) the Fully Diluted Share Number.

“ Permitted Encumbrances ” shall mean any (i) mechanics liens, materialmen’s liens and similar Encumbrances arising or incurred in the ordinary course of business with respect to any amounts not yet due and payable or which are being contested in good faith through appropriate proceedings and which are not, individually or in the aggregate, material to the Company or any of its Subsidiaries and do not interfere in any material respect with the use of any of the Company’s assets, (ii) Encumbrances for Taxes or other governmental charges not yet due and payable, (iii) Encumbrances that are listed on the Company Disclosure Schedule securing rental payments under capital lease agreements to which the Company or its Subsidiaries are a party, (iv) Encumbrances and restrictions on the underlying fee interest in any leased real property (including easements, covenants, rights of way and similar restrictions of record) that do not materially interfere with the present uses of such real property, (v) Encumbrances securing the Company’s obligations under its credit facility with Silicon Valley Bank, (vi) purchase money security interests arising in the ordinary course of business, and (vii) Encumbrances specifically described on the Company Disclosure Schedule.

“ Person ” shall mean any individual, corporation, company, partnership (limited or general), limited liability company, joint venture, association, trust or other business entity.

“ Personal Element ” shall mean a natural person’s full name (or last name if associated with an address), telephone number, e-mail address, Unique Identifying Number, photograph, or any other information, alone or in combination, that allows the identification of a natural person.

“ Preferred Stock ” shall mean the preferred stock, $0.001 par value per share, of the Company.

“ Pro Rata Share ” shall mean, with respect to each Stockholder, the percentage of the aggregate Escrow Cash withheld from each Stockholder pursuant to Section 2.8.3.

“ Recent Accelerated Option Value ” shall mean the amount of cash consideration payable pursuant to Section 2.6 in respect of the aggregate number of shares of Company Stock issuable upon the exercise in full of all Company Option(s) (if any) granted by the Company after August 15, 2005 that contain any vesting acceleration provisions triggered in whole or in part by the Merger or any other transactions contemplated in this Agreement (other than any such Company Options granted by the Company with Buyer’s prior consent), less the aggregate exercise price thereof.

“ SEC ” shall mean the United States Securities and Exchange Commission, and any successor thereto.

“ Securities Act ” shall mean the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder.

“ Series A Conversion Number ” shall mean a fraction, the numerator of which is $3.05, and the denominator of which is $1.0167.

“ Series A Liquidation Preference ” shall mean the amount to which each share of Series A Preferred Stock is entitled upon consummation of the Merger pursuant to the first sentence of Section 2(a) of Article V(C) of the Company Certificate of Incorporation.

“ Series A Preferred Stock ” shall mean the Series A Convertible Preferred Stock, $0.001 par value per share, of the Company.

“ Series B Liquidation Preference ” shall mean the amount to which each share of Series B Preferred Stock is entitled upon consummation of the Merger pursuant to the first sentence of Section 2(a) of Article V(C) of the Company Certificate of Incorporation.

“ Series B Preferred Stock ” shall mean the Series B Convertible Preferred Stock, $0.001 par value per share, of the Company.

“ Series C Liquidation Preference ” shall mean the amount to which each share of Series C Preferred Stock is entitled upon consummation of the Merger pursuant to the first sentence of Section 2(a) of Article V(C) of the Company Certificate of Incorporation.

“ Series C Preferred Stock ” shall mean the Series C Convertible Preferred Stock, $0.001 par value per share, of the Company.

“ Software ” shall mean individually each, and collectively all, of the computer programs, including interfaces and any embedded software programs or applications, owned or licensed by the Company or otherwise included as an asset of the Company under this Agreement, including as to each program, the processes and routines used in the processing of data, the object code, source code (as to third-party source code, when rights to the source code may be obtained), tapes, disks, and all improvements, modifications, enhancements, versions and releases relating thereto.

“ Stockholders ” shall mean the Holders of shares of Company Stock as of immediately prior to the Effective Time.

“ Subsidiary ” of a Person shall mean any other Person more than 50% of the voting stock (or of any other form of other voting or controlling equity interest in the case of a Person that is not a corporation) of which is beneficially owned by the Person directly or indirectly through one or more other Persons.

“ Substances ” shall mean any “hazardous substance,” “hazardous waste,” “pollutant,” “contaminant” or “toxic substance,” as defined by CERCLA, the Resources Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. , the Clean Water Act, 33 U.S.C. Section 1251 et seq. , the Clean Air Act, 42 U.S.C. Section 7401 et seq. , or the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq. , and regulations promulgated thereunder, or any analogous state and local Laws and regulations; petroleum, petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials or polychlorinated biphenyls.

“ Takeover Statute ” shall mean any “fair price,” “moratorium,” “control share acquisition” or other similar anti-takeover statute or regulation enacted under state or federal Laws in the United States including Section 203 of the DGCL.

“ Tax ” or, collectively, “ Taxes ” shall mean (i) any and all U.S. federal, state, local and non-U.S. taxes, and similar assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts, (ii) any liability for the payment of any amounts of the type described in clause (i) of this definition as a result of being a member of an affiliated, consolidated, combined or unitary group for any period, and (iii) any liability for the payment of any amounts of the type described in clauses (i) or (ii) of this definition as a result of any express or implied obligation to indemnify any other person or as a result of any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor or transferor entity.

“ Tax Return ” shall mean any return, declaration, report, claim for refund, or information return or statement relating to Taxes required to be filed with a Taxing Authority, including any schedule or attachment thereto, and including any amendment thereof.

“ Taxing Authority ” shall mean any government or any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or other imposition of Taxes.

“ Trading Day ” shall mean any day on which the NASDAQ National Market is open and available for at least five (5) hours for the trading of securities.

“ Transaction Consideration ” shall mean $222.5 million in cash, less the sum of (x) the Goldman Sachs Fee, (y) Excess Company Transaction Expenses (if any), and (z) the Recent Accelerated Option Value (if any).

“ Treasury Regulations ” shall mean the regulations promulgated under the Code.

“ Unique Identifying Number ” shall mean an identifier uniquely associated with a Person such as a social security number, driver’s license number, passport number or customer number, but excluding an identifier which is randomly or otherwise assigned so that it cannot reasonably be used to identify the person.

“ User Data ” shall mean, to the extent collected or acquired by or on behalf of the Company: (w) all data related to impression and click-through activity of users, including user identification and associated activities at a web site as well as pings and activity related to closed loop reporting and all other data associated with a user’s behavior on the Internet, including without limitation all e-mail lists or other user information acquired by the Company directly or indirectly from a third party that collected such information, (x) all data that contains a Personal Element, (y) known, assumed or inferred information or attributes about a user or identifier, and (z) all derivatives and aggregations of (w), (x) and (y), including user profiles.

“ Warrantholders ” shall mean the Holders of Company Warrants.

“ Welfare Plan ” shall mean any “employee welfare benefit plan” as defined in Section 3(1) of ERISA, which (a) the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (b) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with any such entity).

Section 1.2 Additional Defined Terms . Each of the following terms is defined in the Section set forth opposite such term:

TERM	SECTION




280G Payments	Section 5.6.2
401(k) Plan	Section 5.9.2
Accounts Receivable	Section 3.5.2
Acquisition Proposal	Section 5.5.1
Aggregate Outstanding Claims	Section 2.7.2.1
Agreement	Preamble
Audited Company Financial Statements	Section 3.5.1
Benefit Plan Enrollment Date	Section 5.9.1
Buyer	Preamble
Buyer Benefit Plan	Section 5.9.1
Buyer Indemnified Parties	Section 8.2.1
Certificate of Merger	Section 2.2
Certificates	Section 2.8.2
Closing	Section 2.1.2
Closing Date	Section 2.1.2
Company Assets	Section 3.18
Company Disclosure Schedule	Article 3
Company Dissenting Shares	Section 2.11
Company Inbound License Agreement	Section 3.7.6.1
Company Indemnifying Parties	Section 8.2.1
Company Indemnified Parties	Section 8.3.1
Company Insurance Policies	Section 3.15
Company Outbound License Agreement	Section 3.7.6.2
Company Owned Copyrights	Section 3.7.4.1
Company Owned Intellectual Property	Section 3.7
Company Owned Patents	Section 3.7.3.3
Company Software	Section 3.7.12
Company Transaction Expenses	Section 5.10
Content	Section 3.7.7
Copyrights	Section 1.1 (See Intellectual Property)
Deductible Amount	Section 8.5.2
Development	Section 5.4
Disqualified Individuals	Section 5.6.2
D&O Policy	Section 5.13.2
DGCL	Recitals
Domain Names	Section 1.1 (See Intellectual Property)
Effective Time	Section 2.2
Election Notice	Section 2.6.7.2
Employment Agreements	Recitals
Escrow Account	Section 2.7.1.1

TERM	SECTION

Escrow Agent	Section 2.7.1.1
Escrow Agreement	Section 2.7.1.1
Escrow Cash	Section 2.7.1.1
Excess Company Transaction Expenses	Section 5.10
Holder	Section 2.6
Indemnification Notice	Section 8.3.3
Indemnified Officers and Directors	Section 5.13.3
Investment Company Act	Section 3.21
Losses	Section 8.2.1
Major Customers	Section 3.22
Maximum Annual Premium	Section 5.13.2
Merger	Recitals
Merger Sub	Preamble
Outside Date	Section 7.1.3
Parent	Preamble
Patents	Section 1.1 (See Intellectual Property)
Paying Agent	Section 2.8.1
Permits	Section 3.12.1
Privacy Policies	Section 3.7.15.1
Proceedings	Section 3.11
Resolved Claim Notice	Section 8.3.2
Restricted Shares	Section 2.6.8
Retained Company Employee	Section 5.9.1
Retained Escrow Cash	Section 2.7.2.1
Retention Plan	Recitals
Scheduled Contracts	Section 3.6
Statement of Closing Consideration	Section 5.11
Statement of Closing Expenses	Section 5.10
Stockholder Consent	Section 3.4.3
Stockholder Representative	Section 8.5.7.1
Surviving Corporation	Section 2.1.1
Tax Sharing Agreement	Section 3.10.6
Termination Fee	Section 7.2.2
Third-Party Claim	Section 8.4.1
Threshold Amount	Section 8.5.1
Trademarks	Section 1.1 (See Intellectual Property)
Trade Secrets	Section 3.7.5.1
Transmittal Letter	Section 2.8.2
Unaudited Company Balance Sheet	Section 3.5.1
Unaudited Company Financial Statements	Section 3.5.1
Unvested Company Option	Section 2.6.7.1
Vested Company Options	Section 2.6.7.2

ARTICLE 2.
The Merger

Section 2.1 The Merger .

Section 2.1.1 Merger of the Company into Merger Sub . Upon the terms and subject to satisfaction or waiver of the conditions set forth in this Agreement, and in accordance with the DGCL, at the Effective Time, Merger Sub shall be merged with and into Company. As a result of the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation of the Merger (the “ Surviving Corporation ”).

Section 2.1.2 Closing . Unless this Agreement shall have been terminated pursuant to Section 7.1 of this Agreement, and subject to the satisfaction (or, to the extent permitted by this Agreement, the waiver) of each of the conditions set forth in Article 6 of this Agreement, the consummation of the transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Wilson Sonsini Goodrich Rosati, Professional Corporation, One Market, Spear Tower, Suite 3300, San Francisco, California 94105, at 10:00 a.m., Pacific time, as soon as practicable following the satisfaction (or, to the extent permitted by this Agreement, the waiver) of each of the conditions set forth in Article 6 of this Agreement (and in any event, within two (2) Business Days thereafter), or at such other date, time and place as Buyer and the Company shall mutually agree in writing (the exact date on which the Closing takes place being referred to as the “ Closing Date ”).

Section 2.2 Effective Time . Subject to the terms and conditions set forth in this Agreement, on the Closing Date and at the Closing, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger (the “ Certificate of Merger ”) with the Secretary of State of the State of Delaware, in such mutually agreeable form as required by, and executed in accordance with the relevant provisions of, the DGCL (the date and time of such filing, or if another date and time is specified in such filing, such specified date and time being referred to as the “ Effective Time ”).

Section 2.3 Effect of the Merger . At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the DGCL. Without limiting the generality of the foregoing, at the Effective Time, except as otherwise provided herein, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

Section 2.4 Certificate of Incorporation and Bylaws of the Surviving Corporation .

Section 2.4.1 At the Effective Time, the certificate of incorporation of the Company as in effect immediately prior to the Effective Time shall be amended to read in its entirety to reflect the terms and provisions of the certificate of incorporation of Merger Sub as in effect immediately prior to the Effective Time and, as so amended, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended in accordance with the provisions thereof and Applicable Law.

Section 2.4.2 At the Effective Time, the bylaws of Merger Sub as in effect immediately prior to the Effective Time shall become the bylaws of the Surviving Corporation until thereafter amended in accordance with the provisions thereof, the certificate of incorporation of the Surviving Corporation and Applicable Law.

Section 2.5 Board of Directors and Officers of the Surviving Corporation .

Section 2.5.1 The board of directors of Merger Sub immediately prior to the Effective Time shall be the board of directors of the Surviving Corporation at the Effective Time, each to hold office in accordance with the certificate of incorporation of the Surviving Corporation.

Section 2.5.2 The officers of Merger Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation at the Effective Time, each to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation.

Section 2.6 Conversion of Securities . At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Buyer, Merger Sub, the Company or the holders of any of the following securities (each, a “ Holder ”):

Section 2.6.1 Shares of Common Stock of Merger Sub . Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall automatically be converted into and thereafter represent one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation such that immediately following the Effective Time, Buyer will be the sole and exclusive owner of all capital stock of the Surviving Corporation.

Section 2.6.2 Shares of Series A Preferred Stock . Subject to the terms of this Agreement (including Section 2.7), each share of Series A Preferred Stock outstanding immediately prior to the Effective Time (other than any shares of Series A Preferred Stock held in the treasury of the Company immediately prior to the Effective Time, which shares shall be cancelled and extinguished without any payment being made in respect thereof, or any Company Dissenting Shares) shall be converted into the right to receive an amount in cash (without interest) equal to the sum of (x) the Series A Liquidation Preference and (y) the product obtained by multiplying (i) the Per Share Residual Amount by (ii) the Series A Conversion Number (the “ Per Share Series A Consideration ”). All shares of Series A Preferred Stock converted pursuant to this Section 2.6.2 shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist after the Effective Time.

Section 2.6.3 Shares of Series B Preferred Stock . Subject to the terms of this Agreement (including Section 2.7), each share of Series B Preferred Stock outstanding immediately prior to the Effective Time (other than any shares of Series B Preferred Stock held in the treasury of the Company immediately prior to the Effective Time, which shares shall be cancelled and extinguished without any payment being made in respect thereof, or any Company Dissenting Shares) shall be converted into the right to receive an amount in cash (without interest) equal to the sum of (x) the Series B Liquidation Preference and (y) the Per Share Residual Amount. All shares of Series B Preferred Stock converted pursuant to this Section 2.6.3 shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist after the Effective Time.

Section 2.6.4 Shares of Series C Preferred Stock . Subject to the terms of this Agreement (including Section 2.7), each share of Series C Preferred Stock outstanding immediately prior to the Effective Time (other than any shares of Series C Preferred Stock held in the treasury of the Company immediately prior to the Effective Time, which shares shall be cancelled and extinguished without any payment being made in respect thereof, or any Company Dissenting Shares) shall be converted into the right to receive an amount in cash (without interest) equal to the sum of (x) the Series C Liquidation Preference and (y) the Per Share Residual Amount. All shares of Series C Preferred Stock converted pursuant to this Section 2.6.4 shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist after the Effective Time.

Section 2.6.5 Shares of Common Stock . Subject to the terms of this Agreement (including Section 2.7), each share of Common Stock outstanding immediately prior to the Effective Time (other than any shares of Common Stock held in the treasury of the Company immediately prior to the Effective Time, which shares shall be cancelled and extinguished without any payment being made in respect thereof, or any Company Dissenting Shares) shall be converted into the right to receive an amount in cash (without interest) equal to the Per Share Residual Amount. All shares of Common Stock converted pursuant to this Section 2.6.5 shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist after the Effective Time.

Section 2.6.6 Company Warrants .

Section 2.6.6.1 None of Parent, Buyer or Merger Sub shall assume any Company Warrants in connection with the Merger or any other transaction contemplated by this Agreement.

Section 2.6.6.2 Subject to the terms of this Agreement (including Section 2.7), at the Effective Time, each Company Warrant that is issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without the need for any further action on the part of the Holder thereof (except as expressly provided herein), be converted into and represent the right to receive an amount of cash, without interest, equal to the product obtained by multiplying (x) the number of shares of Series A Preferred Stock issuable upon the exercise in full of such Company Warrant by (y) (A) Per Share Series A Consideration less (B) the exercise price per share attributable to such Company Warrant. The amount of cash each Warrantholder is entitled to receive for the Company Warrants held by such Warrantholder shall be rounded to the nearest cent and computed after aggregating cash amounts for all Company Warrants held by such Warrantholder. As soon as practicable (and in no event more than five (5) calendar days) following the Closing, Parent or Buyer shall pay to each Holder of a Company Warrant the amounts required to be paid to any such Holder in accordance with this Section 2.6.6.2.

Section 2.6.6.3 The Company shall use all commercially reasonable efforts to satisfy all notice or other obligations under any Contracts evidencing or relating to any Company Warrants in order to effectuate the intent of this Section 2.6.6.

Section 2.6.7 Company Options .

Section 2.6.7.1 Unvested Options . The Company and Buyer shall use all commercially reasonable efforts to provide that, at the Effective Time, the Company’s 2002 Stock Incentive Plan and each Company Option that is outstanding, unvested, unexercised and unexpired immediately prior to the Effective Time (each, an “ Unvested Company Option ”) shall be assumed by Buyer. Each Unvested Company Option so assumed by Buyer shall continue to have, and be subject to, the same terms and conditions as set forth in any stock option plan and/or Contract pursuant to which such Unvested Company Option was granted and issued, in each case, as in effect immediately prior to the Effective Time, except that (i) each such Unvested Company Option shall become exercisable in accordance with its terms for that number of Parent Ordinary Shares equal to the product obtained by multiplying (x) the number of shares of Common Stock that were issuable upon the exercise in full of such Unvested Company Option immediately prior to the Effective Time by (y) the Assumed Company Option Exchange Ratio, rounded down to the nearest whole number of Parent Ordinary Shares, and (ii) the per share exercise price for the Parent Ordinary Shares issuable upon exercise of each such Unvested Company Option assumed shall be equal to the quotient obtained by dividing (x) the exercise price per share of Common Stock at which such Company Option was exercisable immediately prior to the Effective Time by (y) the Assumed Company Option Exchange Ratio, rounded up to the nearest whole cent. Following the assumption of such Unvested Company Options, all references to the Company in any such Unvested Company Options and the Company’s 2002 Stock Incentive Plan shall be deemed to refer to Buyer. The conversion of any such assumed Unvested Company Options which are “incentive stock options” within the meaning of Section 422 of the Code into options to purchase Parent Ordinary Shares shall be made so as not to constitute a “modification” of such Company Options within the meaning of Section 424 of the Code; provided, however , that none of Parent, Buyer or Merger Sub make any representations, warranties or other guarantees to the Holders of any assumed Unvested Company Options that any such assumed Unvested Company Options will continue to qualify as “incentive stock options” within the meaning of Section 422 of the Code following the assumption of such Unvested Company Options in accordance with the terms hereof.

Section 2.6.7.2 Vested Options . At the Effective Time, subject to the terms of this Agreement (including Section 2.7), each Company Option that is outstanding, vested, exercisable and unexpired immediately prior to the Effective Time (after giving full effect to any acceleration of vesting triggered solely by the consummation of the transactions contemplated by this Agreement (including, without limitation, the Merger) (the “ Vested Company Options ”) shall, by virtue of the Merger and without any action on the part of the Holder of any such Vested Company Options, be cancelled and converted into and represent the right to receive an amount of cash, without interest, equal to the product obtained by multiplying (x) the number of shares of Common Stock subject to a Vested Company Option by (y) (A) the Per Share Residual Amount, less (B) the exercise price per share attributable to such Vested Company Option, unless on or before the date that is five (5) days prior to the Closing Date (as determined by Buyer and the Company in good faith) the Holder of any such Vested Company Option delivers to Buyer and the Company a written request, in form and substance reasonably acceptable to Buyer and the Company (an “ Election Notice ”), that such Vested Company Option be assumed by Buyer. In the event that Buyer and the Company shall receive an Election Notice with respect to any Vested Company Option, (i) such Vested Company Option shall be assumed by Buyer in the same manner and under the same terms and conditions set forth in Section 2.6.7.1 hereof with respect to Unvested Company Options and (ii) Buyer and the Company shall use all commercially reasonable efforts to provide for such assumption (including, without limitation, by making any necessary amendments to the 2002 Stock Incentive Plan and obtaining any necessary consents from the Holders of such Vested Company Options). The amount of cash each Holder of Vested Company Options is entitled to receive for the Vested Company Options held by such holder shall be rounded down to the nearest cent and computed after aggregating cash amounts for all Vested Company Options held by such Holder. Any amount paid pursuant to this Section 2.6.7.2 in respect of Vested Company Options shall be subject to any applicable Taxes required to be withheld with respect to such payment. At least two weeks prior to the anticipated Closing Date, the Company shall cause a form of Election Notice to be provided to each Holder of a Vested Company Option. Buyer shall use commercially reasonable efforts to assist the Company in respect of such delivery and shall provide to the Company for inclusion in such Election Notice any necessary information concerning Parent, Buyer, the Parent Ordinary Shares and such other information as may be necessary or desirable in connection therewith. As soon as practicable (and in no event more than five (5) calendar days) following the Closing, Parent or Buyer shall pay to each Holder of Vested Company Options the amounts (if any) required to be paid to any such Holder in accordance with this Section 2.6.7.2.

Section 2.6.8 Restrictions on Shares of Company Stock . If any shares of Company Stock outstanding immediately prior to the Effective Time are unvested or are subject to a repurchase option, substantial risk of forfeiture or other similar condition (in each case giving effect to any acceleration of vesting or lapse of such option, risk or condition due to the consummation of the Merger and the transactions contemplated by this Agreement) under any applicable restricted stock purchase agreement or other similar agreement with the Company (“Restricted Shares ”), then the portion of the Transaction Consideration issued in exchange for such Restricted Shares will also be unvested and subject to the same repurchase option, substantial risk of forfeiture or other similar condition. The Company shall use commercially reasonable efforts to ensure that, from and after the Effective Time, Buyer is entitled to exercise any such repurchase option or other right set forth in any such restricted stock purchase agreement or other agreement. Subject to the last sentence of this Section 2.6.8, after the Effective Time, Parent or Buyer shall pay the Transaction Consideration to which such Restricted Shares are entitled in accordance with the vesting schedule applicable to the Restricted Shares, subject to applicable withholdings for Taxes. Notwithstanding the foregoing, the amount of cash contributed to the Escrow Account on behalf of any Stockholder holding Restricted Shares pursuant to Section 2.7 shall be contributed from that portion that is vested or otherwise unrestricted and free from a repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with the Company. To the extent that the vested or unrestricted cash payable to any Stockholder pursuant to this Agreement is less than the amount of Escrow Cash to be contributed to the Escrow Account on behalf of such Stockholder pursuant to this Agreement, the restricted cash amounts contributed to the Escrow Account on behalf of such Stockholder shall vest or otherwise become free from a repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with the Company in priority to other cash amounts otherwise receivable by such Stockholder pursuant to this Agreement and no payment shall be made to such Stockholder unless and until all of the cash amounts contributed to the Escrow Account on behalf of such Stockholder has vested and is otherwise free from a repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with the Company.

Section 2.6.9 Proper Allocation; Maximum Transaction. Consideration . The allocation and distribution of Transaction Consideration to the Holders of the issued and outstanding shares of Company Stock described in this Article 2 is intended to reflect the allocation of Transaction Consideration contemplated by the terms and conditions of the Company Certificate of Incorporation (including, without limitation, Subsections 2(a) and 2(b) of Article V(C) thereof). Notwithstanding the foregoing or anything to the contrary set forth in this Agreement, under no circumstances will the sum of the following exceed the Transaction Consideration: (x) the aggregate amount of all cash consideration payable to Holders of Company Stock, Company Options and Company Warrants issued and outstanding immediately prior to the Effective Time pursuant to this Agreement, (y) the value of all Company Options assumed pursuant hereto (calculated based on the difference derived from subtracting the aggregate exercise prices of the Company Options from the aggregate Per Share Residual Amount that would have been payable on such underlying shares of Company Common Stock if such shares had been outstanding immediately prior to the Effective Time), and (z) the aggregate exercise prices of all Company Options and Company Warrants assumed by Buyer or cancelled pursuant hereto. In the event that the parties hereto determine that (i) the allocation and distribution of Transaction Consideration to the Holders of issued and outstanding Company Stock described in this Article 2 is inconsistent with the allocation of Transaction Consideration contemplated by the Company Certificate of Incorporation in any respect, or (ii) the sum of the amounts referenced above in clauses (x), (y) and (z) exceed the Transaction Consideration, then in any such case the parties shall work together in good faith to amend the terms of this Agreement to appropriately reflect the parties’ intentions.

Section 2.7 Escrow.

Section 2.7.1 Escrow Cash .

Section 2.7.1.1 To provide funds for the satisfaction of any claims for indemnification made by Buyer pursuant to Article 8 of this Agreement, Parent or Buyer shall deliver an amount in cash equal to the product obtained by multiplying (x) the aggregate cash amounts payable pursuant to Section 2.6 to the Stockholders, by (y) 0.10 (the “ Escrow Cash ”) to an escrow account (the “ Escrow Account ”) to be established with a third party escrow agent reasonably satisfactory to Parent, Buyer and the Company (the “ Escrow Agent ”), to be held by the Escrow Agent pursuant to the terms of an escrow agreement substantially in the form attached hereto as Exhibit B (the “Escrow Agreement ”).

Section 2.7.1.2 During the period in which the Escrow Cash is retained in the Escrow Account, the Escrow Cash shall be held for the benefit of the Stockholders, but Buyer shall be treated as the owner of the Escrow Cash for Tax purposes until released to such Stockholders. All interest or other income earned from the investment of Escrow Cash shall be retained in the Escrow Account as additional Escrow Cash.

Section 2.7.2 Release of Escrow Cash .

Section 2.7.2.1 As soon as practicable (and in no event more than five (5) calendar days) following the Expiration Date, the Escrow Agent shall promptly distribute to the former Stockholders, at their respective addresses and in proportion to their respective Pro Rata Shares set forth on the Statement of Closing Consideration, any Escrow Cash initially deposited in the Escrow Account pursuant to this Section 2.7 (plus any interest or income accrued or earned thereon), less (x) any amount of Escrow Cash paid to the Stockholder Representative pursuant to Section 8.5.7.6 and the Stockholder Representative Agreement, (y) the amount of any Escrow Cash recovered by any Buyer Indemnified Parties prior to the Expiration Date pursuant to Section 8.3 hereof, and (z) an amount of Escrow Cash which the Escrow Agent shall retain equal to the aggregate amount of indemnification claims in U.S. Dollars made by any Buyer Indemnified Parties pursuant to Section 8.2 hereof which shall be outstanding and unresolved (the “ Aggregate Outstanding Claims” ), or, in the event that the Aggregate Outstanding Claims exceed the remaining amount of Escrow Cash, all remaining Escrow Cash (such amount of retained Escrow Cash, as well as any such amount of retained Escrow Cash as it may be further reduced after the Expiration Date by distributions to the Stockholders and recoveries by any Buyer Indemnified Parties pursuant to Section 8.3 hereof, the “ Retained Escrow Cash ”).

Section 2.7.2.2 In the event and to the extent that, following the Expiration Date, any outstanding indemnification claim made by any Buyer Indemnified Parties prior to the Expiration Date pursuant to Section 8.2 hereof is resolved against any Buyer Indemnified Parties, the Escrow Agent shall thereupon promptly (and in no event more than five (5) calendar days thereafter) deliver to the Stockholders, at their respective addresses and in proportion to their respective Pro Rata Shares set forth on the Statement of Closing Consideration, an amount of the Retained Escrow Cash corresponding to the amount of the outstanding indemnification claim resolved against any Buyer Indemnified Parties, unless the remaining Aggregate Outstanding Claims would exceed the Retained Escrow Cash after such distribution, in which case such cash shall not be distributed to the extent necessary so that the Retained Escrow Cash would equal the remaining Aggregate Outstanding Claims.

Section 2.8 Paying Agent; Distribution of the Transaction Consideration .

Section 2.8.1 Paying Agent . At the Closing, pursuant to a Paying Agent Agreement in form and substance reasonably satisfactory to Parent, Buyer and the Company, Parent or Buyer shall irrevocably (subject to the right to receive interest) deposit with a third party paying agent (the “ Paying Agent ”) selected prior to the Closing by Parent and Buyer (with the consent of the Company, which shall not be unreasonably withheld) for the benefit of the Stockholders for exchange in accordance with Section 2.6, by wire transfer of immediately available funds, an amount in cash sufficient to pay all amounts payable in respect of shares of Company Stock pursuant to Article 2 of this Agreement (the “ Exchange Fund ”). The Paying Agent shall, pursuant to this Article 2 and the Paying Agent Agreement, deliver the portion of the Transaction Consideration contemplated to be paid pursuant to the Statement of Closing Consideration out of the Exchange Fund to the Stockholders. The Exchange Fund shall not be used for any other purpose. The fees and expenses of the Paying Agent shall be paid by the Company to the extent such fees and expenses exceed the interest, dividends or other income earned with respect to investments made in the Exchange Fund.

Section 2.8.2 Distribution of Transmittal Letter . As soon as practicable (and in no event more than five (5) calendar days) following the Effective Time, Buyer shall cause the Paying Agent to mail to each record holder of certificates evidencing Company Stock (the “ Certificates ”) a letter of transmittal in customary form (which (A) shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass to Buyer, only upon delivery of the Certificates to the Paying Agent, (B) shall require the Stockholders (as a condition to receiving the consideration contemplated hereby) to (i) ratify and approve the appointment of the Stockholder Representative on the terms and subject to the conditions set forth in this Agreement and in the Stockholder Representative Agreement, and (ii) consent and agree to be irrevocably bound by the indemnification obligations of the Company Indemnified Parties hereunder, and (C) shall be in such form and have such other provisions as Parent, Buyer and the Company shall mutually agree prior to the Closing) (the “ Transmittal Letter ”) and instructions for such holder’s use in effecting the surrender of the Certificates and the exercise of the rights of such holder to obtain its share of the Transaction Consideration.

Section 2.8.3 Delivery of Certificates; Payment of Transaction Consideration . Upon surrender to the Paying Agent of any Certificates for cancellation, together with a duly executed and completed Transmittal Letter, the holder of such Certificate shall be entitled to receive in exchange therefor the portion of the Transaction Consideration to which such holder is entitled pursuant to Section 2.6 of this Agreement, less (i) such holder’s pro rata portion of the Escrow Cash based on the proportion of the aggregate cash consideration payable to each Holder of Company Stock pursuant to Section 2.6 in exchange for shares of Company Stock (it being understood that such Escrow Cash shall not be deposited with the Paying Agent and no deduction from the Exchange Fund shall be made in respect thereof), (ii) any amounts to be deducted pursuant to Section 2.12 to cover applicable withholding taxes, and (iii) any amounts to be deducted pursuant to Section 2.13 in payment of principal and accrued interest under any outstanding loans from the Company to such holder.

Section 2.8.4 Cancellation of Company Stock . Upon surrender of each Certificate and delivery by the Paying Agent of the portion of the Transaction Consideration to be delivered in exchange therefor, such Certificate shall forthwith be cancelled. Until so surrendered, each Certificate (other than Certificates representing Company Dissenting Shares) shall be deemed for all corporate purposes to evidence only the right to receive upon such surrender the portion of the Transaction Consideration into which the Company Stock represented thereby shall have been converted in accordance with the terms and upon the conditions of this Agreement.

Section 2.9 No Further Ownership Rights in Shares of Company Stock . The portion of the Transaction Consideration delivered upon the surrender for exchange of Company Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Stock, and there shall be no further registration of transfers of Company Stock which were outstanding immediately prior to the Effective Time on the records of the Surviving Corporation. If, after the Effective Time, the Certificates are presented to the Paying Agent the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article 2.

Section 2.10 Lost, Stolen or Destroyed Certificates . In the event any Certificates shall have been lost, stolen or destroyed, Buyer shall cause the Paying Agent to issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such portion of the Transaction Consideration as may be required pursuant to Section 2.6 of this Agreement; provided, however , that Buyer may, in its sole discretion and as a condition precedent to the Paying Agent’s issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver an indemnity or bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Buyer and/or the Paying Agent with respect to the Certificates alleged to have been lost, stolen or destroyed.

Section 2.11 Dissenting Shares . Any holder of shares of Company Stock issued and outstanding immediately prior to the Effective Time with respect to which appraisal rights, if any, are available by reason of the Merger pursuant to Section 262 of the DGCL who has neither voted in favor of the adoption of this Agreement nor consented thereto in writing and who complies with Section 262 of the DGCL (including the timely making of requisite demand thereunder) (“ Company Dissenting Shares ”) shall not be entitled to receive any portion of the Transaction Consideration pursuant to this Article 2, unless such holder fails to perfect, effectively withdraws or loses its appraisal rights under the DGCL. Such holder shall be entitled to receive only such rights as are granted under Section 262 of the DGCL. If any such holder fails to perfect, effectively withdraws or loses such appraisal rights under the DGCL, such Company Dissenting Shares shall thereupon be deemed to have been converted as of the Effective Time into the right to receive that portion of the Transaction Consideration to which such shares of Company Stock are entitled pursuant to this Article 2, without interest. The Company shall give Buyer prompt notice of any demands for appraisal pursuant to Section 262 of the DGCL received by the Company, withdrawals of any such demands and any other documents or instruments received by the Company in connection therewith, in each case to the extent received prior to Closing. Buyer shall have the right to participate in (but not control) all negotiations and proceedings with respect to any such demands. The Company shall not, except with the prior written consent of Buyer, make any payment with respect to, or settle or offer to settle, any such demands, or agree to do any of the foregoing.

Section 2.12 Withholding . Any of Parent, Buyer, Merger Sub or the Escrow Agent shall be entitled to deduct and withhold from any consideration otherwise payable pursuant to this Agreement such amounts as it may be required to deduct and withhold with respect to the making of such payment under the Code, or any provision of applicable Tax Law. To the extent that amounts are so withheld or paid over to or deposited with the relevant Taxing Authority by Buyer, such amounts shall be treated for all purposes of this Agreement as having been paid to the applicable Person in respect of which Buyer made such deduction and withholding.

Section 2.13 Employee Loans . In the event that any Stockholder or Holder of Company Options to be cancelled pursuant hereto has an outstanding loan from the Company or any of its Subsidiaries as of the Effective Time relating to Company Stock or Company Options, the cash amounts otherwise payable to such Stockholder or Holder of Company Options pursuant to this Article 2 shall be reduced by an amount equal to the outstanding principal and accrued interest of such loans in satisfaction of the obligation to pay such principal and accrued interest.

Section 2.14 Additional Consideration . In the event that (i) the employment of one or more Holders of Company Options assumed by Buyer pursuant hereto is terminated (i) without Cause or (ii) any other performance related reasons, in each case, as determined with consent of Eyal Desheh and Wayne Jackson (or, in the event that Wayne Jackson shall no longer be employed by the Buyer, the Surviving Corporation or any Affiliate of either of them, such other officer of the Company as of the date hereof then having the most senior role with Parent) (it being understood that the withholding of such consent shall not, in and of itself, have any bearing on any employment decisions made by Buyer and its Affiliates) within nine (9) months after the Effective Time, and (ii) the aggregate value of all Parent Ordinary Shares (determined by reference to the Closing Measurement Price) otherwise issuable upon the exercise of then unvested and unexercised assumed Company Options held by such Holders exceeds $750,000, then as soon as practicable (and in no event more than five (5) calendar days) following the nine (9) month anniversary date of the Effective Time, Parent or Buyer shall pay to the Stockholders in proportion to their respective Pro Rata Shares an amount in cash equal to the aggregate value of the Parent Ordinary Shares (determined by reference to the Closing Measurement Value) issuable upon the exercise of all such assumed Company Options held by such terminated Holders that were unvested and unexercised at the time of termination of each such Holder or that were vested upon such termination but unexercised within the requisite post-termination exercise period, if any, and forfeited or terminated.

ARTICLE 3.
Representations and Warranties of the Company

As a material inducement to Parent, Buyer and Merger Sub to enter into this Agreement, except as set forth in the disclosure schedule delivered by the Company to Buyer simultaneously with the execution of this Agreement (the “ Company Disclosure Schedule ”), which shall be read together with the applicable sections of this Agreement and shall not be an independent document, and the exceptions contained in each section of which shall qualify the representations or warranties in the correspondingly numbered section of this Agreement as well as all other sections of this Agreement to which the applicability of such exception is reasonably apparent on the face of the disclosure (without reference to the underlying documents referenced therein unless such referenced documents are attached to the Company Disclosure Schedule), the Company hereby represents and warrants to Buyer as follows:

Section 3.1 Organization . The Company is a corporation, duly incorporated, validly existing and in good standing under the Laws of the State of Delaware, and each of its Subsidiaries is a corporation or other business entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization as set forth on Section 3.1 of the Company Disclosure Schedule. The Company has the corporate power and authority, and each of its Subsidiaries has the corporate or other applicable power and authority, and each possesses all material governmental franchises, licenses, permits and authorizations and approvals necessary to carry on their respective businesses substantially in the manner as they are now being conducted and to own, lease and operate all of their respective properties and assets. Section 3.1 of the Company Disclosure Schedule sets forth a true, correct and complete list of each jurisdiction in which the Company and any of its Subsidiaries is qualified to do business as a foreign corporation or other entity. Each of the Company and its Subsidiaries is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned, leased or operated by it makes such qualification or licensing necessary except in jurisdictions where the failure of such license or qualification would not have a Company Material Adverse Effect. The copies of the Company Certificate of Incorporation and the Company’s bylaws and each of its Subsidiaries’ organizational documents delivered by the Company to Buyer prior to the execution of this Agreement are accurate, complete and correct copies of such instruments as in effect on the date hereof.

Section 3.2 Capitalization .

Section 3.2.1 Authorized, Issued and Outstanding Capital Stock . The authorized capital stock of the Company consists of (i) 35,000,000 shares of Common Stock and (ii) 15,031,658 shares of Preferred Stock, of which (x) 2,495,410 shares have been designated as Series A Preferred Stock, (y) 7,132,205 shares have been designated as Series B Preferred Stock and (z) 5,404,043 shares have been designated Series C Preferred Stock. As of the date of this Agreement, there are issued and outstanding 5,512,882 shares of Common Stock, 2,475,410 shares of Series A Preferred Stock, 7,132,205 shares of Series B Preferred Stock and 5,404,043 shares of Series C Preferred Stock. Except for Series A Preferred Stock which is convertible into a number of shares of Common Stock per share of Series A Preferred Stock equal to the Series A Conversion Number, all Preferred Stock is convertible into Common Stock on a one-for-one basis. As of the date of this Agreement, the Company has no other capital stock authorized, issued or outstanding. Section 3.2.1 of the Company Disclosure Schedule sets forth, as of the date hereof, the name and address of each Holder of shares of Company Stock, as well as the number of shares of Common Stock and each series of Preferred Stock held by each such Holder.

Section 3.2.2 Company Options . As of the date of this Agreement, 4,162,909 shares of Common Stock are reserved for issuance upon the exercise of outstanding Company Options. Section 3.2.2 of the Company Disclosure Schedule sets forth, as of the date hereof, the name of each Holder of Company Options, as well as the number of Company Options held by each such Holder, the number of shares of Common Stock for which each such Company Option is exercisable, the vesting schedule for each such Company Option and the price per share of Common Stock for which each such Company Option is exercisable (without taking into account whether or not such Company Option is in fact exercisable on the date hereof). The Company has delivered or made available to Buyer true, accurate and complete copies of each plan or agreement pursuant to which any Company Option has been granted, including any and all amendments thereto.

Section 3.2.3 Company Warrants . As of the date of this Agreement, 20,000 shares of Series A Preferred Stock are reserved for issuance upon exercise of outstanding Company Warrants. Section 3.2.3 of the Company Disclosure Schedule sets forth the name of each Warrantholder, as well as the number of Company Warrants held by each such Warrantholder, the number of shares class and series of Company Stock for which such Company Warrant is exercisable, the vesting schedule (if applicable) for each such Company Warrant and the price per share of each class and series of Company Stock for which each such Company Warrant is exercisable (without taking into account whether or not such Company Warrant is in fact exercisable on the date hereof). The Company has delivered to Buyer true, accurate and complete copies of each Company Warrant, including any and all amendments thereto (if any).

Section 3.2.4 No Other Capital Stock, Company Options or Company Warrants . Except for the Company Options and Company Warrants referred to above, as of the date hereof, there are no outstanding options, warrants, convertible securities or rights of any kind to purchase or otherwise acquire any shares of capital stock or other securities of the Company. Except for the aggregate of 4,162,909 shares of Common Stock reserved for issuance upon exercise of outstanding Company Options, 20,000 shares of Series A Preferred Stock reserved for issuance upon exercise of outstanding Company Warrants and 19,962,478 shares of Common Stock reserved for issuance upon conversion of outstanding shares of Preferred Stock, no shares of capital stock of the Company are reserved for issuance as of the date hereof.

Section 3.2.5 No Other Agreements . There are no outstanding contractual obligations between the Company and any of its security holders (i) restricting the transfer of; (ii) affecting the voting rights of; (iii) requiring the repurchase, redemption or disposition of, or containing any right of first refusal with respect to; (iv) requiring the registration or sale of or (v) granting any preemptive or antidilutive right with respect to, any shares of Common Stock, Preferred Stock or any capital stock of, or other equity interests in, the Company.

Section 3.2.6 Valid Issuances . All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive rights in respect thereto. All outstanding securities of the Company have been issued in compliance with all applicable state and federal securities Laws. The stock ledgers and related records that have been delivered or made available by the Company to Buyer are complete and accurate.

Section 3.3 Subsidiaries . Section 3.3 of the Company Disclosure Schedule lists each Subsidiary of the Company. Each of the Company’s Subsidiaries is wholly owned by the Company. All of the outstanding shares of capital stock of, or other equity interests in, each such Subsidiary of the Company have been validly issued and are fully paid and nonassessable and such shares or interests are owned directly by the Company, free and clear of all Encumbrances and free of any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests (other than restrictions pursuant to federal and state securities Laws). Except for the capital stock or other ownership interests of each of its Subsidiaries and investments of cash in money market or similar funds in the ordinary course of business, the Company does not beneficially own directly or indirectly any capital stock, membership interest, partnership interest, joint venture interest or other equity interest in any Person.

Section 3.4 Authority; No Violation .

Section 3.4.1 The Company has full corporate power and authority to execute and deliver this Agreement and the Escrow Agreement to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Escrow Agreement to which the Company is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by all requisite corporate action on the part of the Company, and following receipt of the Stockholder Consent, no other corporate proceedings on the part of the Company are necessary to approve this Agreement or the Escrow Agreement to which the Company is a party or to authorize or consummate the transactions contemplated hereby or thereby. This Agreement and the Escrow Agreement to which the Company is a party have been duly and validly executed and delivered by the Company and (assuming the due authorization, execution and delivery of this Agreement and the Escrow Agreement to which the Company is a party by each of the other parties hereto and thereto) constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as the enforceability thereof may be subject to or limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to or affecting the rights of creditors generally and the availability of equitable relief (whether in proceedings at law or in equity).

Section 3.4.2 Neither the execution and delivery by the Company or any of its Affiliates of this Agreement or the Escrow Agreement to which the Company or any of its Affiliates is a party nor the consummation by the Company or any of its Affiliates of any of the transactions contemplated hereby or thereby, nor compliance by the Company or any of its Affiliates with any of the terms or provisions hereof or thereof, will (i) subject to obtaining the Stockholder Consent, violate any provision of the Certificate of Incorporation, charter or bylaws or comparable organizational documents of the Company or any of its Subsidiaries, (ii) violate, conflict with any Applicable Law to which the Company or any of its Subsidiaries or any of their respective properties, contracts or assets are subject, (iii) except for consents, approvals, notices to or filings, declarations or registrations under the HSR Act and the Exon-Florio Act, and the filing of the Certificate of Merger with the Secretary of State of Delaware, require the consent or approval of, or notice to, or filings, declarations or registrations with any Governmental Authority, (iv) violate or conflict with in any material respect, result in a material breach of any provision of, or the loss of any material benefit under, constitute a material default (or an event which, with or without notice or lapse of time, or both, would constitute a material default) under, result in the termination of or a right of termination or cancellation under, accelerate or result in a right of acceleration of the performance required by, result in the creation of any Encumbrance upon the Preferred Stock, the Common Stock or any Encumbrance upon the properties, contracts or assets of the Company or any of its Subsidiaries under, or require any notice, approval, waiver or consent under, any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation and to which the Company or any of its Subsidiaries is a party, or by which the Company or any of its Subsidiaries or any of their respective properties or assets may be bound or affected, or (v) except as a result of restrictions, limitations or requirements imposed upon the Surviving Corporation by or through Parent or Buyer, otherwise prevent the Surviving Corporation from continuing the Company Business immediately following the Closing or using the material Company Assets immediately following the Closing in substantially the same manner in which the Company conducted the Company Business or used the Company Assets immediately prior to the Closing.

Section 3.4.3 The only votes or consents of any class or series of the Company’s capital stock necessary to effect the transactions contemplated in this Agreement under Applicable Law, the Company Certificate of Incorporation and bylaws and any Contracts between the Company, on the one hand, and any of its Stockholders, on the other hand, are votes or consents to adopt this Agreement and approve the Merger by the holders of: (a) a majority in voting power of the outstanding shares of Company Stock, voting together as a single class on an as-converted to Common Stock basis, and (b) at least (i) two-thirds (2/3) of the outstanding Series A Preferred Stock, (ii) sixty percent (60%) of the outstanding Series B Preferred Stock, and (iii) a majority of the outstanding Series C Preferred Stock, voting or consenting as separate classes (collectively, the “ Stockholder Consent ”).

Section 3.4.4 Subject to Section 5.5.2 and Section 5.5.3, the Company’s board of directors (i) determined that this Agreement and the Merger are advisable and fair to, and in the best interests of, the Company and its stockholders, (ii) approved, subject to stockholder approval, this Agreement and the Merger, and (iii) determined, subject to the terms of this Agreement, to recommend that the stockholders adopt this Agreement and approve the Merger, by a unanimous vote of the members of the Company’s board of directors.

Section 3.5 Financial Statements .

Section 3.5.1 Section 3.5.1 of the Company Disclosure Schedule sets forth true, correct and complete copies of (i) the unaudited balance sheet of the Company and its Subsidiaries as of August 31, 2005 (the “ Unaudited Company Balance Sheet ”) and the related statements of income and changes in stockholders’equity for the nine months ended August 31, 2005 (the statements referred to in this clause (i) (including the Unaudited Company Balance Sheet), the “ Unaudited Company Financial Statements ”; and (ii) the audited balance sheets of the Company and its Subsidiaries as of December 31, 2004, 2003 and 2002 and the related statements of income and changes in Stockholders’ equity for the fiscal years ended December 31, 2004, 2003 and 2002 (the statements referred to in this clause (ii) (including the balance sheets), the “ Audited Company Financial Statements ”). The Unaudited Company Financial Statements and the Audited Company Financial Statements present fairly, in all material respects, the financial position of the Company and its Subsidiaries as of the respective dates thereof and the results of the Company’s operations for the fiscal periods therein set forth. Each of the Audited Company Financial Statements and the Unaudited Company Financial Statements have been prepared in accordance with both the Company’s past practice and GAAP consistently applied throughout such fiscal periods.

Section 3.5.2 Section 3.5.2 of the Company Disclosure Schedule sets forth a true, correct and complete itemization of the accounts receivable (including aging) of the Company as of August 31, 2005 (the “ Accounts Receivable ”). The Accounts Receivable represent bona fide claims against debtors for sales, services performed or other charges arising on or before the respective dates of recording thereof, and all of the goods delivered and services performed which gave rise to the Accounts Receivable were delivered or performed in accordance with applicable orders, Contracts or customer requirements in all material respects. All Accounts Receivable have been billed in accordance with the past practice of the Company consistently applied. The reserve for doubtful accounts reflected on the Unaudited Company Balance Sheet was established in accordance with GAAP.

Section 3.5.3 There are no material claims against the Company to return any products by reason of alleged over shipments, defective products or otherwise, or of products in the hands of customers under a written agreement that such merchandise would be returnable. No outstanding purchase commitment of the Company presently is materially in excess of the normal, ordinary and usual requirements of the Company Business.

Section 3.5.4 Each of the Company and its Subsidiaries maintains, in all material respects, accurate books and records reflecting its assets and liabilities and maintains a system of internal accounting controls which are sufficient in all material respects to provide reasonable assurance that (i) transactions are executed with management’s authorization; (ii) transactions are recorded as necessary to permit preparation of the consolidated financial statements of the Company in accordance with GAAP and to maintain accountability for the Company’s consolidated assets; (iii) access to the Company’s assets is permitted only in accordance with management’s authorization; (iv) the reporting of the Company’s assets is compared with existing assets at regular intervals; (v) accounts, notes and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis and (vi) there are adequate procedures regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets. As of the date of this Agreement, (i) there are no significant deficiencies or material weaknesses in the design or operation of the Company’s internal control over financial reporting which is reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial data and (ii) there has been no fraud, whether or not material, that involved management or other employees of the Company or any of its Subsidiaries who have a significant role in the Company’s internal controls over financial reporting.

Section 3.5.5 The Company has no liabilities or obligations of any kind or nature (whether known or unknown, absolute, accrued, contingent or otherwise) other than (i) those liabilities and obligations that are set forth in the Company Disclosure Schedule, (ii) those liabilities and obligations reflected or adequately reserved for in the Unaudited Company Balance Sheet, (iii) those liabilities and obligations not required by GAAP to be reflected or reserved for in a balance sheet or the related footnotes thereto prepared in accordance with GAAP, and (iv) those current liabilities and obligations incurred in the ordinary course of business since August 31, 2005 or incurred in connection with the Merger and the other transactions contemplated hereby.

Section 3.6 Contracts .

Section 3.6.1 Section 3.6.1 of the Company Disclosure Schedule contains a complete and accurate list of the following Contracts to which the Company or any of its Subsidiaries is a party as of the date hereof (all Contracts actually listed or required to be to listed (whether or not actually listed) in Section 3.6.1 , Section 3.7 or Section 3.9 of the Company Disclosure Schedule being referred to herein as the “ Scheduled Contracts ”):

Section 3.6.1.1 any employment management, consulting or severance Contract or other arrangement with any of the Company Business Employees or Company Business Independent Contractors (other than offer letters and employee invention and proprietary rights assignment agreements and option agreements, in each case, in substantially the Company’s standard forms previously provided to Buyer and other than the Employee Plans listed on Section 3.8.1 of the Company Disclosure Schedules);

Section 3.6.1.2 any Contract or Employee Plan, any of the benefits of which could be increased, or the vesting of benefits of which could be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement;

Section 3.6.1.3 any Contract that includes any noncompetition or nonsolicitation covenant or any exclusive dealing or similar arrangement that limits the ability of the Company of any of its Subsidiaries or any of their Affiliates to compete (geographically or otherwise) in any line of business;

Section 3.6.1.4 any customer Contract providing for payments to the Company in excess of $250,000;

Section 3.6.1.5 any Contract conferring an interest in real property, owned or leased;

Section 3.6.1.6 any Contract providing for capital expenditures commitments after the date hereof in excess of $50,000;

Section 3.6.1.7 any Contract relating to the disposition or acquisition of assets or any interest in any business enterprise, in each case, outside the ordinary course of the Company’s business;

Section 3.6.1.8 any mortgages, indentures, guarantees, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money, extension of credit or security interest (other than employee expense advances made in the ordinary course of business);

Section 3.6.1.9 any pending purchase order or contract for the purchase of materials involving in excess of $50,000;

Section 3.6.1.10 any Contract that involves payments based on profits or revenues of the Company or any of its Subsidiaries;

Section 3.6.1.11 any powers of attorney granted by the Company;

Section 3.6.1.12 any Contract containing any price protection, "most favored nation" or similar provisions;

Section 3.6.1.13 any partnership, joint venture, strategic alliance or similar Contract;

Section 3.6.1.14 any Contract to which an Affiliate of the Company is a party, other than Contracts relating to the acquisition or ownership of equity securities of the Company or relating to an Affiliate of the Company’s employment or service relationship with the Company; or

Section 3.6.1.15 any development Contract or original equipment manufacturer Contract.

Section 3.6.2 Each of the Scheduled Contracts is a legal, valid and binding obligation of the Company or its Subsidiaries (assuming the due authorization, execution and delivery by the other parties thereto) and is in full force and effect and enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar Laws relating to or affecting creditors generally and by the availability of equitable remedies (whether in proceedings at law or in equity).

Section 3.6.3 Neither the Company nor any of its Subsidiaries has received written notice of cancellation of or default under or intent to cancel or call a default under any of the Scheduled Contracts.

Section 3.6.4 The Company and each of its Subsidiaries has performed all obligations required to be performed by it to date under the Scheduled Contracts, except for nonperformance that would not result in a material breach of, or material default under, any such Scheduled Contracts and except for nonperformance which has been remedied or cured, and, to the Knowledge of the Company, there exists no event or condition which with or without notice or lapse of time or both would be a material breach or a material default on the part of the Company or any of its Subsidiaries or, to the Knowledge of the Company, on the part of any other party to such Scheduled Contracts.

Section 3.6.5 The Company has delivered or made available to Parent true, correct and complete copies of all of the Scheduled Contracts.

Section 3.7 Intellectual Property .

Section 3.7.1 Generally . Section 3.7.1 of the Company Disclosure Schedule sets forth a complete and accurate list of all Intellectual Property that is the subject of any application or registration filed in the United States or in any foreign jurisdiction (including: (i) registered trademarks and service marks and applications therefor; (ii) patents and patent applications (including any continuations, continuations-in-part, divisionals, reissues, renewals, applications and provisional applications for any of the foregoing); (iii) copyright and mask work registrations and applications; and (iv) registered Domain Names and Universal Resource Locators) in each case owned by the Company, in whole or in part, including jointly with others (such schedule specifying if such Intellectual Property is owned jointly) (all of the foregoing, the “ Registered Company Intellectual Property ” and, together with all other Intellectual Property owned or purported to be owned by the Company, the “ Company Owned Intellectual Property ”). Section 3.7.1 of the Company Disclosure Schedule also lists for each item of Registered Company Intellectual Property the known status of any actions (including the payment of fees) that must be taken within 120 days of the date hereof with respect to the registration of maintenance of such Registered Company Intellectual Property. Section 3.7.1 of the Company Disclosure Schedule lists all third-party Intellectual Property with respect to which the Company has been granted an exclusive license or the right or obligation to enforce the intellectual property rights of the third-party licensor.

Section 3.7.2 Trademarks .

Section 3.7.2.1 All Trademarks of the Company for which an application for trademark registration (including any intent to use application) has been filed are currently in compliance with all legal requirements applicable to trademarks in the jurisdiction in which the application was filed, other than any requirement that, if not satisfied, would not result in a cancellation of any such application or registration or otherwise adversely affect the use, ownership, exclusivity, or priority of the Trademark in question in the field of use specified in the application. No registered Trademark of the Company or Trademark of the Company with respect to which an application for registration has been filed, has been or is now involved in any opposition or cancellation proceeding in the United States Patent and Trademark Office. To the Company’s Knowledge, there has been no prior use of any Trademark of the Company by any third party that confers upon said third party superior rights in any such Trademark in such Trademark’s field of use.

Section 3.7.2.2 The Company is the owner of all right, title and interest in and to all of the Trademarks that are Registered Company Intellectual Property, in each case free and clear of any and all Encumbrances (other than Permitted Encumbrances), covenants, conditions and restrictions or other adverse claims or interests of any kind or nature, and the Company has not received any written notice or claim or, to the Knowledge of the Company, any oral notice or claim, challenging the Company’s complete and exclusive ownership of such Trademarks or suggesting that any other Person has any claim of legal or beneficial ownership with respect thereto. There is no agreement, decree, arbitral award or other provision or contingency which obligates the Company to grant licenses in future Trademarks of the Company.

Section 3.7.3 Patents .

Section 3.7.3.1 All Patents of the Company are currently in compliance with legal requirements (including payment of filing, examination, and maintenance fees and proofs of working or use) other than any requirement that, if not satisfied, would not result in a revocation or lapse or otherwise adversely affect the issuance or ownership, of the Patent in question. The Company has not taken any action or failed to take any action (including a failure to disclose known material prior art in connection with the prosecution of any Patent), or used or enforced (or failed to use or enforce) any of the Patents in a manner that would result in the abandonment of any of the Patents.

Section 3.7.3.2 No Patent of the Company has been or is now involved in any interference, reissue, reexamination or opposing proceeding in the United States Patent and Trademark Office or any foreign patent office and, to the Knowledge of the Company, no such action has been threatened. To the Knowledge of the Company, there is no patent of any Person that claims the same subject matter as any Patent of the Company and, to the Knowledge of the Company, no prior art, that invalidates any claim of any Patent of the Company.

Section 3.7.3.3 The Company is the owner of all right, title and interest in and to all of the Patents owned by, assigned to, filed in the name of Company or any Company employee while an employee of the Company (except those Patents with respect to which ownership rights are retained by company employees pursuant to such employees’ employment or assignment of inventions agreements, copies of which have been made available to Buyer) (“ Company Owned Patents ”), in each case free and clear of any and all Encumbrances (other than Permitted Encumbrances), covenants, conditions and restrictions or other adverse claims or interests of any kind or nature (other than the rights of users to use Company Owned Patents as part of their use of the Company’s products pursuant to ordinary course customer, reseller and other license agreements), and the Company has not received any written or oral notice or claim challenging the Company’s complete and exclusive ownership of the Patents or suggesting that any other Person has any claim of legal or beneficial ownership with respect thereto. There is no agreement, decree, arbitral award or other provision or contingency which obligates the Company to grant licenses in any Company Owned Patents. Company has not assigned or transferred any Patents that were Company Owned Patents to any third Person.

Section 3.7.3.4 To the Knowledge of the Company, the inventions disclosed in the Patents of the Company may be practiced by the Company without infringing any other Patents owned by any Person.

Section 3.7.4 Copyrights .

Section 3.7.4.1 The Company is the owner of all right, title and interest in and to each of the Copyrights used by the Company other than those as to which the rights being exercised by the Company have been licensed from another Person (collectively, “ Company Owned Copyrights ”), free and clear of any and all Encumbrances (other than Permitted Encumbrances), covenants, conditions and restrictions or other adverse claims or interests of any kind or nature (other than the rights of users to use Company Owned Copyrights pursuant to ordinary course customer, reseller and other license agreements), and the Company has not received any notice or claim (whether written or oral) challenging the Company’s complete and exclusive ownership of such Company Owned Copyrights or suggesting that any other Person has any claim of legal or beneficial ownership with respect thereto. Company has not assigned or transferred any Copyrights that were Company Owned Copyrights to any third Person.

Section 3.7.4.2 The Company has not received any notice or claim (whether written or oral) challenging or questioning the validity or enforceability of any of the Company Owned Copyrights or indicating an intention on the part of any Person to bring a claim that any Company Owned Copyright is invalid, is unenforceable or has been misused and, to the Knowledge of the Company, no Company Owned Copyright otherwise has been challenged or threatened in any way.

Section 3.7.4.3 The Company has not taken any action or, to the Knowledge of the Company, failed to take any action (including a failure to disclose required information to the United States Copyright Office in connection with any registration of a registered copyright therewith), or used or enforced (or failed to use or enforce) any of the Company Owned Copyrights, in each case in a manner that would result in the unenforceability of any of the Company Owned Copyrights. The Company has taken all reasonable steps to protect the Company’s rights in and to the Company Owned Copyrights, in each case in accordance with standard industry practice. To the Knowledge of the Company, no other Person has infringed or is infringing any of the Company Owned Copyrights.

Section 3.7.5 Trade Secrets .

Section 3.7.5.1 The Company has taken reasonable steps in accordance with normal industry practice to protect its rights in confidential information and proprietary information, including any formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to the public or to other Persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy (collectively, “ Trade Secrets ”).

Section 3.7.5.2 Without limiting the generality of Section 3.7.5.1, the Company enforces a policy of requiring each relevant employee, consultant and contractor to execute proprietary information, confidentiality and assignment agreements substantially in the Company’s standard forms that assign to the Company all rights to any Intellectual Property relating to the Company Business that are developed by the employees, consultants or contractors, as applicable, and that otherwise appropriately protect the Intellectual Property of the Company, and, except under confidentiality obligations and in connection with the release of distribution of products, there has been no disclosure by the Company of its confidential information or Trade Secrets; nor have any actions been taken by the Company which would affect the Company’s ability to obtain U.S. or, to the Knowledge of the Company, foreign protection for the Company’s inventions.

Section 3.7.6 License Agreements .

Section 3.7.6.1 Section 3.7.6.1 of the Company Disclosure Schedule sets forth a complete and accurate list of all license agreements granting to the Company any right to use or practice any rights under any material third party Intellectual Property (collectively, the “ Company Inbound License Agreements ”), (other than “off-the-shelf” shrink wrap software commercially available on reasonable terms to any Person for a license fee of no more than $100,000, but including all such agreements that are otherwise material to Company, indicating for each the title and the parties thereto.

Section 3.7.6.2 Section 3.7.6.2 of the Company Disclosure Schedule sets forth a complete and accurate list of all license agreements (other than shrinkwrap or “click through” end user license agreements entered into in the ordinary course of the Company Business and in a form provided by Company to Buyer) currently in effect and providing for annual payments to the Company in excess of $250,000 under which the Company has granted licenses of Software or other rights to use or practice any rights under any Company Owned Intellectual Property (indicating for each the title and parties thereto) and the Company’s current forms of license agreements (indicating for each the title of such form agreement) used by the Company in the ordinary course under which the Company grants licenses of Software or grants other rights in or to use or practice any rights under any Company Owned Intellectual Property (collectively, the “ Company Outbound License Agreements ”).

Section 3.7.6.3 There is no outstanding or, to the Knowledge of the Company, threatened dispute or disagreement with respect to any Company Inbound License Agreement or any Company Outbound License Agreement. Correct and complete executed copies of all Company Inbound License Agreements and Company Outbound License Agreements have been made available to Buyer.

Section 3.7.7 Domain Names . The Company is the sole owner of the Domain Name registrations, and all such Domain Names are currently registered by the Company, as sole owner, with an ICANN accredited registrar or other registrar, as applicable, and the registration fees are paid through the date(s) listed on Section 3.7.7 of the Company Disclosure Schedule. The Company is the owner of, or has sufficient rights to display, all content displayed on the Internet site associated with each of the Domain Names (collectively, the “ Content ”), and no consent, license or approval from any third party is required in connection with the sale or transfer of the ownership of the Domain Names and the continued use of the Content by Buyer or the Surviving Corporation. To the Knowledge of the Company, no facts or circumstances exist which could reasonably form the basis of a challenge relating to Buyer’s unencumbered use of the Domain Names, or any part thereof.

Section 3.7.8 Ownership; Sufficiency of Intellectual Property Assets . The Company owns or possesses adequate licenses or other rights to use, free and clear of Encumbrances (except, in the case of licenses from third parties, the interests of such licensing parties and except for Permitted Encumbrances), all Intellectual Property used in the conduct of the Company Business and the manufacture, sale and license of the Company’s products. The Company Owned Intellectual Property, including the Company Registered Intellectual Property identified in Section 3.7.1 of the Company Disclosure Schedule, together with the Company’s rights granted to it under the Company Inbound License Agreements, constitute all the Intellectual Property rights used in or necessary to the operation of the Company Business.

Section 3.7.9 No Infringement by the Company . The operation of the Company Business including all products used, manufactured, marketed, sold or licensed by the Company, and all Intellectual Property used in the conduct of the Company Business as currently conducted, do not, and will not following the Closing when conducted in the same manner as conducted prior to the Closing, infringe upon, violate or constitute the unauthorized use of any rights owned or controlled by any third party, including any Intellectual Property of any third party. No litigation is now, or since incorporation of Company has been, pending and no notice or other claim has been received by the Company, (A) alleging that the Company has engaged in any activity or conduct that infringes upon, violates or constitutes the unauthorized use of the Intellectual Property rights of any third party, including any contamination or misappropriation of trade secrets claims, or (B) challenging the ownership, use, validity or enforceability of any Intellectual Property owned or exclusively licensed by or to the Company.

Section 3.7.10 No Infringement by Third Parties . To the Knowledge of the Company, no third party is misappropriating, infringing, diluting or violating any Intellectual Property owned or exclusively licensed by the Company, and no claims for any of the foregoing have been brought against any third party by the Company. The Company has taken reasonable steps in accordance with normal industry practice to protect its Intellectual Property.

Section 3.7.11 Assignment; Change of Control . The execution, delivery and performance by the Company of this Agreement, the Escrow Agreement and each of the other documents contemplated hereby or thereby to which it is a party, and the consummation of the transactions contemplated hereby and thereby, will not result in (i) the loss or impairment of, or give rise to any right of any third party to terminate, any of the Company’s rights to own any of its Intellectual Property or rights under any Company Inbound License Agreement or Company Outbound License Agreement, nor require the consent of any Governmental Authority or third party in respect of any such Intellectual Property or (ii) the purported grant by Buyer to any third Person of rights to use Buyer’s own Intellectual Property.

Section 3.7.12 Software . The Software owned or purported to be owned by the Company or distributed by the Company as a Company product (“ Company Software ”) was: (i) developed by employees of the Company within the scope of their employment; (ii) developed by independent contractors who have assigned their rights to the Company pursuant to written agreements; or (iii) otherwise acquired by the Company from a third party who assigned all Intellectual Property rights in the Company Software to the Company. None of the Company Software, or any party thereof, is, in whole or in part, subject to the provisions of any open source or quasi-open source license agreement (including, for example, the GNU, GPL or LGPL licenses). The Company has made no submission or suggestion and is not subject to any agreement with standards bodies or other entities which would obligate the Company to grant licenses to or otherwise impair its control of its Intellectual Property. Except for the warranties and indemnities contained in those contracts and agreements set forth in Section 3.7.12 of the Company Disclosure Schedules or this Agreement, warranties and indemnities in the Company’s standard customer and reseller agreements, and warranties implied by law, the Company has not given any warranties or indemnities relating to products or technology sold or services rendered by the Company.

Section 3.7.13 Encryption Technology . The Company Business as currently conducted complies with all U.S. Applicable Laws, rules and regulations regarding encryption technology, including, without limitation, the import and export thereof.

Section 3.7.14 Performance of Existing Products . The Company’s existing and currently manufactured and marketed products substantially perform the functions described in their published end user documentation, and the Company has not been notified, either verbally or in writing, that such products do not perform as set forth above, and to the Knowledge of the Company, there are no material defects or errors with respect to such products. To the extent that the Company’s products have not been launched, the Company has fully disclosed to Buyer in writing all material known technical problems or concerns associated with such products that affect the prospective performance of the Company’s products.

Section 3.7.15 Use of User Data .

Section 3.7.15.1 The Company’s use, license, sublicense and sale of any User Data collected from users at any website operated by the Company or its Affiliates and any co-branded websites which the Company manages have complied in all material respects with the Company’s applicable published privacy policy at the time such User Data was collected (collectively, the “ Privacy Policies ”), excluding any violation that, if disclosed, would not reasonably be expected to result in a material claim against the Company.

Section 3.7.15.2 The Company is in compliance in all material respects with all U.S. Applicable Laws and contractual obligations binding on the Company that relate to or govern the compilation, use and transfer of User Data.

Section 3.7.15.3 There is no Proceeding (including any audit or investigation) pending or, to the Knowledge of the Company, threatened, by any Person or any U.S. Governmental Authority involving the use, disclosure or transfer of any User Data by the Company, nor, to the Knowledge of the Company, has the Company been contacted by any U.S. Governmental Authority regarding the use, disclosure or transfer of any User Data by the Company.

Section 3.7.15.4 None of the Privacy Policies or any law or regulation restricts, or limits or prohibits the transfer of User Data to Buyer and its Affiliates as contemplated by this Agreement or otherwise limit Parent, Buyer or the Surviving Corporation succeeding to all rights and privileges of Company with respect to such User Data (it being understood that, following such transfer, such User Data will remain subject to the applicable use limitations set forth in such Privacy Policies).

Section 3.7.15.5 To the Knowledge of the Company, no Person has obtained unauthorized access to User Data stored on the computer systems owned and operated by the Company (including, without limitation, any User Data contained in any hard copy printouts), nor has there been any other unauthorized acquisition of material computerized data of the Company (including, without limitation, any data contained in any hard copy printouts) that has compromised the security, confidentiality or integrity of any User Data maintained by the Company in any material manner.

Section 3.8 Employee Benefit Matters .

Section 3.8.1 Section 3.8.1 of the Company Disclosure Schedule contains a complete list of Employee Plans which cover or have covered employees of the Company. The Company has made true and complete copies of each of the following documents available to Parent and Buyer prior to the date hereof: (i) each Employee Plan (and, if applicable, related trust agreements, annuity contracts or other funding instruments) which covers or has covered employees of the Company (with respect to their relationship with the Company) and all amendments thereto, all current summary plan descriptions, the most recent summary of material modifications (as defined in ERISA) and all written interpretations and descriptions thereof which the Company generally distributes to participants therein and a complete description of any material Employee Plan which is not in writing except that any severance policy, program or agreement shall be described in full, (ii) the most recent determination letter or opinion letter issued by the Internal Revenue Service with respect to each Pension Plan and each voluntary employees’ beneficiary association as defined under Section 501(c)(9) of the Code (other than a Multiemployer Plan) which covers or has covered employees of the Company (with respect to their relationship with the Company), (iii) for the three (3) most recent plan years, Annual Reports on Form 5500 Series with all schedules and attachments required to be filed with any governmental agency for each Pension Plan or Welfare Plan which covers or has covered employees of the Company (with respect to their relationship with the Company), (iv) a description of complete age, salary, service and related data as of the last day of the last plan year for employees and former employees of the Company, (v) a description setting forth the amount of any liability of the Company as of the Closing Date for payments more than thirty (30) calendar days past due with respect to any Welfare Plan and (vi) all correspondence to or from any Governmental Authority related to any specific Employee Plan.

Section 3.8.2 Pension Plans .

Section 3.8.2.1 No Employee Plan is or was at any time subject to Title IV or Part 3 of Title I of ERISA or Section 412 of the Code and neither the Company nor any ERISA Affiliate is subject to any liability under Title IV or Part 3 of Title I of ERISA.

Section 3.8.2.2 Each Pension Plan and each related trust agreement, annuity contract or other funding instrument which covers or has covered employees or former employees of the Company (with respect to their relationship with the Company) which has been operated as a qualified plan (i) has received a favorable opinion letter from the Internal Revenue Service stating that such Pension Plan is qualified under the provisions of Code Sections 401(a), and (ii) to the Knowledge of the Company, has been so qualified during the period from its adoption to date.

Section 3.8.2.3 Each Pension Plan and each related trust agreement, annuity contract or other funding instrument which covers or has covered employees or former employees of the Company (with respect to their relationship with the Company) currently complies in all material respects and has been maintained in compliance in all material respects with its terms and, both as to form and in operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including, without limitation, ERISA and the Code.

Section 3.8.3 Multiemployer Plans . Neither the Company nor any ERISA Affiliate has any liability with respect to a Multiemployer Plan.

Section 3.8.4 Welfare Plans .

Section 3.8.4.1 Each Welfare Plan which covers or has covered employees or former employees of the Company (with respect to their relationship with the Company) currently complies in all material respects and has been maintained in compliance in all material respects with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including, without limitation, ERISA and the Code.

Section 3.8.4.2 Except as required by COBRA, none of the Company, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment to, or with respect to any present or former employee, officer, consultant, or director of the Company or any ERISA Affiliate pursuant to, any retiree medical benefit plan, or other retiree Welfare Plan, and no condition exists which would prevent the Company or an ERISA Affiliate from amending or terminating any such benefit plan or such Welfare Plan without liability or cost to the Company or any ERISA Affiliate (other than routine administrative expenses).

Section 3.8.4.3 Each Welfare Plan which covers or has covered employees or former employees of the Company (with respect to their relationship with the Company) and which is a “group health plan,” as defined in Section 607(1) of ERISA, presently complies in all material respects with and has been operated in compliance in all material respects with provisions of COBRA and the Health Insurance Portability and Accountability Act of 1996, as amended.

Section 3.8.4.4 The insurance policies or other funding instruments, if any, for each Welfare Plan provide coverage for each employee, consultant, independent contractor or retiree of the Company or any of its Subsidiaries (and, if applicable, their respective dependents) who has been advised by the Company, whether through an Employee Plan or otherwise, that he or she is covered by such Welfare Plan.

Section 3.8.5 Benefit Arrangements . Each Benefit Arrangement which covers or has covered employees or former employees of the Company (with respect to their relationship to the Company) presently complies and has been maintained in compliance in all material respects with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including, without limitation, the Code. The employment of all persons presently employed or retained by the Company is terminable at will. To the Company’s Knowledge, no amounts payable under any Benefit Arrangements are or will be included in income for any current or former Company Business Employee by operation of Code Section 409A.

Section 3.8.6 Unrelated Business Taxable Income; Unpaid Contributions . No Employee Plan (or trust or other funding vehicle pursuant thereto) has incurred any liability under Code Section 511. Neither the Company nor any ERISA Affiliate has any liability for unpaid contributions under Section 515 of ERISA with respect to any Employee Plan.

Section 3.8.7 Fiduciary Duties and Prohibited Transactions . To the Knowledge of the Company, neither the Company nor any plan fiduciary of any Welfare Plan or Pension Plan which covers or has covered employees or former employees of the Company or any ERISA Affiliate has engaged in, or has any liability in respect of, any transaction in violation of Sections 404 or 406 of ERISA (and not exempt under ERISA Section 408 and the regulations issued thereunder) or any “prohibited transaction,” as defined in Section 4975(c)(1) of the Code, or has otherwise violated the provisions of Part 4 of Title I, Subtitle B of ERISA so as to create any liability of the Company or any of its Subsidiaries or any Employee Plan. To the Knowledge of the Company, the Company has not participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare Plan or Pension Plan, and the Company and its Subsidiaries have not been assessed any civil penalty under Section 502(l) of ERISA.

Section 3.8.8 Litigation . There is no action, order, writ, injunction, judgment or decree outstanding or claim (other than routine claims for benefits), suit, litigation, proceeding, arbitration proceeding, governmental audit or investigation relating to or seeking benefits under any Employee Plan that is pending or, to the Knowledge of the Company, anticipated or threatened against the Company, any ERISA Affiliate or any Employee Plan.

Section 3.8.9 No Amendments . Except for the Retention Plan, neither the Company nor any ERISA Affiliate has announced to employees, former employees, consultants or directors an intention to create, or otherwise created, a legally binding commitment to adopt any additional Employee Plan which is intended to cover employees or former employees of the Company (with respect to their relationship with the Company) or to amend or modify any existing Employee Plan which covers or has covered employees or former employees of the Company or any of its Subsidiaries (with respect to their relationship with the Company or any of its Subsidiaries).

Section 3.8.10 Unpaid Contributions . Neither the Company nor any ERISA Affiliate has any liability for unpaid contributions under Section 515 of ERISA with respect to any Multiemployer Plan.

Section 3.8.11 Insurance Contracts . No Employee Plan holds as an asset of any Employee Plan any interest in any annuity contract, guaranteed investment contract or any other investment or insurance contract issued by an insurance company that is the subject of bankruptcy, conservatorship or rehabilitation proceedings.

Section 3.8.12 No Acceleration or Creation of Rights . Neither the execution and delivery of this Agreement or the Escrow Agreement by the Company nor the consummation of the transactions contemplated hereby or thereby would reasonably be expected to result, either by itself or in combination with the satisfaction of any other conditions precedent in addition to the consummation of such transactions ( e.g. , a post-Closing termination of employment), in the acceleration or creation of any rights of any person to benefits under any Employee Plan (including, without limitation, the acceleration of the vesting or exercisability of any stock options, the acceleration of the vesting of any restricted stock, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement). No amounts payable to any Company Business Employee in connection with the Merger or any other transactions contemplated hereby, either upon consummation of the Merger or as a result of the satisfaction of any other conditions precedent in addition to the consummation of such transactions ( e.g. , a post-Closing termination of employment), will be considered “parachute payments” pursuant to Section 280G of the Code.

Section 3.8.13 No Other Material Liability . To the Knowledge of the Company, no event has occurred in connection with which the Company, any ERISA Affiliate or any Employee Plan, directly or indirectly, could be subject to any material liability (other than the payment of benefits under the terms of such Employee Plan) (A) under any statute, regulation or governmental order relating to any Employee Plan or (B) pursuant to any obligation of the Company to indemnify any person against liability incurred under any such statute, regulation or order as they relate to the Employee Plans.

Section 3.9 Labor and Other Employment Matters .

Section 3.9.1 Section 3.9.1 of the Company Disclosure Schedule sets forth a complete and accurate list (giving name, job title, credited service, current annual compensation (including a separate statement of base salary for the 2005 calendar year and bonus paid for the 2004 calendar year for each individual (other than bonuses under the Retention Plan))) of each Company Business Employee. Each Company Business Employee who is a member of management is in good standing with the Company. Neither the Company nor any of its Subsidiaries is or has ever been delinquent (except to the extent such delinquency has been fully remedied or cured) in payments to any current or former Company Business Employees or current or former Company Business Independent Contractors for any wages, salaries, commissions, bonuses or other similar direct compensation for any services performed for it or amounts required to be reimbursed to such employee. The Company and each of its Subsidiaries are in compliance in all material respects with all Applicable Law respecting labor, employment, immigration, fair employment practices, terms and conditions of employment, workers’ compensation, occupational safety, plant closings, wages and hours. The Company and each of its Subsidiaries has withheld all amounts required by Applicable Laws or by agreement to be withheld from the wages, salaries, and other payments to employees, and neither the Company nor any of its Subsidiaries is liable for any arrears of wages or any penalty for failure to comply with any of the foregoing. Neither the Company nor any of its Subsidiaries is liable for any payment to any trust or other fund or to any Governmental Authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for employees (other than routine payments to be made in the ordinary course of business and consistent with past practice).

Section 3.9.2 There are no pending claims against the Company or any of its Subsidiaries under any workers’compensation plan or policy or for long-term disability. Neither the Company nor any of its Subsidiaries is bound by or subject to (and none of their respective assets or properties are bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the Knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company or any of its Subsidiaries. There is no strike or other labor dispute involving the Company or any of its Subsidiaries pending or, to the Knowledge of the Company, threatened. The Company has not, during the three year period prior to the date of this Agreement, received any demand letters pursuant to Applicable Law, civil rights charges, suits, drafts of suits, administrative claims of or from any of its employees. There are no claims pending or, to the Knowledge of the Company, threatened, between the Company or any of its Subsidiaries and any current or former Company Business Employees or current or former Company Business Independent Contractors, which controversies have or could reasonably be expected to result in an action, suit, proceeding, claim, arbitration or investigation before any Governmental Authority.

Section 3.9.3 As of the date hereof, to the Knowledge of the Company, no current or former Company Business Employees or current or former Company Business Independent Contractors are in violation of any term of any employment contract, non-disclosure agreement, noncompetition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by the Company or any of its Subsidiaries because of the nature of the business conducted or presently proposed to be conducted by the Company or any of its Subsidiaries or to the use of trade secrets or proprietary information of others. To the Knowledge of the Company, no current or former Company Business Employees or current or former Company Business Independent Contractors are or have ever been in violation of any term of any employment contract, non-disclosure agreement, noncompetition agreement, or any restrictive covenant relating to the Company Business.

Section 3.9.4 No Company Business Employees or Company Business Independent Contractors have given notice to the Company or any of its Subsidiaries that any such Person intends to terminate his or her employment with the Company or any of its Subsidiaries. The Company and each of its Subsidiaries are in compliance with all Laws concerning the classification of employees and independent contractors and have properly classified all such Persons for purposes of participation in the Employee Plans.

Section 3.10 Tax Matter s.

Section 3.10.1 Filing of Tax Returns . The Company and each of its Subsidiaries have filed with the appropriate Taxing Authorities all Tax Returns required to have been filed. All such Tax Returns have been prepared in accordance with Applicable Law and are complete and accurate in all respects. All Taxes required to have been paid by the Company and each of its Subsidiaries have been paid, whether or not shown on any Tax Returns. None of the Company nor any of its Subsidiaries is currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where the Company or its Subsidiaries do not file Tax Returns that any of them is or may be subject to taxation by that jurisdiction.

Section 3.10.2 Payment of Taxes . The unpaid Taxes of the Company and its Subsidiaries did not, as of the date of the Unaudited Company Financial Statements, exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Unaudited Company Balance Sheet (rather than in any notes thereto). Since the date of the Unaudited Company Financial Statements, the Company and its Subsidiaries have not incurred any liability for Taxes outside the ordinary course of business (other than those incurred in connection with the Merger and the other transactions contemplated hereby) or otherwise inconsistent with past custom and practice.

Section 3.10.3 Audits, Investigations or Claims . No deficiencies for Taxes of the Company or any of its Subsidiaries have been claimed, proposed or assessed by any Taxing Authority which has not since been finally resolved by payment of such Taxes or agreement with the relevant Taxing Authority, with no unpaid liability for any such Taxes or under any such agreement. There are no pending or, to the Knowledge of the Company, threatened audits, assessments or other proceedings for or relating to any liability for Taxes payable by the Company or any of its Subsidiaries, and there are no matters under discussion with any Taxing Authority, or known to the Company with respect to Taxes that are likely to result in an additional liability for Taxes of the Company or any of its Subsidiaries. The Company has delivered or made available to Buyer complete and accurate copies of federal, state and local income Tax Returns and, to the extent specifically requested by Buyer, all other Tax Returns filed by the Company, its Subsidiaries and their respective predecessors since the relevant entity’s inception, and complete and accurate copies of all examination reports and statements of Tax owed arising out of audits or proceedings asserting or assessing Tax liabilities against the Company, any of its Subsidiaries or any of their respective predecessors in respect of an alleged failure of the Company, any of its Subsidiaries or any of their respective predecessors to timely file Tax Returns or pay Taxes otherwise due. None of the Company, any of its Subsidiaries or any of their respective predecessors has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency which is currently effective, nor has any request been made in writing for any such extension or waiver that was not executed as requested and for which the relevant period for assessment has not since expired. No power of attorney (other than powers of attorney authorizing employees of the Company or any of its Subsidiaries to act on behalf of the Company or any of its Subsidiaries, as applicable) with respect to any Taxes has been executed or filed with any Taxing Authority that is currently in force.

Section 3.10.4 Liens . There are no Encumbrances for Taxes (other than Encumbrances for Taxes not yet due and payable) on any Company Assets or any assets of the Company’s Subsidiaries. There are no existing circumstances which reasonably may be expected to result in the assertion of any claim for Taxes for periods through the Closing Date that, if adversely determined, would result in any Encumbrances for Taxes on the assets of the Company or any of its Subsidiaries (other than Encumbrances for Taxes not yet due and payable).

Section 3.10.5 Tax Elections . All material elections with respect to Taxes which would have continuing effect for taxable periods of the Company, any of its Subsidiaries or their respective successors for which Tax Returns have not yet been filed, to the extent such elections are not shown on or in the Tax Returns that have been delivered or made available to Buyer, are set forth on Section 3.10.5 of the Company Disclosure Schedule. Neither the Company nor any of its Subsidiaries (i) has consented at any time pursuant to former Section 341(f)(1) of the Code to have the provisions of former Section 341(f)(2) of the Code apply to any disposition of the assets of the Company; (ii) has agreed, or is required, to make any adjustment pursuant to Section 481(a) of the Code to its income for any taxable period for which a Tax Return has not been filed by reason of a change in accounting method; (iii) has made an election, or is required, to treat any of its assets as owned by another Person pursuant to the provisions of former Section 168(f) of the Internal Revenue Code of 1954 or as tax-exempt bond financed property or tax-exempt use property within the meaning of Section 168 of the Code; (iv) has acquired or owns any assets that directly or indirectly secure any debt the interest on which is tax exempt under Section 103(a) of the Code; (v) has made or will make a consent dividend election under Section 565 of the Code; (vi) has elected at any time to be treated as an S corporation within the meaning of Sections 1361 or 1362 of the Code; or (vii) made any of the foregoing elections or is required to apply any of the foregoing rules under any comparable state or local Tax provision.

Section 3.10.6 Tax Sharing Agreements . None of the Company or any of its Subsidiaries is a party to any agreement that obligates the Company or its Subsidiaries to make payments with respect to Taxes imposed on another Person (including agreements providing for an allocation of responsibility for or satisfaction of Taxes jointly owed by the Company or its Subsidiaries and any other Person and reimbursement of Taxes imposed on another Person, but excluding agreements that were not entered into for the primary purpose of allocating risk or responsibility for Tax liability and in which the provisions relating to Taxes are of a nature typical of similar agreements) (a “ Tax Sharing Agreement ”).

Section 3.10.7 Other Entity Liability . Neither the Company nor any of its Subsidiaries has ever been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which is the Company). Neither the Company nor any of its Subsidiaries has any liability for the Taxes of any Person (other than Taxes of the Company or any of its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign Law, and including any arrangement for group relief within a jurisdiction or similar arrangement), whether as a transferee or successor, by contract, or otherwise.

Section 3.10.8 Withholding . The Company and each of its Subsidiaries have withheld all Taxes required to have been withheld in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and has paid over to the relevant Taxing Authority all such withheld Taxes to the extent required to have been paid over.

Section 3.10.9 USRPHC. The Company has never been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

Section 3.10.10 Partnerships, Single Member LLCs, CFCs, PHCs and PFICs . Neither the Company nor any of its Subsidiaries (i) is a partner for Tax purposes with respect to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for Tax purposes, (ii) owns a single member limited liability company which is treated as a disregarded entity, (iii) is a stockholder of a “controlled foreign corporation” as defined in Section 957 of the Code, (iv) is a “personal holding company” as defined in Section 542 of the Code, and (v) is a “passive foreign investment company” within the meaning of Section 1297 of the Code.

Section 3.10.11 Permanent Establishment . Neither the Company nor any of its Subsidiaries has or has had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States of America and such foreign country.

Section 3.10.12 Disallowance of Interest Deductions . None of the outstanding indebtedness of the Company or any of its Subsidiaries constitutes indebtedness with respect to which any interest deduction is subject to disallowance under Sections 163(i) or 163(l) or 279 of the Code.

Section 3.10.13 International Boycotts . Neither the Company nor any of its Subsidiaries has participated in or is participating in an international boycott within the meaning of Section 999 of the Code.

Section 3.10.14 Tax Shelters . Neither the Company nor any of its Subsidiaries has participated in any “reportable transaction” within the meaning of Treasury Regulations Sections 1.6011-4(b)(1) that was, is, or, to the Knowledge of the Company, will ever be required to be disclosed by the Company or any of its Subsidiaries pursuant to Treasury Regulation Section 1.6011-4, and no Tax Return of the Company or its Subsidiaries has contained a disclosure statement under Section 6662 of the Code.

Section 3.10.15 Spin-Offs . Neither the Company nor any of its Subsidiaries has distributed the stock of any corporation in a transaction intended to satisfy the requirements of Section 355 of the Code since April 16, 1997, and the stock of each of the Company and any of its Subsidiaries has not been distributed in a transaction intended to satisfy the requirements of Section 355 of the Code since April 16, 1997.

Section 3.10.16 Deductibility of Payments . To the Knowledge of the Company, there is no Contract, plan or arrangement covering any employee or former employee of the Company or any of its Subsidiaries (with respect to such employee’s relationship with the Company or any of its Subsidiaries, as applicable) that , in connection with the Merger or any other transactions contemplated hereby, either upon the consummation of the Merger or as a result of the satisfaction of any other conditions precedent in addition to the consummation of such transactions ( e.g. , a post-Closing termination of employment), requires the payment by the Company or any of its Subsidiaries of any amount that is a “parachute payment” pursuant to Section 280G of the Code.

Section 3.11 Legal Proceedings . There are no legal, administrative, arbitral or other proceedings (including disciplinary proceedings), legal claims, suits, actions or governmental or regulatory investigations of any nature (collectively, “ Proceedings ”) that are pending or, to the Knowledge of the Company, threatened (i) against the Company, any of its Subsidiaries, any of the Company Assets or the Company Business or that challenge the validity or propriety of the transactions contemplated by this Agreement or the Escrow Agreement; (ii) involving any of the Company’s or any of its Subsidiaries’ products; or (iii) challenging the Company’s or any of its Subsidiaries’ right to use any products owned or licensed by any of the Company’s or its Subsidiaries’ vendors. There is no injunction, order, judgment, decree or regulatory restriction naming the Company imposed upon the Company or any of its Subsidiaries or any of the Company Assets or the Company Business.

Section 3.12 Compliance with Applicable Law .

Section 3.12.1 The Company and each of its Subsidiaries holds, and at all times has held (except where any failure has been cured or remedied), all material licenses, franchises, decrees, permits and authorizations required under Applicable Law (collectively, “ Permits ”) for the lawful ownership, operation and use of the Company Assets and the conduct of the Company Business under and pursuant to, and has complied with each in all material respects, and none of the Company or any of its Subsidiaries is in default under any Applicable Law relating to the Company or any of its Subsidiaries or any of their respective assets, properties or operations in any material respect, and there are no outstanding material violations of any of the above, and none of the Company nor any of its Subsidiaries has received notice asserting any such violation. The Company and each of its Subsidiaries have been and are in compliance with all Permits.

Section 3.12.2 No Governmental Authority has initiated, and no Governmental Authority has provided notice to the Company sufficient to give the Company Knowledge of any threatened proceeding or investigation into the business or operations of the Company or any of its Subsidiaries or any of their respective officers, directors or employees in their capacity as such with the Company or any of its Subsidiaries. There is no material unresolved deficiency, violation or exception claimed or asserted by any Governmental Authority with respect to any examination of any of the Company or any of its Subsidiaries.

Section 3.12.3 Neither the Company, any of its Subsidiaries nor any predecessor nor, to the Knowledge of the Company, any agent, employee or other Person associated with or acting on behalf of the Company or any of its Subsidiaries or any predecessor has, directly or indirectly, used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds, violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment, kickback or other similar unlawful payment.

Section 3.13 Environmental Matters . The Company and each of its Subsidiaries (v) are in compliance with all, and are not subject to any material liability, in each case with respect to any, applicable Environmental Laws, (w) hold or have applied for Environmental Permits materially necessary to conduct their current operations, and (x) are in material compliance with their respective Environmental Permits. Neither the Company nor any of its Subsidiaries has received any notice, demand, claim or request for information alleging that the Company or any of its Subsidiaries may be in violation of, or liable under, any Environmental Law. Neither the Company nor any of its Subsidiaries (y) has entered into or agreed to any consent decree or order or is subject to any judgment, decree or judicial order relating to compliance with Environmental Laws, Environmental Permits or the investigation, sampling, monitoring, treatment, remediation, removal or cleanup of Substances and, to the Knowledge of the Company, no investigation, litigation or other proceeding is pending or, to the Knowledge of the Company, threatened with respect thereto, or (z) is an indemnitor in connection with any threatened or asserted claim against the Company or any of its Subsidiaries by any third-party indemnitee for any liability under any Environmental Law or relating to any Substances. Neither the Company nor any of its Subsidiaries has, at any time, disposed of, discharged, emitted or released any amount of any Substance so as to contaminate any soil, groundwater, surface water, air or building materials of any property in a manner which would legally require remediation, investigation or similar response activity. No Substances are present as a result of the actions or omissions of the Company or its Subsidiaries, or, to the Knowledge of the Company, as a result of any actions of any third party or otherwise, in, on or under any property that the Company has at any time owned, operated, occupied or leased, including the land and the improvements, ground water and surface water thereof so as to give rise to any liability or clean-up obligation of the Company or its Subsidiaries under any Environmental Laws. To the Knowledge of the Company, of the real property owned or leased by the Company or any of its Subsidiaries is listed or, proposed for listing on the “National Priorities List” under CERCLA, as updated through the date hereof, or any similar state or foreign list of sites requiring investigation or cleanup.

Section 3.14 Properties . Neither the Company nor its Subsidiaries owns any real property nor has either ever owned any real property. The Company and each of its Subsidiaries have good and valid title to, or valid leasehold or license interests in, all of its properties and assets, free and clear of all Encumbrances other than Permitted Encumbrances. All such assets and properties, other than assets and properties in which the Company or any of its Subsidiaries has a leasehold interest, license or other rights, are free and clear of all Encumbrances. Each of the Company and its Subsidiaries has complied in all material respects with the terms of all leases of real property to which it is a party and under which it is in occupancy, and all such leases are in full force and effect. Each of the Company and its Subsidiaries enjoys quiet possession under all such leases. Section 3.14 of the Company Disclosure Schedule sets forth a complete list of all real property and interests in real property owned or leased by the Company and a true and complete list of all personal property, equipment and fixtures (other than items or categories of items having a book value of less than $50,000 individually) owned by the Company, all of which personal property, equipment and fixtures are in operating condition, normal wear and tear excepted.

Section 3.15 Insurance . Section 3.15 of the Company Disclosure Schedule includes a list of all policies of fire, liability, product liability, workmen’s compensation, health and other forms of insurance presently in effect with respect to the Company Business (the “ Company Insurance Policies ”), including the named insured(s) and all beneficiaries thereunder, true and complete copies of which have been delivered or made available to Buyer prior to the date hereof. All Company Insurance Policies are valid, outstanding and enforceable policies (subject to Applicable Law) and provide insurance coverage for the Company Assets and operation of the Company Business, of the kinds, in the amounts and against the risks required to comply in all material respects with Applicable Law relating to the Company and/or any contractual or other obligations, and such policies provide insurance coverage against the types of risks of the sort normally insured by similar businesses of similar size and nature. Neither the Company nor any of its Subsidiaries has been refused any insurance with respect to any aspect of the operations of its business that would otherwise be customarily provided to a similarly situated business, nor has its coverage been limited below customary limits for a company of the size and nature of the Company by any insurance carrier to which it has applied for insurance or with which it has carried insurance. No notice of cancellation or termination has been received by the Company from its insurer with respect to any such policy. The activities and operations of the Company and each of its Subsidiaries have been conducted in a manner so as to conform in all material respects to all applicable provisions of the Company Insurance Policies.

Section 3.16 No Broker . No broker, finder, investment banker, financial advisor or other similar Person has acted for or on behalf of, or is entitled to any broker’s, finder’s, advisory, opinion or similar fee or other similar commission from, the Company or any of its Affiliates in connection with this Agreement, the Escrow Agreement or the transactions contemplated hereby or thereby. The Company has heretofore provided to Buyer a complete copy of all agreements between the Company and any broker, finder, investment banker, financial advisor or similar other Person pursuant to which such Person would be entitled to any such payment relating to the transactions contemplated by this Agreement or the Escrow Agreement.

Section 3.17 Absence of Certain Changes or Events . From August 31, 2005 through the date hereof, there has not been or occurred any:

Section 3.17.1 Company Material Adverse Effect or any event or development that would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect;

Section 3.17.2 failure to operate the Company Business in the ordinary course so as to use all commercially reasonable efforts (i) to preserve the Company Business intact and (ii) to preserve the goodwill of employees, suppliers, customers and others having business relations with the Company or its Subsidiaries (except where the Company believes it necessary or desirable to terminate employment or business relations);

Section 3.17.3 (i) resignation or termination of any key employee or independent contractor, officer or manager, (ii) any increase in the rate of compensation (whether in cash, stock, or other equity instruments) payable or to become payable to any officer or manager of the Company (other than general, regularly-scheduled reviews), including, without limitation, the making of any loan (other than expense or sales commission advances in the ordinary course of business consistent with past practice) to, or the payment, grant or accrual of, any bonus, incentive compensation, service award or other similar benefit to, any such Person, or (iii) the adoption, addition to, or modification of, any Employee Plan, or (iv) any contribution to any Employee Plan other than contributions made in the ordinary course of business consistent with past practice, except, in the case of clauses (ii), (iii) and (iv), for the adoption of the Retention Plan;

Section 3.17.4 sale, assignment, license or transfer of, or the imposition of any Encumbrance (other than Permitted Encumbrances) on, any of the Company Assets, tangible or intangible, singly or in the aggregate, other than sales and licenses of products and services in the ordinary course of business and consistent with past practice;

Section 3.17.5 new Scheduled Contracts, or extensions, modifications, terminations or renewals thereof, except for Scheduled Contracts entered into, modified or terminated in the ordinary course of business and consistent with past practice;

Section 3.17.6 change in accounting methods or practices by the Company (other than as required by Applicable Law, GAAP or a Governmental Authority) revaluation by the Company of any of the Company Assets, including writing off or establishing reserves with respect to inventory, notes or accounts receivable (other than for which adequate reserves have been previously established or other than in the ordinary course of business consistent with past practice);

Section 3.17.7 damage, destruction or loss (whether or not covered by insurance) adversely affecting any material, tangible Company Assets;

Section 3.17.8 declaration, setting aside or payment of any dividend or distribution in respect of any capital stock of the Company or any redemption, purchase or other acquisition of any equity securities of the Company other than repurchases made below the then current fair market value pursuant to, and in accordance with, pre-existing restricted stock agreements, stock option agreements or other equity compensation plans or similar agreements;

Section 3.17.9 failure to pay any material obligation of the Company when due or promptly thereafter;

Section 3.17.10 cancellation of any indebtedness or waiver of any rights of substantial value to the Company, except in the ordinary course of business and consistent with past practice;

Section 3.17.11 indebtedness incurred by the Company for borrowed money or any commitment to borrow money entered into by the Company, or any loans made or agreed to be made by the Company (other than expense or sales commission advances to Company Business Employees in the ordinary course of business consistent with past practice);

Section 3.17.12 acquisition of any equity interest in any other Person (other than investments of cash in money market or similar funds); or

Section 3.17.13 agreement by the Company directly or indirectly to do any of the foregoing.

Section 3.18 Sufficiency of and Title to Assets . The Company owns, all right, title and interest in and to, or has a valid right to use, all of the properties, assets and rights of any kind, whether tangible or intangible, real or personal (including, without limitation, the Company’s Intellectual Property), necessary to enable the Company to conduct the Company Business (the “ Company Assets ”), free and clear of any Encumbrances other than Permitted Encumbrances. The Company has sole right, title and interest in and to all of the assets on the Unaudited Company Balance Sheet, free and clear of any Encumbrances (other than Permitted Encumbrances), other than assets disposed of, transferred, sold or otherwise eliminated in the ordinary course of business consistent with past practice since August 31, 2005.

Section 3.19 Potential Conflicts of Interest . No director or officer of the Company or any of its Subsidiaries has any claim against, or owes any amount to, the Company, except for claims for salary, commissions, accrued vacation pay, unreimbursed expenses and accrued benefits under Employee Plans.

Section 3.20 Transactions with Affiliates . The Company is not a party to any Contract (other than employment Contracts entered into in the ordinary course of business) or pending transaction with any of its directors, officers or, to the Knowledge of the Company, other Affiliate, or any corporation, partnership or other business association in which any employee director or officer has a material financial interest. The Company is not a party to any Scheduled Contract with any non-employee director or Company Affiliate or any corporation, partnership or other business association in which such non-employee director or Company Affiliate has a material financial interest. None of the Stockholders provides any material services to the Company or its Subsidiaries other than in such Stockholder’s capacity as an employee of the Company.

Section 3.21 Governmental Regulation . The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended (the “ Investment Company Act ”), which is required to be registered under the Investment Company Act in order to engage in the transactions described in Section 7 of that Act. The Company is not a “broker” or “dealer” within the meaning of the Exchange Act. The Company does not act as investment adviser or subadviser to any “investment company,” as defined in the Investment Company Act, which is registered under such Act.

Section 3.22 No Loss of Customers . Section 3.22 of the Company Disclosure Schedule contains a complete and accurate list of the Company’s top 20 customers during calendar year ended December 31, 2004, as measured by revenues received by the Company during such period (the “ Major Customers ”). Since December 31, 2004 through the date hereof, the Company has not suffered cancellations or non-renewals from any Major Customer. Since December 31, 2004 through the date hereof, there has been no material adverse change in the business relationship of the Company with any Major Customer, and neither the Company nor any of its Subsidiaries has received any written or oral communication regarding the intention of any Major Customer to terminate its relationship with the Company or any of its Subsidiaries.

Section 3.23 Books and Records . The Company has made and kept (and given Buyer access to) its true, correct and complete books and records and accounts, which, in reasonable detail, accurately and fairly reflect the activities of the Company Business in all material respects. The minute books of the Company and its Subsidiaries previously delivered to Buyer accurately and adequately reflect all action previously taken by the stockholders, board of directors and committees of the board of directors of the Company and its Subsidiaries. The copies of the stock book records of the Company previously delivered to Buyer in connection with Buyer’s due diligence are true, correct and complete, and accurately reflect all transactions effected in the Company’s equity securities through and including the date hereof. The Company has not engaged in any material transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the Company’s books and records.

Section 3.24 Takeover Statutes . The Company’s board of directors has taken all actions necessary to ensure that the restrictions applicable to business contained in Section 203 of the DGCL are inapplicable to the execution, delivery and performance of this Agreement and the Escrow Agreement and to the consummation of the Merger and the transactions contemplated hereby and thereby. As of the date thereof, no other Takeover Statute applies to or purports to apply to the Merger, this Agreement and the Escrow Agreement or the transactions contemplated hereby and thereby.

ARTICLE 4.
Representations and Warranties of Parent, Buyer and Merger Sub

As a material inducement to the Company to enter into this Agreement, each of Parent, Buyer and Merger Sub hereby represents and warrants to the Company as follows:

Section 4.1 Organization . Parent is a company, duly organized and validly existing under the Laws of Israel. Buyer is a corporation, duly organized, validly existing and in good standing under the Laws of the State of Delaware. Merger Sub is a corporation, duly organized, validly existing and in good standing under the Laws of the State of Delaware. Merger Sub has not conducted any business other than in connection with the negotiation and execution of this Agreement and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby.

Section 4.2 Authority; No Violation .

Section 4.2.1 Each of Parent, Buyer and Merger Sub has full power and authority to execute and deliver this Agreement and the Escrow Agreement to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Escrow Agreement to which each of Parent, Buyer and Merger Sub is a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of each of Parent, Buyer and Merger Sub, and no other corporate proceedings on the part of Parent, Buyer or Merger Sub is necessary to approve this Agreement or the Escrow Agreement to which either is a party or authorize or consummate the transactions contemplated hereby and thereby. This Agreement and the Escrow Agreement to which each of Parent, Buyer or Merger Sub is a party have been duly and validly executed and delivered by each of Parent, Buyer and Merger Sub (assuming the due authorization, execution and delivery of this Agreement and the Escrow Agreement by the other parties hereto and thereto) constitute valid and binding obligations of each of Parent, Buyer and Merger Sub, enforceable against each of Parent, Buyer and Merger Sub in accordance with their terms, except as the enforceability thereof may be subject to or limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to or affecting the rights of creditors generally and the availability of equitable relief (whether in proceedings at law or in equity).

Section 4.2.2 Neither the execution and delivery of this Agreement or the Escrow Agreement to which it is a party by each of Parent, Buyer and Merger Sub nor the consummation by Parent, Buyer or Merger Sub of the transactions contemplated hereby or thereby to be performed by Parent, Buyer or Merger Sub, nor compliance by Buyer or Merger Sub with any of the terms or provisions hereof or thereof, will (i) violate any provision of the organizational documents of Parent, Buyer or Merger Sub, (ii) (x) violate, conflict with or require any notice, filing, consent, waiver or approval under any Applicable Law to which Parent, Buyer, Merger Sub or any of their respective Subsidiaries or any of their respective properties, contracts or assets are subject, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with or without notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate or result in a right of acceleration of the performance required by, result in the creation of any Encumbrance upon the properties, contracts or assets of Parent, Buyer or Merger Sub under, or require any notice, approval, waiver or consent under, any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Buyer, Merger Sub or any of their respective Subsidiaries is a party, or by which Buyer, Merger Sub or any of their respective Subsidiaries, or any of their respective properties or assets, may be bound or affected.

Section 4.3 Consents and Approvals . Except for the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and such filings as are required to be made under the HSR Act, the Exon-Florio Act and any antitrust or similar regulatory filings in any foreign jurisdiction, no consents or approvals of or filings or registrations with any Governmental Authority or any third party are necessary in connection with the execution and delivery by Parent, Buyer or Merger Sub of this Agreement and the Escrow Agreement to which either is a party or the consummation by Parent, Buyer or Merger Sub of the transactions contemplated hereby or thereby.

Section 4.4 No Broker . No broker, finder investment banker, financial advisor or other similar Person has acted for or on behalf of, or is entitled to any broker’s, finder’s, advisory, opinion or similar fee or other commission from, Parent, Buyer, Merger Sub or any of their respective Subsidiaries in connection with this Agreement, the Escrow Agreement or the transactions contemplated hereby or thereby.

Section 4.5 Available Funds . Parent and Buyer together have available to them, and Parent will make available to Buyer, all funds necessary to satisfy all of Parent’s and Buyer’s obligations under this Agreement and in connection with the transactions contemplated hereby.

Section 4.6 Sufficient Shares Reserved for Option Exercise . Parent has duly authorized and reserved for issuance a sufficient number of Parent Ordinary Shares under its stock option plans for issuance to the Holders of Company Options that are assumed pursuant to this Agreement. The Parent Ordinary Shares underlying such assumed Company Options, when issued in accordance with the terms and conditions of the assumed Company Options, will be duly authorized, validly issued, fully paid and nonassessable.

ARTICLE 5.
Covenants and Additional Agreements

Section 5.1 Conduct of Business . Commencing with the execution and delivery of this Agreement and continuing until the earlier to occur of the Effective Time and termination of this Agreement in accordance with its terms, the Company shall carry on the operation of the Company Business in the ordinary course and substantially in accordance with past practice and shall use its commercially reasonable efforts not to take any action inconsistent with the provisions of this Agreement. Commencing with the execution and delivery of this Agreement and continuing until the earlier to occur of the Effective Time and termination of this Agreement in accordance with its terms, except as expressly set forth in this Agreement, the Company shall use its commercially reasonable efforts, in a manner consistent with its past practices, to maintain the present character and quality of the Company Business, including, without limitation, its present operations, physical facilities, working conditions, goodwill and relationships with lessors, licensors, suppliers, customers, employees and independent contractors. Commencing with the execution and delivery of this Agreement and continuing until the earlier to occur of the Effective Time and termination of this Agreement in accordance with its terms, without limiting the generality of the foregoing, unless specifically consented to by Buyer in advance in writing or by e-mail (which consent shall not be unreasonably withheld), except as expressly set forth in or contemplated by this Agreement or the Retention Plan, the Company and its Subsidiaries shall not:

Section 5.1.1 incur any indebtedness for borrowed or purchase money or letters of credit (other than in the ordinary course of business consistent with past practice under existing lines of credit), or assume, guarantee, endorse (other than endorsements for deposit or collection in the ordinary course of business), or otherwise become responsible for obligations of any other Person in excess of $10,000 in the aggregate;

Section 5.1.2 issue (except pursuant to Company Options outstanding on the date of this Agreement and disclosed on Section 3.2.2 of the Company Disclosure Schedule, Company Warrants outstanding on the date of this Agreement and disclosed on Section 3.2.3 of the Company Disclosure Schedule and upon the conversion of shares of Preferred Stock issued and outstanding on the date of this Agreement) or commit to issue any shares of its capital stock or any other securities or any securities convertible into shares of its capital stock or any other securities, including, without limitation, any options to acquire capital stock (other than options issued to new hires in the ordinary course of business and in amounts consistent with past practices);

Section 5.1.3 except as may be necessary or desirable in connection with Section 2.6.7 hereof or obtaining the approval referenced in Section 5.6.2 hereof, amend, waive or modify any terms of any Company Option or Company Warrant, including, without limitation, by directly or indirectly increasing or reducing the per share exercise price or the number of shares of Common Stock subject to any Company Option or Company Warrant;

Section 5.1.4 other than the payment of accrued but unpaid dividends to the holders of Preferred Stock as part of the aggregate consideration paid by Buyer hereunder in compliance with the terms of the Company Certificate of Incorporation, declare, set aside, make, pay or incur any obligation to pay any dividend or distribution on its capital stock (whether payable in cash, stock, property or a combination thereof) or enter into any voting agreement with respect to its capital stock;

Section 5.1.5 reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock, other equity interests or securities (other than repurchases made at or below then current fair market value pursuant to, and in accordance with, pre-existing restricted stock agreements, stock option agreements or under other equity compensation plans or similar agreements in effect on the date hereof);

Section 5.1.6 make any change to the Company's Certificate of Incorporation or the Company's bylaws;

Section 5.1.7 mortgage, pledge or otherwise encumber (other than through the involuntary imposition of Permitted Encumbrances solely of a nature described in clauses (i), (ii), (v) or (vi) of the definition of “Permitted Encumbrances” set forth herein) any Company Assets or sell, transfer, license or otherwise dispose of any Company Assets except for (i) the non-exclusive license of Intellectual Property or (ii) the sale of inventory to customers, in the case of the matters referred to in the foregoing clauses (i) and (ii), in the ordinary course of business and consistent with the Company’s past practice;

Section 5.1.8 make or commit to make any loan to any Person (other than expense and sales commission advances to Company employees in the ordinary course of business consistent with past practice);

Section 5.1.9 cancel, release or assign any material indebtedness owed to it or any material claims or rights held by it or waive any rights of material value to the Company; provided that for purposes of this sentence, any amount equal to, or in excess of $50,000, individually or in the aggregate, shall be deemed to be material;

Section 5.1.10 make any (i) investment or commitment of a capital nature either by purchase of stock or securities, other than investments of cash in money market or similar funds, (ii) contributions to capital, (iii) business or product line acquisitions, or (iv) by the purchase of any property or assets of any other Person, other than (A) the purchase of inventory in the ordinary course of business consistent with past practice or (B) in accordance with the Company’s present operating plan attached to Section 5.1.10 of the Company Disclosure Schedule;

Section 5.1.11 adopt a plan of partial or complete liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization (other than the Merger) or otherwise permit its corporate existence to be suspended, lapsed or revoked;

Section 5.1.12 unless otherwise permitted by the express provisions of Section 5.1.1 – Section 5.1.23, inclusive, (i) enter into any Contract that would have been a Scheduled Contract if it had been executed prior to the date hereof, (ii) terminate any Scheduled Contract or any Contract described in the immediately preceding clause (i), or (iii) make any change in or waive or exercise any right under any Scheduled Contract or any Contract described in the immediately preceding clause (i);

Section 5.1.13 other than in the ordinary course of business consistent with past practice, (i) enter into or modify any employment Contract, (ii) change the status, title or responsibilities, including without limitation, termination or promotion, of any officer of the Company, or promote any Company Business Employee (who is not an officer as of the date of this Agreement) to an officer position; (iii) pay any compensation to or for any Company Business Employee, officer or director other than in the ordinary course of business and pursuant to existing employment arrangements; (iv) approve or adopt any commission, bonus, retention or similar plan or target, (v) pay or agree to pay any bonus, incentive compensation, service award, severance, “stay bonus” or other like benefit, (vi) enter into or modify any other Employee Plan, or (vii) modify any Employee Plan (provided, however , that for this clause (vii), the Retention Plan shall not be modified except to allocate awards thereunder with Buyer’s approval notwithstanding anything to the contrary); provided, however , that notwithstanding the foregoing, for retention purposes, the Company may increase the annual compensation payable to any employees of the Company in amounts that do not exceed the amounts set forth in Section 5.1.13 of the Company Disclosure Scheduled;

Section 5.1.14 make any change in any method of accounting or accounting practice other than as required by GAAP, Applicable Law or any Governmental Authority;

Section 5.1.15 file any material Tax Return or any material amendment to a material Tax Return, make or change any election in respect of Taxes, adopt or change any material accounting method in respect of Taxes, enter into any Tax Sharing Agreement or any closing agreement with a Taxing Authority, settle or compromise any claim, notice, audit report or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes;

Section 5.1.16 (i) prepay any long-term debt, or pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, contingent or otherwise) (except in the ordinary course of business consistent with past practice or as necessary and with Buyer’s consent in order to comply with Section 6.3.12 ), (ii) willfully accelerate or delay the collection of notes or accounts receivable in advance of or beyond their regular due dates or the dates on which the same would have been collected in the ordinary course of business consistent with past practice; (iii) willfully delay or accelerate the payment of any account payable in advance of its due date or the date such liability would have been paid in the ordinary course of business consistent with past practice, (iv) vary the Company’s inventory practices in any material respect from the Company’s past practices or (v) fail to pay any material obligation of the Company when due;

Section 5.1.17 Change the accounting methods or practices by the Company or revalue any of the Company Assets, including writing off or establishing reserves with respect to inventory, notes or accounts receivable (other than for which adequate reserves have been previously established) other than as required by GAAP, Applicable Law or any Governmental Authority;

Section 5.1.18 write up, write down or write off the book value of any Company Assets, except for depreciation and amortization in accordance with GAAP consistently applied;

Section 5.1.19 other than (i) the payment of the Goldman Sachs Fee and the out-of-pocket legal, accounting and similar advisory fees and expenses set forth in the Statement of Closing Expenses, and (ii) except as permitted by clause (iv) of Section 5.1.10, make any individual cash payment in excess of $10,000, other than payments made in the ordinary course of business consistent with past practice (including, without limitation, payments for Taxes due and payments to the Company’s suppliers in the ordinary course of business) or consistent with the Company’s plan attached hereto as Section 5.1.19 of the Company Disclosure Schedule;

Section 5.1.20 waive, release, assign, settle or compromise any material claims or settle any Proceeding;

Section 5.1.21 do any other act or fail to take any action, that would cause any representation or warranty of the Company in this Agreement that is currently true to be or become untrue in any material respect that is not in the ordinary course of business consistent with past practice;

Section 5.1.22 take any action regarding any Registered Company Intellectual Property, other than (i) filing continuations for existing patent applications or completing or renewing registrations of existing patents, domain names, trademarks or service marks in the ordinary course of business and (ii) the enforcement of rights under, and the filing and maintenance of, Patents, Trademarks, Copyrights and applications therefor in the ordinary course of business;

Section 5.1.23 grant any rights in Intellectual Property except in the ordinary course of business and consistent with past practice; or

Section 5.1.24 directly or indirectly take, agree to take or otherwise permit to occur any of the actions described in Section 5.1.1 through Section 5.1.23, inclusive.

Section 5.2 Confidentiality and Announcements .

Section 5.2.1 The parties to this Agreement hereby agree to be bound by and comply with the provisions set forth in the Non-Disclosure Agreement, the provisions of which (other than the eleventh and twelfth paragraphs thereof, which are terminated and superseded hereby) are hereby incorporated herein by reference. Effective upon, and only upon the earlier of (i) the Closing or (ii) the termination date set forth in the seventeenth paragraph of the Non-Disclosure Agreement, the parties obligations under the Non-Disclosure Agreement shall terminate.

Section 5.2.2 Subject to Section 5.2.1 of this Agreement, the parties hereto shall consult with each other as to the form, substance and timing of any press release or other public disclosure related to this Agreement or the transactions contemplated hereby and no such press release or other public disclosure shall be made without the consent of the other parties hereto, which consent shall not be unreasonably withheld or delayed; provided , however , that the parties may make such disclosure to the extent (i) such disclosure is compelled by legal process (by interrogatories, subpoena, civil investigative demand or similar process) or (ii) such disclosure is required, based upon the written advice of counsel, pursuant to the requirements of any Applicable Law (including without limitation the Securities Act, the Exchange Act or, in the case of Buyer only, any rule or regulation promulgated by any national stock exchange or the NASDAQ National Market).

Section 5.3 Access by Buyer . Subject to the terms of the Non-Disclosure Agreement, commencing with the execution and delivery of this Agreement and continuing until the earlier to occur of the Effective Time and termination of this Agreement in accordance with its terms, the Company shall, and shall cause each of its directors, officers, employees and representatives to, afford Buyer and its representatives reasonable access upon reasonable notice and at all reasonable times to the Company Business for the purpose of inspecting the same, and to its directors, officers, employees and representatives, properties, books and records, Contracts and Company Assets, and shall furnish Buyer and its representatives, upon reasonable notice and in a timely manner, all financial, operating and other data and information as Buyer or its Affiliates, through their respective representatives, may reasonably request. Notwithstanding anything to the contrary in this Agreement, nothing learned by, discovered by or otherwise disclosed to Parent, Buyer or any of their Affiliates or representatives pursuant to this Section 5.3 shall amend or modify any representation or warranty of the Company in this Agreement in any manner or adversely affect the rights and remedies of Parent and Buyer under this Agreement and Applicable Law.

Section 5.4 Notification of Certain Matters . Commencing with the execution and delivery of this Agreement and continuing until the earlier to occur of the Effective Time and termination of this Agreement in accordance with its terms, the Company shall give prompt notice to Buyer of (i) the occurrence, or failure to occur, of any event after the date hereof that would cause any representation or warranty of the Company contained in this Agreement or in any Escrow Agreement to which it is a party to be untrue or inaccurate in any material respect and (ii) any failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder (each, a “ Development ”); provided , however , that such disclosure shall not be deemed to amend or modify any representation or warranty of the Company in this Agreement in any manner or adversely affect the rights and remedies of Parent and Buyer under this Agreement and Applicable Law. The Company shall promptly notify Buyer of any Development that occurs before the Closing that would reasonably be expected to result in a Company Material Adverse Effect, to materially adversely affect the ability of the Company to consummate any of the transactions contemplated by this Agreement or the Escrow Agreement.

Section 5.5 Acquisition Proposals .

Section 5.5.1 Subject to the terms of Section 5.5.2 and Section 5.5.3, commencing with the execution and delivery of this Agreement and continuing until the earlier to occur of the Effective Time and termination of this Agreement in accordance with its terms, the Company shall not, and shall not authorize or knowingly permit any of its directors, officers, employees, agents or other representatives to, directly or indirectly: (i) solicit, encourage, initiate, substantively review (except as may be permitted by the DGCL) or participate in any negotiations or discussions with respect to any offer or proposal (formal or informal, oral, written or otherwise) to acquire all or any part of the Company, whether by purchase of assets, exclusive license, joint venture formation, purchase of stock, business combination or otherwise (other than (A) discussions with Parent and Buyer regarding this Agreement, the Merger and the other transactions contemplated hereby, and (B) discussions with current and former Company Business Employees or any Holders of Company Warrants outstanding on the date hereof or granted after the date hereof in accordance with the terms of this Agreement regarding the exercise and termination of any Company Options and Company Warrants) (an “ Acquisition Proposal ”), (ii) disclose any information not customarily disclosed to any Person concerning the Company and which the Company believes would be used for the purposes of formulating any Acquisition Proposal, (iii) assist, cooperate with, facilitate or encourage any Person to make any Acquisition Proposal (directly or indirectly), or (iv) agree to, enter into a Contract regarding, approve, recommend or endorse any transaction involving, any Acquisition Proposal. Commencing with the execution and delivery of this Agreement and continuing until the earlier to occur of the Effective Time and termination of this Agreement in accordance with its terms, the Company shall notify Buyer promptly of any proposal or offer (formal or informal, oral, written or otherwise), or any inquiry or contact with any Person with respect thereto, regarding any Acquisition Proposal, such notice to include the identity of the Person proposing such Acquisition Proposal and the terms thereof, and shall keep Buyer apprised, on a current basis, of the status of any such Acquisition Proposal and of any modifications to the terms thereof. Subject to the terms of Section 5.5.2 and Section 5.5.3, the Company shall immediately cease and cause to be terminated any and all existing activities, discussions or negotiations with any Persons conducted prior to the execution and delivery of this Agreement with respect to any Acquisition Proposal.

Section 5.5.2 Notwithstanding the provisions of Section 5.5.1 hereof, the Company may, in response to an unsolicited proposal for an Acquisition Proposal made after the date of this Agreement and prior to the Company’s receipt of the Stockholder Consent, which did not result from a knowing breach of Section 5.5.1 and which the Company’s board of directors determines, in good faith, after consultation with outside legal counsel and financial advisors, is or would reasonably be expected to lead to a Superior Proposal (as defined below), and subject to compliance with the last sentence of Section 5.5.1, (i) furnish information with respect to Company to the Person making such Acquisition Proposal and its officers, directors, employees, investment bankers, attorneys or other advisors or representatives (“ Advisors ”) pursuant to a customary confidentiality agreement not less restrictive of the other party than the Non-Disclosure Agreement, and (ii) participate in discussions or negotiations with such person and its Advisors regarding such Acquisition Proposal; provided, however , that notwithstanding the foregoing or anything to the contrary in this Agreement, the parties hereto agree that the terms of this Section 5.5.2 shall have no further force or effect whatsoever upon the Company’s receipt of the Stockholder Consent and, in furtherance thereof, the Company hereby irrevocably waives any rights to enforce or seek to enforce or invoke the terms of this Section 5.5.2 immediately upon its receipt of the Stockholder Consent.

Section 5.5.3 If the Company’s board of directors receives a Superior Proposal after the date of this Agreement and prior to the Company’s receipt of the Stockholder Consent, which Superior Proposal was not knowingly solicited by the Company in violation of Section 5.5.1, and as a result thereof the Company’s board of directors determines, in good faith, after consultation with outside legal counsel and financial advisors, that the Company is required to take the applicable action described in the following clauses (i), (ii) or (iii) in order to fulfill their fiduciary duties to the Company’s stockholders, the Company’s board of directors may (i) terminate this Agreement pursuant to clause (ii) of Section 7.1.7, (ii) change or modify its recommendation to the Stockholders with respect to this Agreement, the Merger and the transactions contemplated hereby, and/or (iii) recommend such Superior Proposal to the Stockholders and may authorize the Company immediately thereafter to enter into an agreement with respect to such Superior Proposal, but only (x) at a time that is not less than 48 hours after the Company’s delivery to Buyer of written notice advising Buyer that the Company’s board of directors is prepared to approve a Superior Proposal, identifying the person making such Superior Proposal and otherwise complying with this Section 5.5.3 and (y) after taking into full account any proposal by Buyer to amend the terms or conditions of the Merger and this Agreement. For purposes of this Agreement, the term “ Superior Proposal ” shall mean any Acquisition Proposal to acquire all or substantially all of the equity securities, or all or substantially all of the assets, of the Company, pursuant to a tender or exchange offer, a merger, a consolidation, a liquidation or dissolution, a recapitalization, a sale of all or substantially all of its assets or otherwise, which the Company’s board of directors determines in good faith, after consultation with outside legal counsel and its financial advisors, if completed on the terms proposed, would be more favorable to the Stockholders than the Merger, taking into account (i) all of the terms and conditions of such proposal and this Agreement (including any proposal by Buyer to amend the terms of the Merger) and (ii) such other factors (in addition to price) as the Company’s board of directors reasonably considers to be relevant (including, for example, legal, regulatory, and timing factors); provided, however , that notwithstanding the foregoing or anything to the contrary in this Agreement, the parties hereto agree that the terms of this Section 5.5.3 shall have no further force or effect whatsoever upon the Company’s receipt of the Stockholder Consent and, in furtherance thereof, the Company hereby irrevocably waives any rights to enforce or seek to enforce or invoke the terms of this Section 5.5.3 immediately upon its receipt of the Stockholder Consent.

Section 5.5.4 Nothing contained in this Section 5.5 shall prohibit the Company from making any disclosure to its Stockholders if, in the reasonable good faith judgment of the Company’s board of directors, after consultation with outside counsel, the Company’s board of directors determines that it is required to make such disclosure to its stockholders in order to satisfy its fiduciary duties under Applicable Law.

Section 5.6 Company Stockholder Approval .

Section 5.6.1 The Company shall use its best efforts to obtain the Stockholder Consent immediately following the execution of this Agreement. Promptly upon obtaining the Stockholder Consent, the Company shall prepare and, as soon as reasonably practicable, send to all Holders of Company Stock on the record date for the Stockholders Consent who did not execute such Stockholder Consent the notices required pursuant to Sections 228 and 262 of the DGCL. Such materials submitted to the Company’s stockholders in connection with such Stockholder Consent shall be subject to review and comment (not to be unreasonably withheld or delayed) by Buyer and, with respect to the notice required by Section 262 of the DGCL, shall include an information statement regarding the Company, Parent and Buyer, the terms of this Agreement and the Merger and the unanimous recommendation of the Company’s board of directors that the Company’s stockholders vote their shares in favor of the adoption of this Agreement and the approval of the Merger and the other transactions contemplated by this Agreement and the Escrow Agreement (the “Information Statement ”). Each party agrees that information supplied by such party for inclusion in the Information Statement will not, on the date the Information Statement is first sent or furnished to the Stockholders contain any statement which, at such time, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they are made, not false or misleading. The parties shall update, amend and supplement the Information Statement from time to time as may be required by Applicable Laws.

Section 5.6.2 Promptly following the execution and delivery of this Agreement, the Company shall use commercially reasonable efforts to determine those persons who may constitute “disqualified individuals” within the meaning of Section 280G of the Code whose receipt of payments that are contingent on the change of ownership that will result from consummation of the Merger (the “ 280G Payments ”) may cause them to receive “excess parachute payments” within the meaning of Section 280G of the Code. The Company shall consult in good faith with Parent and Buyer in connection with such determination and shall permit Parent and Buyer to review the work papers of the Company and any advisors retained to assist the Company in making its determination. The disqualified individuals who are determined by the Company, after consultation with Parent and Buyer, to be the prospective recipients of excess parachute payments in connection with the Merger shall be referred to herein as the “ Disqualified Individuals ”. The Company shall use commercially reasonable efforts to procure a binding agreement from each Disqualified Individual pursuant to which each such Disqualified Individual agrees to waive his or her right to receive an amount of his or her 280G Payments that will be sufficient to cause his or her remaining 280G payments not to be parachute payments in the event that the Company stockholders fail to approve the payments placed at risk pursuant to such waivers. In the event that the Company procures one or more waivers of any 280G Payments, the Company shall promptly submit (in a manner reasonably satisfactory to Buyer) the 280G Payments subject to such waivers for approval by the Company’s stockholders by the requisite vote under Applicable Law, so that, if approved, such 280G Payments shall not be deemed to be “parachute payments”pursuant to Section 280G of the Code. The Company shall keep Parent and Buyer reasonably informed of the status and results of such stockholder submission and vote and the outcome thereof.

Section 5.7 Takeover Statutes . If any Takeover Statute is or may become applicable to the Merger or any of the other transactions contemplated by this Agreement and the Escrow Agreement, the board of directors of the Company shall grant such approvals and take such actions as are necessary so that the Merger and such other transactions contemplated by this Agreement and the Escrow Agreement may be consummated as promptly as practicable on the terms set forth in this Agreement and the Escrow Agreement and otherwise act to eliminate the effects of any Takeover Statute on the Merger and any of the other transactions contemplated by this Agreement and the Escrow Agreement.

Section 5.8 Further Assurances . Upon the terms and subject to the conditions contained in this Agreement, the parties hereby agree, in each case both before and after the Closing, (i) to use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement and the Escrow Agreement, including obtaining such consents, approvals and notices set forth in, or otherwise required to be in, Section 3.4 of the Company Disclosure Schedule, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder and thereunder and (iii) to cooperate, to the extent practicable, with each other in connection with the foregoing. Without limiting the generality of the foregoing, the parties agree to use their respective commercially reasonable efforts (A) to promptly seek to obtain any necessary consents (including, without limitation, the making, promptly after the date hereof, of all filings required to be made under the HSR Act, the Exon-Florio Act and/or with any Governmental Authority with respect to this Agreement, the Escrow Agreement, the Merger and the other transactions contemplated hereby and thereby), (B) to give all notices to, and make all registrations and filings with third parties, including submissions of information requested by Governmental Authorities and (C) to fulfill all other conditions to this Agreement. Notwithstanding the foregoing, (y) no material amendment or modification shall be made to any Contract to obtain any required consent without the prior written consent of Buyer and (z) no party hereto or any of their respective Affiliates shall be required to sell, transfer, divest or otherwise dispose of any of its respective business, assets or properties in connection with this Agreement, the Escrow Agreement, the Merger or any of the other transactions contemplated hereby or thereby in connection with obtaining such consents or making such filings. Each party shall deliver customary closing certificates and representations for the purpose of facilitating delivery of the opinions of counsel contemplated by this Agreement.

Section 5.9 Employee Matters .

Section 5.9.1 As soon as practicable following the Effective Time, Buyer may (unless Buyer elects in its discretion to maintain comparable Employee Plans of the Company) enroll those current Company Business Employees who will be retained by the Surviving Corporation following the Closing (each a “ Retained Company Employee ”) in Buyer’s “employee benefit plans” as defined in Section 3(3) of ERISA or other plans, arrangements or agreements providing benefits to employees (or to any dependent or beneficiary thereof) of Buyer, including, without limitation, all incentive, bonus, deferred compensation, vacation, holiday, cafeteria, medical, disability, stock purchase, stock option plans, policies, programs, practices or arrangements (each a “ Buyer Benefit Plan ”). The date of Buyer’s enrollment of Retained Company Employees in the Buyer Benefit Plans may vary with respect to each Buyer Benefit Plan, but shall hereafter be referred to with respect to each Buyer Benefit Plan as the “ Benefit Plan Enrollment Date .” During the period between the Effective Time and the Benefit Plan Enrollment Date, if any, for a Buyer Benefit Plan, each Retained Company Employee shall remain enrolled in the relevant Company Benefit Plans.

Section 5.9.2 Unless Buyer and the Company agree otherwise in writing, the board of directors of the Company shall adopt resolutions terminating, effective at least one (1) day prior to the Closing Date but contingent on Closing, any Employee Plan which is intended to meet the requirements of Section 401(k) of the Code (each such Employee Plan, a “ 401(k) Plan ”). At the Closing, the Company shall provide Buyer (i) executed resolutions of the board of directors of the Company authorizing such termination and (ii) an executed amendment to each such 401(k) Plan intended to assure compliance with all applicable requirements of the Code and regulations thereunder. The form of such resolutions and amendment shall be subject to prior reasonable approval of Buyer, and the Company shall take any such reasonable steps to terminate the 401(k) Plan as Buyer may direct.

Section 5.9.3 Buyer shall use commercially reasonable efforts to provide that each of the Retained Company Employees (i) shall receive benefits comparable to similarly situated employees of Buyer or Parent and (ii) shall be credited with their years of service with the Company for purposes of eligibility to participate and vesting in any Buyer benefit plans intended to be qualified under Section 401(a) of the Code, (iii) subject to any limitations set forth in Buyer’s benefit plans, or applicable to such plans under Applicable Law, shall not be subject to any exclusions for pre-existing conditions under such plans, and (iv) shall be permitted to carry over any vacation leave accrued as of the Closing Date (not to exceed 240 hours for each individual Retained Company Employee, subject to Applicable Law) under the Company’s vacation leave policy.

Section 5.10 Statement of Closing Expenses . Not later than three (3) Business Days prior to the Closing Date, the Company shall provide to Buyer an itemized list (the “ Statement of Closing Expenses ”) of (i) the Goldman Sachs Fee, (ii) all (A) out-of-pocket legal, accounting and other similar advisory fees and expenses of the Company incurred by the Company in connection with the negotiation and preparation of this Agreement and the consummation of the transactions contemplated hereby (other than the Goldman Sachs Fee) and (B) termination fees and expenses paid or payable to Silicon Valley Bank in connection with the termination of the Company’s credit facility with Silicon Valley Bank in connection with the transactions contemplated hereby (the items in this clause (ii), “ Company Transaction Expenses ”), and (iii) the Recent Accelerated Option Value. Any Company Transaction Expenses in excess of $550,000 shall be deemed “ Excess Company Transaction Expenses .” Parent, Buyer and Merger Sub shall pay any expenses related to the filings made by such parties under the HSR Act and the Exon-Florio Act. Except as expressly provided otherwise in this Agreement, the parties shall each bear their respective direct and indirect expenses incurred in connection with the negotiation and preparation of this Agreement and the Escrow Agreement and the consummation of the Merger and the other transactions contemplated hereby and thereby.

Section 5.11 Statement of Closing Consideration . No later than three (3) Business Days prior to the Closing Date, the Company shall provide to Buyer a statement (the “ Statement of Closing Consideration ”) setting forth the following information as of immediately prior to the Effective Time: (i) the names, addresses and, if reasonably requested, taxpayer identification numbers of each Holder, (ii) the type and number of shares of Company Stock held by each such Holder, (iii) the number of Company Options held by each such Holder, (iv) the number and type of Company Warrants held by each such Holder, (iv) each such Holder’s allocation of Transaction Consideration and Escrow Cash, which shall be in accordance with Article 2 hereof and the terms and conditions of the Company Certificate of Incorporation, and (v) (A) in the case of Company Options to be assumed by Buyer at the Closing pursuant to this Agreement, the number of shares of Company Stock issuable upon the exercise in full of each such assumed Company Option immediately prior to the Effective Time and the respective pre-Closing exercise prices thereof, or (B) in the case of Vested Company Options to be cancelled pursuant to this Agreement, the amount of cash to be paid in respect of each such Vested Company Option.

Section 5.12 Retention Bonuses . Promptly following the execution and delivery of this Agreement and prior to the Closing, Parent, Buyer and the Company shall work together in good faith to allocate the $2.5 million in cash set aside under the Retention Plan among the Company Business Employees who accept offers of employment with Parent or Buyer in connection with the Merger and the other transactions contemplated hereby, subject only to being employed by Parent or one of its Subsidiaries on the payment date of such bonuses.

Section 5.13 Indemnified Directors and Officers .

Section 5.13.1 For a period of no less than six (6) years following the Effective Time, the certificate of incorporation and bylaws of the Surviving Corporation shall contain provisions no less favorable with respect to indemnification of, and advancement of expenses to, present and former directors and officers of the Company than those set forth in the Company Certificate of Incorporation and the Company’s bylaws on the date of this Agreement, which provisions shall not be amended, repealed or otherwise modified for a period of six (6) years from the Closing Date in any manner that would adversely affect the rights thereunder of the individuals who immediately prior to the Closing are present or former directors or officers of the Company, unless such modification is required after the Closing by Applicable Law.

Section 5.13.2 Parent, Buyer or the Surviving Corporation shall maintain in effect for six (6) years following the Effective Time, if available, the current directors’ and officers’ liability insurance policy (the “ D&O Policy ”) maintained by the Company (provided that the Surviving Corporation may substitute therefor policies of at least the same coverage containing terms and conditions that are not less favorable) with respect to matters occurring prior to the Effective Time; provided, however , that in no event shall Parent, Buyer or the Surviving Corporation be required to expend in the aggregate an amount per year in excess of 200% of the current annual premium paid by the Company (which annual premium is set forth on Section 5.13.2 of the Company Disclosure Schedule) for such D&O Policy (such 200% amount, the “ Maximum Annual Premium ”); and provided, further , that if the aggregate premiums of such insurance coverage exceed such amount, Parent, Buyer and the Surviving Corporation shall be obligated to obtain a policy with the greatest coverage available for a cost not exceeding the Maximum Annual Premium. Prior to the Effective Time, notwithstanding anything to the contrary in this Agreement, the Company may purchase a six-year “tail” prepaid policy on the D&O Policy on terms and conditions no less advantageous than the D&O Policy, provided that the amount paid by the Company for such “tail” policy shall not exceed 200% of the Maximum Annual Premium. In the event that the Company purchases such a “tail” policy prior to the Effective Time, Parent, Buyer and the Surviving Corporation shall maintain such “tail”policy in full force and effect and continue to honor their respective obligations thereunder, in lieu of all other obligations of Parent, Buyer and the Surviving Corporation under the first sentence of this Section 5.13.2 for so long as such “tail” policy shall be required to be maintained in full force and effect.

Section 5.13.3 Each of Parent and Buyer agrees that it shall, and shall cause the Surviving Corporation and its Subsidiaries to, jointly and severally, indemnify each Person who is now, or has been at any time prior to the date hereof, a director or officer of the Company or of any of its Subsidiaries, and each of their successors and assigns (the “ Indemnified Officers and Directors ”), with respect to any claim, liability, loss, damage, judgment, fine, penalty, amount paid in settlement or compromise, cost or expense (including reasonable fees and expenses of legal counsel), against any of the Indemnified Officers and Directors in his or her capacity as a officer or director of the Company or its Subsidiaries, whenever asserted or claimed, based in whole or in part on, or arising in whole or in part out of, any facts or circumstances occurring at or prior to the Effective Time whether commenced, asserted or claimed before or after the Effective Time, including liability arising under Applicable Law and including any liability arising out of or pertaining to the transactions contemplated by this Agreement, in each case to the same extent as provided in the Company’s bylaws or the Company Certificate of Incorporation or any other applicable contract or agreement in effect on the date of this Agreement. In the event of any claim, liability, loss, damage, judgment, fine, penalty, amount paid in settlement or compromise, cost or expense described in the preceding sentence, Parent, Buyer and the Surviving Corporation shall pay the reasonable fees and expenses of counsel selected by the Indemnified Officers and Directors promptly after statements are received in advance of settlement, judgment or other resolution thereof to such Indemnified Officers and Directors upon request for reimbursement of documented expenses reasonably incurred, provided the applicable Indemnified Officers and Directors provide an undertaking to repay all advanced expenses if it is finally judicially determined that such Indemnified Officers and Directors are not entitled to indemnification.

Section 5.13.4 If Parent, Buyer or the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Parent, Buyer or the Surviving Corporation, as the case may be, shall assume the obligations set forth in this Section 5.13.

Section 5.13.5 The rights of each of the Indemnified Officers and Directors under this Section 5.13 shall be in addition to any rights such Person may have under the Company Certificate of Incorporation, bylaws or similar organizational documents of the Company or any of its Subsidiaries, or under Applicable Law or under any agreement of any of the Indemnified Officers and Directors with the Company or any of its Subsidiaries (which agreements shall survive the Merger). These rights shall survive consummation of the Merger and are intended to benefit, and shall be enforceable by, each of the Indemnified Officers and Directors.

Section 5.14 Tax Matters .

Section 5.14.1 Buyer shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company and its Subsidiaries for all periods ending on or prior tot he Closing Date which are filed after the Closing Date, including amended Tax Returns. Buyer shall permit the Holder Representative to review and comment on each such Tax Return described in the preceding sentence prior to filing.

Section 5.14.2 The parties agree, upon request, to use reasonable efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could otherwise be imposed with respect to a taxable period (or portion thereof) ending on or before the Closing Date. Buyer and the Holder Representative shall cooperate, and cause their representatives and Affiliates to cooperate, as and to the extent reasonably requested by any other party hereto in connection with the preparation and filing of Tax Returns as provided herein and any audit, litigation or other proceeding with respect to Taxes or otherwise. Such cooperation shall include the provision of records and information which are reasonably relevant to any such Tax Return, audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Buyer and the Company shall (i) retain all books and records with respect to Company Taxes (including Tax Returns) relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations for assessment of Taxes for such respective taxable period, and (ii) give the Holder Representative reasonable written notice prior to transferring, destroying or discarding any books and records of the Company and, if another party so requests, allow the Holder Representative to take possession of such books and records.

Section 5.15 Assumed Company Options .

Section 5.15.1 As soon as practicable after the Effective Time, Buyer shall deliver to each Holder of a Company Option an appropriate notice setting forth such holder’s rights pursuant thereto after giving effect to the adjustments required by Section 2.6.7. Buyer shall take all corporate action necessary to duly authorize and reserve for issuance a sufficient number of Parent Ordinary Shares for delivery upon exercise of such assumed Company Options pursuant to the terms of this Agreement.

Section 5.15.2 As soon as reasonably practicable following the Effective Time, but in any event within five (5) Business Days thereafter, Parent shall prepare and file with the SEC a registration statement on Form S-8 (or on such other registration statement form as may be required under Applicable Law) to register the sale of Parent Ordinary Shares issuable upon the exercise of all Company Options assumed by Buyer pursuant to this Agreement, and Parent shall cause such registration statement(s) to become and remain effective until the later of (i) the date on which all such assumed Company Options are no longer outstanding, and (ii) the date on which all such Parent Ordinary Shares issued pursuant to the outstanding assumed Company Options are freely tradable or tradable pursuant to Rule 144 of the Securities Act without being subject to the volume restrictions thereof.

ARTICLE 6.
Conditions to Closing

Section 6.1 Conditions to Each Party’s Obligations to Effect the Merger . The respective obligations of each party hereto to consummate the transactions provided for hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions:

Section 6.1.1 The waiting period applicable to the Merger under the HSR Act and any waiting period applicable to the Merger under the Exon-Florio Act shall have been terminated or shall have expired, all approvals under antitrust regulatory filings in any jurisdiction that shall be necessary or jointly determined by Buyer and the Company to be reasonably desirable shall have been obtained, and there shall be no pending commitment by Parent, Buyer, the Company or any of their respective Subsidiaries to any Governmental Authority (which commitment was requested or required by such Governmental Authority) not to close the transactions contemplated hereby.

Section 6.1.2 No Proceeding by any Governmental Authority shall have been instituted and remain pending which questions the validity or legality of the transactions contemplated hereby and which would reasonably be expected to adversely affect the Company, the Company Business or the Company Assets in any material respect if the transactions contemplated hereby are consummated.

Section 6.1.3 There shall not be any Applicable Law or Court Order in effect that enjoins or makes the transactions contemplated hereby illegal or otherwise prohibited.

Section 6.1.4 Any governmental or regulatory notices or approvals required under any Applicable Law to carry out the transactions contemplated by this Agreement shall have been obtained and the parties shall have complied in all material respects with all Applicable Laws applicable to the transactions contemplated by this Agreement.

Section 6.1.5 The Stockholder Consent shall have been obtained.

Section 6.2 Additional Conditions to the Obligations of the Company to Effect the Merger . The obligations of the Company to consummate the transactions provided for hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by the Company:

Section 6.2.1 (i) The representations and warranties of Parent, Buyer and Merger Sub set forth in this Agreement that are qualified by reference to the word “material” or the phrase “Parent Material Adverse Effect” shall have been true and correct in all respects as of the date hereof (other than such representations and warranties that speak as of a specific date, which shall have been true and correct as of such date), and the representations and warranties of Parent, Buyer and Merger Sub set forth in this Agreement that are not so qualified by reference to the word “material” or the phrase “Parent Material Adverse Effect” shall have been true and correct in all material respects as of the date hereof (other than such representations and warranties that speak as of a specific date, which shall have been true and correct in all material respects as of such date), and (ii) the representations and warranties of Parent, Buyer and Merger Sub set forth in this Agreement shall be true and correct in all material respects at and as of the Closing Date as if made on and as of the Closing Date (other than such representations and warranties that speak as of a specific date, which shall have been true and correct in all material respects as of such date).

Section 6.2.2 Each of Parent, Buyer and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement and each Escrow Agreement to which it is a party to be performed or complied with by it on or prior to the Effective Time.

Section 6.2.3 Parent, Buyer and the Escrow Agent shall have executed and delivered a copy of the Escrow Agreement to the Company and to the Stockholder Representative.

Section 6.2.4 Wilson Sonsini Goodrich & Rosati, Professional Corporation or Naschitz, Brandes & Co., counsel for Parent, Buyer and Merger Sub, shall have delivered to the Company a legal opinion or opinions, dated as of the Closing Date, substantially in the form attached hereto as Exhibit C .

Section 6.3 Additional Conditions to the Obligations of Parent, Buyer and Merger Sub to Effect the Merger . The respective obligations of Parent, Buyer and Merger Sub to consummate the transactions provided for hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Parent, Buyer and Merger Sub:

Section 6.3.1 (i) The representations and warranties of the Company set forth in this Agreement that are qualified by reference to the word “material” or the phrase “Company Material Adverse Effect” shall have been true and correct in all respects as of the date hereof (other than such representations and warranties that speak as of a specific date, which shall have been true and correct as of such date), and the representations and warranties of the Company set forth in this Agreement that are not so qualified by reference to the word “material” or the phrase “Company Material Adverse Effect” shall have been true and correct in all material respects as of the date hereof (other than such representations and warranties that speak as of a specific date, which shall have been true and correct in all material respects as of such date), and (ii) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects at and as of the Closing Date as if made on and as of the Closing Date (other than such representations and warranties that speak as of a specific date, which shall have been true and correct in all material respects as of such date); provided, however , that solely for purposes of this clause (ii) of this Section 6.3.1, the representations and warranties of the Company set forth in this Agreement shall be deemed to be true and correct “in all material respects” at and as of the Closing Date (or, if applicable, on another specific date) if any and all inaccuracies in such representations and warranties as of the Closing Date (or, if applicable, such specific date) would not be reasonably expected to result in Losses for which the Buyer Indemnified Parties are entitled to indemnification pursuant to Article 8 that exceed six million dollars ($6,000,000) in the aggregate.

Section 6.3.2 The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement and each Escrow Agreement to which it is a party to be performed or complied with by it on or prior to the Effective Time.

Section 6.3.3 Each of the written employment agreements between the Company and each of Wayne Jackson, Tom McDonough and Martin Roesch that are in effect on the date hereof and have been delivered to Parent and Buyer prior to the date hereof shall remain in full force and effect.

Section 6.3.4 The Company shall have received all consents and approvals of, and made all notices to, the third parties set forth on Exhibit D hereto.

Section 6.3.5 The Company shall have delivered a certificate, dated as of the Closing Date and executed by the Chief Executive Officer and Chief Financial Officer, as to the fulfillment of each of the conditions set forth in Section 6.3.1, Section 6.3.2, Section 6.3.8 and Section 6.3.10 of this Agreement.

Section 6.3.6 The Stockholder Representative shall have executed and delivered a copy of the Escrow Agreement to Parent, Buyer and the Escrow Agent.

Section 6.3.7 Morrison &Foerster LLP, counsel for the Company, shall have delivered a legal opinion to Parent and Buyer, dated as of the Closing Date, substantially in the form attached hereto as Exhibit E .

Section 6.3.8 Since the date of this Agreement, no Company Material Adverse Effect shall have occurred or arisen and no events or developments shall have occurred or arisen that would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

Section 6.3.9 The Company shall have delivered certified organizational documents and certificates of good standing for the Company issued by (x) the Secretary of State of the State of Delaware and (y) the Secretary of State of each state in which the Company is qualified to do business as a foreign corporation, in each case dated not more than five (5) Business Days prior to the Closing Date.

Section 6.3.10 There shall have been no (i) actual litigation, proceeding or claim against Parent, Buyer, Merger Sub or the Company seeking to prohibit or calling into question the Merger or any other transaction contemplated by this Agreement, or (ii) any actual or threatened litigation, proceeding or claim brought by third parties in respect of the Company Owned Intellectual Property that would be reasonably likely to have a Company Material Adverse Effect.

Section 6.3.11 No more than three percent (3%) of the shares of Common Stock (calculated on both an as-converted and a fully-diluted basis) as of the Closing Date shall be Company Dissenting Shares.

Section 6.3.12 The Company shall have obtained binding payoff letters from Silicon Valley Bank, in a form reasonably acceptable to Parent and Buyer, in respect of the loans set forth in Section 6.3.12 of the Company Disclosure Schedule.

Section 6.3.13 On or prior to the Closing Date, the Company shall have delivered to Buyer a form of notice to the Internal Revenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2) and in form and substance reasonably acceptable to Buyer along with written authorization for Buyer to deliver such notice form to the Internal Revenue Service on behalf of the Company upon the Closing of the Merger.

Section 6.3.14 The person set forth on Exhibit F shall have executed and delivered an irrevocable assignment and release in favor of the Company, Parent and Buyer in respect of the matters set forth on Exhibit F , and such individual shall not have taken any action to revoke, rescind or otherwise repudiate his assignment and release.

ARTICLE 7.
Termination

Section 7.1 Termination . This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time:

Section 7.1.1 by mutual written consent of Parent, Buyer, Merger Sub and the Company;

Section 7.1.2 by Parent, Buyer and Merger Sub, on the one hand, or the Company, on the other hand, if (i) any court of competent jurisdiction or other Governmental Authority shall have issued a final order, decree or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action is or shall have become non-appealable, or (ii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Authority that would make consummation of the Merger illegal or otherwise prohibited;

Section 7.1.3 by Parent, Buyer and Merger Sub, on the one hand, or the Company, on the other hand, if the Merger has not been consummated by December 31, 2005 (the “ Outside Date ”); provided, however , that, if the Merger is not consummated on or before December 31, 2005 solely by reason of the failure of the condition set forth in Section 6.1.1 to be satisfied on or before such date, the Outside Date shall be February 15, 2006; provided further, however , that no party hereto may terminate this Agreement pursuant to this Section 7.1.3 if such party’s material breach of any of its obligations under this Agreement shall have been the principal reason that the Merger shall not have been consummated on or before the applicable Outside Date;

Section 7.1.4 by Parent, Buyer and Merger Sub if (w) none of them is in material breach of its obligations under this Agreement at the time of such termination, (x) there shall have been (i) a material breach of any representation or warranty of the Company set forth in this Agreement, or (ii) a material breach by the Company of any of its covenants or agreements set forth in this Agreement, (y) in the case of (x)(i) above, in a manner that would cause the condition set forth in Section 6.3.1 not to be satisfied at the time of such breach, or in the case of (x)(ii) above, in a manner that would cause the condition set forth in Section 6.3.2 not to be satisfied at the time of such breach, and (z) if such applicable breach described in (i) or (ii) of clause (x) above is of a nature that can be cured, the Company has not cured such breach or event within ten (10) Business Days after written notice by Parent, Buyer or Merger Sub thereof.

Section 7.1.5 by Parent, Buyer and Merger Sub if there has occurred a Company Material Adverse Effect;

Section 7.1.6 by Parent, Buyer and Merger Sub if the Stockholder Consent shall not have been obtained promptly (and in any event within one (1) hour) following the execution and delivery of this Agreement by the parties hereto (provided that such termination right shall automatically expire at such time as the Stockholder Consent shall have been obtained);

Section 7.1.7 by the Company if (i) it is not in material breach of its obligations under this Agreement at the time of such termination and (x) if there shall have been (A) a material breach of any representation or warranty of any of Parent, Buyer or Merger Sub set forth in this Agreement or (B) a material breach by any of Parent, Buyer or Merger Sub of any of their respective covenants or agreements set forth in this Agreement, (y) in the case of (x)(A) above, in a manner that would cause the condition set forth in Section 6.2.1 not to be satisfied at the time of such breach or in the case of (x)(B) above, in a manner that would cause the condition set forth in Section 6.2.2 not to be satisfied at the time of such breach and (z) if such applicable breach described in (A) or (B) of clause (x) above is of a nature that can be cured, Parent, Buyer or Merger Sub, as applicable, has not cured such breach or event within ten (10) Business Days after written notice by the Company thereof, or (ii) subject to the terms of clause (ii) of Section 7.2.2, pursuant to and in accordance with Section 5.5.3 for the purpose of pursuing a Superior Proposal previously received by the Company and not withdrawn at the time of such termination; provided, however , that notwithstanding the foregoing or anything to the contrary in this Agreement, the parties hereto agree that the termination rights set forth in this clause (ii) shall have no further force or effect whatsoever upon the Company’s receipt of the Stockholder Consent and, in furtherance thereof, the Company hereby irrevocably waives any rights to enforce or seek to enforce or invoke the termination rights set forth in this clause (ii) immediately upon its receipt of the Stockholder Consent; and

Section 7.1.8 by the Company if there has occurred a Parent Material Adverse Effect.

Section 7.2 Effect of Termination .

Section 7.2.1 Notwithstanding anything to the contrary in this Agreement, in the event of the termination and abandonment of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void and have no effect and there shall be no liability on the part of any party hereto or its Affiliates, directors, officers or stockholders except as set forth in the Non-Disclosure Agreement and Section 5.10, this Section 7.2 and Article 9 hereof, each of which shall survive the termination of this Agreement. Nothing contained in this Section 7.2 shall relieve any party from liability for any willful or intentional breach of this Agreement.

Section 7.2.2 The Company shall pay Buyer a cash fee of $8.9 million (the “ Termination Fee ”), (i) by wire transfer of immediately available funds to an account designated in writing by Buyer within one (1) Business Day after satisfaction of all conditions to such payment referenced in this clause (i) of this Section 7.2.2, in the event that (A) Parent or Buyer terminates this Agreement pursuant to Section 7.1.4, and (B) following the date hereof and prior to such termination, an Acquisition Proposal shall have been publicly announced or shall have become publicly known, and (C) within twelve (12) months following such termination of this Agreement, either a Company Acquisition (as defined below) is consummated, or the Company enters into a letter of intent or binding contract providing for a Company Acquisition and such Company Acquisition is later consummated, or (ii) by wire transfer of immediately available funds to an account designated in writing by Buyer and as a condition precedent to the validity of such termination by the Company, in the event that the Company terminates this Agreement pursuant to Section 5.5.3 and clause (ii) of Section 7.1.7. For purposes of this Agreement, a “ Company Acquisition ” shall mean any of the following transactions or a series of related transactions having any of the following effects (other than the transactions contemplated by this Agreement): (A) a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company pursuant to which the stockholders of Company immediately preceding such transaction hold less than fifty percent (50%) of the aggregate equity interests in the surviving or resulting entity of such transaction; (B) a sale or other disposition by the Company of assets representing in excess of fifty percent (50%) of the aggregate fair market value of the Company’s business immediately prior to such sale; or (C) the acquisition by a person or group (including by way of a tender offer or an exchange offer or issuance by the Company), directly or indirectly, of beneficial ownership or a right to acquire beneficial ownership of shares representing in excess of fifty percent (50%) of the voting power of the then outstanding shares of capital stock of the Company.

Section 7.2.3 The parties acknowledge that the agreements contained in this Section 7.2 are an integral part of the transactions contemplated by this Agreement and that, without such agreements, the parties would not enter into this Agreement. If the Company fails to promptly pay to Buyer the Termination Fee if and when it becomes due hereunder, the Company shall pay the costs and expenses (including reasonable legal fees and expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken to collect payment, together with interest on the amount of any unpaid fee at the publicly announced prime rate of Bank of America, N.A. plus five percent per annum, compounded quarterly, from the date the Termination Fee was originally required to be paid.

Section 7.2.4 The parties agree and acknowledge that, notwithstanding anything to the contrary in this Agreement, the Termination Fee shall be deemed liquidated damages in respect of any breach or obligation hereunder. To the extent that the Termination Fee is paid by the Company and accepted by Buyer, Buyer shall not be entitled to exercise any other rights it may have under this Agreement or otherwise.

ARTICLE 8.
Indemnification

Section 8.1 Survival of Representations, Warranties and Covenants . All of the representations and warranties of the Company set forth in this Agreement or in any certificate or other instrument executed and delivered by the Company at the Closing (including, for this purpose, the Statement of Closing Expenses and the Statement of Closing Consideration) in connection with this Agreement and the consummation of the transactions contemplated hereby shall survive the Closing and any investigation conducted by Parent, Buyer, their Affiliates and representatives until the Expiration Date. All representations and warranties of Parent, Buyer and Merger Sub set forth in this Agreement shall survive the Closing until the Expiration Date. All covenants or other agreements contained in this Agreement shall survive the Closing in accordance with their respective terms.

Section 8.2 Indemnification Obligations of Company Indemnifying Parties .

Section 8.2.1 From and after the Effective Time, each Stockholder (the “ Company Indemnifying Parties ”) shall, severally in proportion to their respective Pro Rata Shares and not jointly, indemnify and hold Parent, Buyer, the Company and each of their Subsidiaries, and each of their respective officers, directors, employees, members, stockholders, agents and representatives (the “ Buyer Indemnified Parties ”), harmless from and against all losses, damages, liabilities, claims, demands, obligations, deficiencies, payments, judgments, settlements, costs and expenses of any nature whatsoever (including, without limitation, the costs and expenses of any and all investigations, actions, suits, proceedings, demands, assessments, judgments, orders, settlements and compromises relating thereto, and reasonable attorneys’, accountants’, experts’ and other fees and expenses incurred in connection therewith) (“ Losses ”) paid, suffered, sustained or incurred by any Buyer Indemnified Parties, resulting from, arising out of, or due to, directly or indirectly, any of the following: (i) (A) any inaccuracies or misrepresentations in, or breaches of, any representation or warranty of the Company (x) contained in this Agreement (when read together with the applicable disclosures on the Company Disclosure Schedule) as of the date of this Agreement, or (y) contained in the certificate delivered by the Company pursuant to Section 6.3.5, and (B) any inaccuracies in any representation or warranty of the Company contained in this Agreement (when read together with the applicable disclosures in the Company Disclosure Schedule) as of the Closing Date as if such representations and warranties had been made at and as of the Closing Date (other than representations and warranties that speak as of a specific date, which must only be accurate as of such date, rather than the Closing Date); provided, however , that, the parties hereto acknowledge and understand that solely for the purposes of this clause (i)(B), (x) the Company shall not be deemed to be actually making any representations and warranties on or as of the Closing Date, and indemnity liability under this clause (i)(B) shall be imposed only by reason of the comparison of the representations and warranties made in this Agreement on the date hereof (read together with the applicable disclosure on the Company Disclosure Schedule) with the facts, events and occurrences in existence on the Closing Date, and (y) no Buyer Indemnified Party shall have any claim for fraud or willful misrepresentation arising out of this clause (i)(B); (ii) any breaches or non-fulfillments of any covenant or other agreement of the Company contained in this Agreement or the Escrow Agreement; (iii) any payments made to a holder of Company Dissenting Shares in excess of that portion of the Transaction Consideration to which such Stockholder was entitled under Section 2.6 hereof (but for the fact that such Company Stock was deemed Company Dissenting Shares; (iv) the matters set forth in (A) Section 8.2.1(iv)(A) of the Company Disclosure Schedule, and (B) Section 8.2.1(iv)(B) of the Company Disclosure Schedule; (v) any inaccuracies in the Statement of Closing Expenses; and (vi) any inaccuracies in the Statement of Closing Consideration.

Section 8.2.2 For the purpose of this Article 8 only, when determining the amount of Losses suffered as a result of (i) any inaccuracy or misrepresentation in, or any breach of, any representation or warranty of the Company, whether as of the date hereof or as of the Closing Date, or (ii) any breach or non-fulfillment of any covenant or other agreement of the Company, but not for determining whether any such inaccuracy, misrepresentation, breach or non-fulfillment has occurred, any representation, warranty, agreement or covenant given or made by the Company that is qualified in scope as to materiality or “Company Material Adverse Effect” shall be deemed to be made or given without such qualification.

Section 8.2.3 The Company Indemnifying Parties shall not have any right of contribution from Parent, Buyer, the Company, the Surviving Corporation or their Affiliates with respect to any Loss claimed by a Buyer Indemnified Party under Section 8.2.1; provided, however , that nothing in this Section 8.2.3 shall limit, restrict or otherwise impair the rights of any Indemnified Officers and Directors under the terms of Section 5.13.

Section 8.3 Indemnification Obligations of Buyer Indemnifying Parties .

Section 8.3.1 From and after the Effective Time, each of Parent, Buyer and Merger Sub (the “ Buyer Indemnifying Parties ”) shall jointly and severally indemnify and hold each Stockholder, and each of their respective officers, directors, employees, members, stockholders, agents and representatives (the “ Company Indemnified Parties ”), harmless from and against all Losses paid, suffered, sustained or incurred by any Company Indemnified Party resulting from, arising out of, or due to, directly or indirectly, any of the following: (i) any (A) inaccuracy or misrepresentation in, or breach of, any representation or warranty of any of Parent, Buyer or Merger Sub contained in this Agreement as of the date hereof, and (B) any inaccuracy or misrepresentation in, or breach of, any representation or warranty of Parent, Buyer and Merger Sub contained in this Agreement as of the Closing Date as if such representations and warranties had been made at and as of the Closing Date; and (ii) any breach or non-fulfillment of any covenant or other agreement of any of Parent, Buyer or Merger Sub contained in this Agreement or the Escrow Agreement.

Section 8.3.2 For the purpose of this Article 8 only, when determining the amount of Losses suffered as a result of (i) any inaccuracy or misrepresentation in, or any breach of, any representation or warranty of Parent, Buyer and Merger Sub, whether as of the date hereof or as of the Closing Date, or (ii) any breach or non-fulfillment of any covenant or other agreement of Parent, Buyer and Merger Sub, but not for determining whether any such inaccuracy, misrepresentation, breach or non-fulfillment has occurred, any representation, warranty, agreement or covenant given or made by Parent, Buyer or Merger Sub that is qualified in scope as to materiality or “Parent Material Adverse Effect” shall be deemed to be made or given without such qualification.

Section 8.3.3 Indemnification Claim Procedures . In the event that a Buyer Indemnified Party wishes to make an indemnification claim under this Article 8, such Buyer Indemnified Party shall provide written notice of such claim (an “ Indemnification Notice ”) to the Escrow Agent and the Stockholder Representative, to the extent that such indemnification claim will be recovered solely from the Escrow Cash in the Escrow Account, and to the Stockholder Representative and all Company Indemnifying Parties, to the extent that such indemnification claim will be recovered directly from any Company Indemnified Parties. In the event that a Company Indemnified Party wishes to make an indemnification claim under this Article 8, such Company Indemnified Party shall provide an Indemnification Notice to Parent and Buyer. Any such Indemnification Notice shall, to the extent practicable, set forth in reasonable detail the basis for the indemnification claim and a good faith determination of the estimated amount of the indemnification claim. No recovery in respect of any such indemnification claim shall be permitted unless and until the validity of such indemnification claim is finally resolved, either by mutual agreement of the parties or by a court of competent jurisdiction. In the event that a Buyer Indemnified Party is entitled to recover Losses hereunder as a result of the final resolution of the validity of an indemnification claim, such Buyer Indemnified Party and the Stockholder Representative shall provide written notice (a “ Resolved Claim Notice ”) of such recovery to the Escrow Agent if and to the extent that such indemnification claim will be satisfied and paid with Escrow Cash. Within five (5) calendar days after receipt of a Resolved Claim Notice, the Escrow Agent shall deliver to the applicable Buyer Indemnified Parties an amount of Escrow Cash equal to the amount of such recovery, and each Company Indemnifying Party shall be deemed to have contributed its Pro Rata Share of the amounts set forth in the Resolved Claim Notice to such payment.

Section 8.4 Third-Party Claims .

Section 8.4.1 In the event that any Buyer Indemnified Party wishes to make an indemnification claim under this Article 8 in respect of, arising out of or involving a claim made by any third party (which for this purpose shall included written notification of the commencement of any audit by any Taxing Authority) (a “ Third-Party Claim ”) against such Buyer Indemnified Party, promptly following receipt by such Buyer Indemnified Party of written notice of the Third-Party Claim, such Buyer Indemnified Party shall provide written notice thereof to the Stockholder Representative to the extent that such Buyer Indemnified Party intends to seek indemnification from the Escrow Account in respect of such Third Party Claim; provided , however , that failure to give such notification shall not limit or otherwise affect the indemnification rights provided hereunder except to the extent the Company Indemnifying Parties shall have been actually and materially prejudiced as a result of such failure. In the event that any Company Indemnified Party wishes to make an indemnification claim under this Article 8 in respect of, arising out of or involving a Third Party Claim against such Company Indemnified Party, promptly following receipt by such Company Indemnified Party of written notice of the Third-Party Claim, such Company Indemnified Party shall provide written notice thereof to Parent and Buyer; provided , however , that failure to give such notification shall not limit or otherwise affect the indemnification rights provided hereunder except to the extent the Buyer Indemnifying Parties shall have been actually and materially prejudiced as a result of such failure.

Section 8.4.2 The Company Indemnifying Parties shall not be entitled to assume and control the defense of any Third-Party Claim against any Buyer Indemnified Party, and the Buyer Indemnifying Parties shall not be entitled to assume and control the defense of any Third Party Claims against the Company indemnified Parties. The parties each agree to consult with and to keep the other parties hereto informed on a regular basis regarding the status of any Tax audit or proceeding to the extent that such audit or proceeding could affect a liability of such other parties or the Stockholders (including indemnity obligations hereunder). No settlement of any Third Party Claim against a Buyer Indemnified Party effected without the prior consent of the Stockholder Representative shall be determinative of whether the Buyer Indemnified Parties are entitled to indemnification hereunder with respect thereto or the amount of Losses paid, suffered, sustained or incurred by the Buyer Indemnified Parties in respect thereof. No settlement of any Third Party Claim against a Company Indemnified Party effected without the prior consent of Parent and Buyer shall be determinative of whether the Company Indemnified Parties are entitled to indemnification hereunder with respect thereto or the amount of Losses paid, suffered, sustained or incurred by the Company Indemnified Parties in respect thereof.

Section 8.5 Limitations on Indemnification Obligations .

Section 8.5.1 Except in the case of fraud or willful misrepresentation in connection with this Agreement and the transactions contemplated hereby, from and after the Effective Time, the Company Indemnifying Parties shall not be obligated to indemnify any Buyer Indemnified Party pursuant to clause (i)(A) of Section 8.2.1 unless and until the aggregate amount of all Losses paid, suffered, incurred or sustained by the Buyer Indemnified Parties under this Agreement exceeds $750,000 (the “ Threshold Amount ”), whereupon the Buyer Indemnified Parties shall be entitled to recover pursuant to such clause (i)(A) the amount of all such Losses in excess of $375,000; provided, however , that the Threshold Amount limitation set forth in this Section 8.5.1 shall not apply to Losses arising out of breaches of the representations and warranties of the Company set forth in Section 3.1, Section 3.2, Section 3.4, Section 3.7, Section 3.10 and Section 3.16, and any Losses arising out of any breaches of such representations and warranties shall not be taken into account for purposes of determining whether the Buyer Indemnified Parties have incurred Losses in excess of the Threshold Amount.

Section 8.5.2 From and after the Effective Time, the Company Indemnifying Parties shall not be obligated to indemnify any Buyer Indemnified Party pursuant to clause (i)(B) or clause (iv)(B) of Section 8.2.1 unless and until the aggregate amount of all Losses paid, suffered, incurred or sustained by the Buyer Indemnified Parties under such clauses of this Agreement exceeds $2,000,000 (the “ Deductible Amount ”), whereupon the Buyer Indemnified Parties shall be entitled to recover pursuant to such clauses (i)(B) and (iv)(B) only the amount in excess of the Deductible Amount.

Section 8.5.3 Except in the case of fraud or willful misrepresentation in connection with this Agreement and the transactions contemplated hereby, or in the case of any claim arising out of a breach of the representations and warranties set forth in Section 3.2, from and after the Effective Time, the Company Indemnifying Parties shall not be obligated to indemnify the Buyer Indemnified Parties pursuant to clauses (i) – (v) of Section 8.2.1 (but specifically excluding clause (vi) of Section 8.2.1) for any amounts in excess of the amounts held in the Escrow Account at the time any such indemnification obligation is paid to the Buyer Indemnified Parties, and the funds held in the Escrow Account shall be the Buyer Indemnified Parties sole recourse and remedy for any indemnification claims arising hereunder.

Section 8.5.4 Except in the case of fraud or willful misrepresentation in connection with this Agreement and the transactions contemplated hereby, from and after the Effective Time, the Company Indemnifying Parties shall not be obligated to indemnify the Buyer Indemnified Parties pursuant to clause (i) – (v) of Section 8.2.1 (but specifically excluding clause (vi) of Section 8.2.1) for any indemnification claim that is made after the Expiration Date; provided, however , that such obligations shall not terminate with respect to any item as to which a Buyer Indemnified Party shall have, before the Expiration Date, previously made a bona fide claim by delivering a notice of such indemnification claim pursuant to this Article 8.

Section 8.5.5 Except in the case of fraud or willful misrepresentation in connection with this Agreement and the transactions contemplated hereby, from and after the Effective Time, the indemnification provisions set forth in this Article 8 shall be the sole and exclusive recourse and remedy of the Buyer Indemnified Parties and the Company Indemnified Parties for any breach or violation of this Agreement and any claims or Losses arising out of the transactions contemplated hereby, and Parent, Buyer, Merger Sub and the Surviving Corporation (on behalf of all Buyer Indemnified Parties), on the one hand, and the Company (on behalf of all Company Indemnified Parties), on the other hand, hereby irrevocably waive any and all other remedies they may have against the Company Indemnifying Parties or the Buyer Indemnifying Parties, as the case may be, from and after the Effective Time, in respect of any and all such Losses arising under this Agreement and the transactions contemplated hereby and thereby.

Section 8.5.6 No Limitations .

Section 8.5.6.1 Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement shall limit the liability of any party hereto for any Losses arising out of fraud or willful misrepresentation in connection with this Agreement and the transactions contemplated hereby.

Section 8.5.6.2 Notwithstanding anything to the contrary in this Agreement, subject to the terms of Section 7.2, nothing in this Agreement shall limit the rights and remedies of the parties hereto prior to the Effective Time of the Merger.

Section 8.5.6.3 Notwithstanding anything to the contrary in this Agreement, from and after the Effective Time, nothing in this Agreement shall limit the liability of any Company Indemnifying Party for any Losses arising out of (i) a breach of the representations and warranties of the Company set forth in Section 3.2, and (ii) the matters described in clause (vi) of Section 8.2.1; provided, however , that notwithstanding the foregoing, the Company Indemnifying Party shall not be obligated to indemnify the Buyer Indemnified Parties for any amounts in excess of the amounts held in the Escrow Account at the time of any indemnification claim is paid unless and until the Escrow Cash has been fully exhausted or reserved for payment in respect of any previously submitted indemnification claims.

Section 8.5.6.4 Notwithstanding anything to the contrary in this Agreement, subject to the terms of Section 7.2, nothing in this Agreement shall limit the rights of any party hereto to apply for equitable remedies to enforce the other party or parties’ obligations hereunder (it being understood and hereby agreed that, from and after the Effective Time, any suit for equitable remedies shall be limited to a suit to specifically enforce the terms and provisions of this Article 8 and Article 9).

Section 8.5.6.5 Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement shall limit the rights of the Buyer Indemnified Parties or the Company Indemnified Parties, as the case may be, to bring and recover a claim for indemnification under this Article 8 notwithstanding the fact that any such party had knowledge of the breach, facts or circumstances giving rise to the Losses forming the basis for such indemnification claim prior to the Effective Time or otherwise waived any conditions to the consummation of the Merger related thereto.

Section 8.5.7 Stockholder Representative .

Section 8.5.7.1 Tim Guleri shall be appointed and constituted the “ Stockholder Representative ” under a Stockholder Representative Agreement by and among Parent, Buyer, the Company and the Stockholder Representative, in customary form and substance reasonably acceptable to, and mutually agreed upon prior to the Closing by, Parent, Buyer and the Company (the “ Stockholder Representative Agreement ”), and as such shall serve as agent for, and have all powers as attorney-in-fact of, each Company Indemnifying Party, to (i) negotiate, settle and compromise indemnification claims by any Buyer Indemnified Parties pursuant to this Article 8 solely to the extent that such indemnification claims would be satisfied and payable out of the Escrow Cash, (ii) authorize the release of Escrow Cash in connection therewith, (iii) give and receive notices of communications in respect thereof, (iv) comply with orders of courts with respect thereto, and (v) take all actions necessary or appropriate in the judgment of the Stockholder Representative in connection with the foregoing. By virtue of the adoption of this Agreement and the approval of the Merger by the Stockholders, each Stockholder (regardless of whether such Stockholder votes in favor of the adoption of this Agreement and the approval of the Merger, whether at a meeting or by written consent in lieu thereof) shall be deemed to have appointed the Stockholder Representative, effective from and after the Effective Time, to serve in the foregoing capacity.

Section 8.5.7.2 If the Stockholder Representative elects to resign as Stockholder Representative for any reason, the Stockholder Representative shall notify Parent and Buyer of its intent to resign, which shall be effective 20 Business Days after such notice. The Company Indemnifying Parties shall, with the written consent of the Holders of a majority-in-interest of the Escrow Cash then remaining in the Escrow Account, appoint a successor Stockholder Representative and notify the Parent and Buyer within five (5) Business Days after such appointment.

Section 8.5.7.3 Notice or communications to or from the Stockholder Representative pursuant to this Section 8.5.7 shall constitute notice to or from each of the Company Indemnifying Parties with an interest in the Escrow Cash at the time of such notice.

Section 8.5.7.4 A decision, act, consent or instruction of the Stockholder Representative pursuant to this Section 8.5.7 shall constitute a decision, act, consent or instruction of each and all of the Indemnifying Parties with an interest in the Escrow Cash at such time, and shall be final, binding and conclusive upon each and all of such Company Indemnifying Parties, and Parent and Buyer shall be entitled to rely upon any decision, act, consent or instruction of the Stockholder Representative as being the decision, act, consent or instruction of each and all such Company Indemnifying Parties, and Parent and Buyer shall be relieved from any liability to any such Company Indemnifying Parties (or any other Person) for any acts done by it in accordance with such decision, act, consent or instruction.

Section 8.5.7.5 The Stockholder Representative shall promptly notify each Company Indemnifying Party in the event of any decision, act, consent or instruction of the Stockholder Representative pursuant to this Section 8.5.7. The Stockholder Representative shall have no liability to any party hereto, any Buyer Indemnified Party or any Company Indemnifying Party in connection with actions taken hereunder. Each Company Indemnifying Party, jointly and severally, with right of contribution among them, shall indemnify and hold harmless the Stockholder Representative with respect to any claim, loss, damage and liability against such Stockholder Representative (including, without limitation, reasonable attorneys’ fees and costs) arising from any decision, act, consent or instruction of such Stockholder Representative pursuant to this Section 8.5.7, unless and to the extent that such claim arises from such Stockholder Representative’s gross negligence or willful misconduct.

Section 8.5.7.6 The Stockholder Representative shall be entitled to receive reimbursement from the Company Indemnifying Parties for any and all reasonable expenses, charges, liabilities and debts (including, without limitation, reasonable attorneys’ fees and costs), incurred by the Stockholder Representative from and after the Closing in the performance or discharge of its rights and obligations under this Agreement. The Stockholder Representative shall be entitled to collect up to an aggregate of $200,000 of such reimbursement amount (including any expenses incurred in connection with the defense of any indemnity claims made by the Buyer Indemnified Parties pursuant to this Article 8), as and when such expenses, charges, liabilities and debts are actually incurred and paid, from the Escrow Cash pursuant to the terms of the Escrow Agreement.

ARTICLE 9.
Miscellaneous

Section 9.1 Entire Agreement . This Agreement (including the Company Disclosure Schedule, any other exhibits, schedules, certificates, lists and documents referred to herein, and any documents executed by the parties simultaneously herewith or pursuant thereto), the Escrow Agreement and the Non-Disclosure Agreement (as amended hereby) constitute the entire agreement of the parties hereto, except as provided herein, and supersedes all prior agreements and understandings, written and oral, among the parties with respect to the subject matter hereof. Each party hereto, in entering into this Agreement, is relying only on the representations, warranties, covenants and agreements contained herein and in the Escrow Agreement and is not relying upon any other representations, warranties, covenants or agreements (written or oral) made by any other party or any other party’s Affiliates, officers, directors, stockholders, agents, attorneys or representatives.

Section 9.2 Interpretation . When a reference is made in this Agreement to Sections, Exhibits or Schedules, such reference shall be to a Section of or an Exhibit or a Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,”“includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” The phrases “the date of this Agreement,” “the date hereof” and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date set forth in the first paragraph of this Agreement. This Agreement and the Escrow Agreement were the products of extensive drafting, review, negotiation and acceptance by and among the parties. Each of the parties was represented by counsel or had the opportunity to seek counsel in the course of negotiations. Accordingly, the parties agree that there shall be no presumption against any party with regard to any ambiguity or uncertainty in the Agreement or the Escrow Agreement, and no party shall be deemed to be the draftsman of such agreements.

Section 9.3 Severability . Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broadly as is enforceable.

Section 9.4 Notices . Unless otherwise provided herein, all notices and other communications hereunder shall be in writing and shall be deemed given if (a) delivered in person, (b) transmitted by telecopy (with written confirmation of transmission), (c) mailed by certified or registered mail (return receipt requested) (in which case such notice shall be deemed given on the third (3 ^rd ) day after such mailing) or (d) delivered by an express courier (with written confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

If to Parent, Buyer or Merger Sub at any time, or to the Company after the Closing Date, to:

Check Point Software Technologies, Inc.
800 Bridge Parkway
Redwood City, CA 94065
Facsimile: (650) 649-1975
Attention: General Counsel

With copies (which shall not constitute notice) to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (650) 493-6811
Attention: Jeffrey D. Saper, Esq.
Steven Liu, Esq.

Wilson Sonsini Goodrich & Rosati, Professional Corporation
One Market, Spear Tower, Suite 3300
San Francisco, California 94105
Facsimile: (415) 947-2099
Attention: Michael S. Ringler, Esq.

and

Naschitz, Brandes & Co.
5 Tuval Street
Tel Aviv 67897 Israel
Facsimile: +972-3-623-5005
Attention: Aaron M. Lampert, Esq.

If to the Company before the Closing Date, to:

Sourcefire, Inc.
9770 Patuxent Woods Drive
Columbia, Maryland 21046
Facsimile: (703) 991-2435
Attention: Chief Executive Officer

With a copy (which shall not constitute notice) to:

Morrison & Foerster LLP
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102
Facsimile: (703) 760-7777
Attention: Thomas J. Knox, Esq.
Lawrence T. Yanowitch, Esq.

If to the Stockholder Representative, to the address and facsimile number set forth in the Stockholder Representative Agreement entered into in connection with the transactions contemplated hereby.

With a copy (which shall not constitute notice) to:

Morrison & Foerster LLP
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102
Facsimile: (703) 760-7777
Attention: Thomas J. Knox, Esq.
Lawrence T. Yanowitch, Esq.

Section 9.5 Binding Effect; Persons Benefiting; No Assignment . This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and permitted assigns. No provision of this Agreement is intended or shall be construed to confer upon any entity or Person other than the parties hereto and their respective successors and permitted assigns any right, remedy or claim under or by reason of this Agreement or any part hereof, except that (i) the provisions of Section 8.2 through Section 8.4 shall be for the benefit of, and shall be enforceable by, the Company Indemnified Parties and the Buyer Indemnified Parties, (ii) the provisions of Section 5.13 shall be for the benefit of, and shall be enforceable by, the Indemnified Officers and Directors, and (iii) the provisions of Article 8 shall be enforceable by the Stockholder Representative in accordance with the terms of the Stockholder Representative Agreement. This Agreement may not be assigned by any of the parties hereto; provided, however , that Buyer may assign all or part of its rights under this Agreement and delegate all or part of its obligations under this Agreement to (i) a wholly owned Subsidiary of Buyer, in which event all of the rights and powers of Buyer and remedies available to Buyer under this Agreement shall extend to and be enforceable by such Subsidiary or (ii) any Person who acquires Buyer, whether by way of merger or the purchase of all of Buyer’s outstanding capital stock or substantially all of Buyer’s assets, provided further in the case of the foregoing clauses (i) and (ii), the Buyer shall remain fully and primarily obligated hereunder. In the event of any such assignment and delegation, the term “Buyer” as used in this Agreement shall be deemed to refer to such Subsidiary or successor of Buyer, as the case may be, where reference is made with respect to actions to be taken with respect to the transactions contemplated by this Agreement and the Escrow Agreement, and shall be deemed to include both Buyer and such Subsidiary or successor of Buyer, as the case may be, where appropriate.

Section 9.6 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same agreement, it being understood that all of the parties need not sign the same counterpart.

Section 9.7 WAIVER OF JURY TRIAL . EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 9.8 Governing Law . This Agreement, the legal relations between the parties and the adjudication and the enforcement thereof, shall be governed by and interpreted and construed in accordance with the substantive laws of the State of California without regard to applicable choice of law provisions thereof.

Section 9.9 Consent to Jurisdiction . Each of the parties hereto hereby irrevocably and unconditionally submits to the jurisdiction of any state court of the State of California and any federal court sitting in San Francisco, California or San Jose, California and irrevocably agrees that all actions or proceedings arising out of or relating to this agreement or the transactions contemplated hereby or in aid or arbitration or for enforcement of an arbitral award shall be litigated exclusively in such courts. Each of the parties hereto agrees not to commence any legal proceedings related hereto except in such courts. Each of the parties hereto irrevocable waives any objection which he or it may now or hereafter have to the laying of the venue of any such proceeding in any such court and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

Section 9.10 Attorneys’Fees . If any proceeding relating to this Agreement or the Escrow Agreement or the enforcement of any provision hereof or thereof is brought against any party to this Agreement, the prevailing party in such suit or proceeding shall be entitled to recover its reasonable attorneys’ fees, costs and disbursements incurred in the course of such proceeding, in addition to any other relief to which the prevailing party may be entitled.

Section 9.11 Joint and Several Liability . The covenants, agreements and obligations of Parent and Buyer (and the liability of Parent and Buyer for any breach thereof) arising under this Agreement shall be joint and several.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

CHECK POINT SOFTWARE
TECHNOLOGIES, LTD.

By:
——————————————
Name:
Title:

CHECK POINT SOFTWARE
TECHNOLOGIES, INC.

By:
——————————————
Name:
Title:

SEYFERT ACQUISITION CORPORATION

By:
——————————————
Name:
Title:

SOURCEFIRE, INC.

By:
——————————————
Name:
Title:

[Signature Page of Agreement and Plan of Merger]

EXHIBIT A

Form of Retention Plan

EXHIBIT B

Form of Escrow Agreement

EXHIBIT C

Form of Opinions of Wilson Sonsini Goodrich & Rosati, Professional Corporation

[Subject to appropriate qualifications, including, without limitation, the exclusion of any opinion with respect to the HSR Act, the Exon-Florio Act, any United States federal or state securities laws or any non-United States laws.]

1. Each of Buyer and Merger Sub is a corporation organized and existing under the General Corporation Law of the State of Delaware, with corporate power and authority to enter into the Merger Agreement and the Escrow Agreement and perform its respective obligations thereunder.

2. Each of Buyer and Merger Sub is validly existing and in good standing under the laws of the State of Delaware.

3. The execution, delivery and performance of the Merger Agreement and the Escrow Agreement have been duly authorized by all necessary corporate action of Buyer and Merger Sub, and the Merger Agreement and the Escrow Agreement have been duly executed and delivered by Buyer and Merger Sub.

4. Each of the Merger Agreement and the Escrow Agreement constitute legally valid and binding obligations of each of Buyer and Merger Sub, enforceable against each of Buyer and Merger Sub in accordance with its respective terms.

5. The execution and delivery of the Merger Agreement by Buyer and Merger Sub did not, and the consummation of the Merger by Buyer and Merger Sub on the date hereof does not: (i) violate the provisions of the certificate of incorporation or bylaws of Buyer or Merger Sub; (ii) violate any federal or California statute, rule or regulation applicable to Buyer or Merger Sub or (iii) require any consents, approvals or authorizations to be obtained by Buyer or Merger Sub, or any registrations, declarations or filings to be made by Buyer or Merger Sub, under any federal or California statute, rule or regulation applicable to Buyer or Merger Sub that have not been obtained or made.

Form of Opinions of Naschitz, Brandes & Co.

[Subject to appropriate qualifications, including, without limitation, the exclusion of any opinion with respect to the laws of any jurisdiction other than Israel.]

1. Parent is a company under the laws of Israel, with corporate power and authority to enter into the Merger Agreement and the Escrow Agreement and perform its obligations thereunder.

2. Based solely on certificates from public officials, we confirm that Parent is validly existing under the laws of Israel.

3. The execution, delivery and performance of the Merger Agreement and the Escrow Agreement have been duly authorized by all necessary corporate action of Parent, and the Merger Agreement and the Escrow Agreement have been duly executed and delivered by Parent.

4. The execution and delivery of the Merger Agreement by Parent did not, and the consummation of the Merger by Parent on the date hereof does not: (i) violate the provisions of the organizational documents of Parent; (ii) violate any Israeli statute, rule or regulation applicable to Parent, or (iii) require any consents, approvals or authorizations to be obtained by Parent, or any registrations, declarations or filings to be made by Parent, under any Israeli statute, rule or regulation applicable to Parent that have not been obtained or made.

EXHIBIT D

Schedule of Required Closing Consents, Approvals and Notices

Consent and approval to the consummation of the Merger and the other transactions contemplated hereby from Liberty Property Limited Partnership (or any successor in interest thereto) under that certain lease by and between the Company and Liberty Property Limited Partnership, dated January 28, 2005 (as amended by Amendment No. 1 thereto, dated February 22, 2005) for the Company’s headquarters located at 9770 & 9780 Patuxent Woods Drive, Columbia, Maryland 21046.

EXHIBIT E

Form of Opinions of Morrison & Foerster LLP

1. The Company is a corporation under the General Corporation Law of the State of Delaware, with corporate power and authority to enter into the Merger Agreement and perform its obligations thereunder.

2. The Company is validly existing and in good standing under the laws of the State of Delaware.

3. The authorized capital stock of the Company consists of (i) 35,000,000 shares of Common Stock and (ii) 15,031,658 shares of Preferred Stock, of which (x) 2,495,410 shares have been designated as Series A Preferred Stock, (y) 7,132,205 shares have been designated as Series B Preferred Stock and (z) 5,404,043 shares have been designated Series C Preferred Stock. To our knowledge, based solely on the corporate records of the Company, as of immediately prior to the Effective Time, there are issued and outstanding [ — ] shares of Common Stock, [ — ] shares of Series A Preferred Stock, 7,132,205 shares of Series B Preferred Stock and 5,404,043 shares of Series C Preferred Stock. To our knowledge, based solely on the corporate records of the Company, except as set forth on the Company Disclosure Schedule, as of immediately prior to the Effective Time, except as set forth in Exhibit A hereto, there are no other outstanding shares of capital stock of the Company or options, warrants, convertible securities or rights of any kind to purchase or otherwise acquire any shares of capital stock or other securities of the Company.

4. The execution, delivery and performance of the Merger Agreement have been duly authorized by all necessary corporate action of the Company, and the Merger Agreement has been duly executed and delivered by the Company.

5. The Merger Agreement constitutes a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms.

6. The execution and delivery of the Merger Agreement by the Company did not, and the consummation of the Merger by the Company on the date hereof does not: (i) violate the provisions of the certificate of incorporation or bylaws of the Company; (ii) violate any federal or Delaware statute, rule or regulation applicable to the Company; or (iii) require any consents, approvals or authorizations to be obtained by the Company, or any registrations, declarations or filings to be made by the Company, under any federal or Delaware statute, rule or regulation applicable to the Company that have not been obtained or made.

7. To our knowledge, the Company is not party to any pending litigation other than as set forth on Section 3.11 of the Company Disclosure Schedule or on Exhibit A hereto.

EXHIBIT F

Schedule of Closing Assignments and Releases

Persons	Intellectual Property Rights

Martin Roesch	All intellectual property rights of Martin Roesch in (i) the inventions listed on Exhibit 1 of the Employee Proprietary Information, Inventions, and Non-Competition Agreement, dated October 31, 2002 and effective July 1, 2002, between the Company and Martin Roesch and (ii) the Domain Names listed in Section 3.7.1(iv) of the Company Disclosure Schedule.

Exhibit 10

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-114489, 333-9508, 333-6032, 333-7260, 333-9136) pertaining to the Israel Stock Option Plan and the United States Stock Option Plan and the Employee Stock Purchase Plan of Check Point Software Technologies Ltd. of our report dated January 29, 2006, with respect to the consolidated financial statements of Check Point Software Technologies Ltd. and subsidiaries included in the Annual Report (Form 20-F) for the year ended December 31, 2005.






Tel Aviv, Israel	/s/ KOST, FORER, GABBAY & KASIERER
March 09, 2006	A Member of Ernst & Young Global

Exhibit 12.1

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 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 report;

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

4.	The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the company and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)

Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.	The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: March 13, 2006

BY: /S/ Gil Shwed
——————————————
Gil Shwed
Chief Executive Officer and Chairman of the Board

Exhibit 12.2

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 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 report;

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

4.	The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the company and have:

(a)

(b)

(c)

5.	The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: March 13, 2006

BY: /S/ Eyal Desheh
——————————————
Eyal Desheh
Executive Vice President and Chief Financial Officer

Exhibit 13

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 Technologies 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, 2005 (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 the information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 13, 2006

BY: /S/ Gil Shwed
——————————————
Gil Shwed
Chief Executive Officer and Chairman of the Board

BY: /S/ Eyal Desheh
——————————————
Eyal Desheh
Executive Vice President and Chief Financial Officer

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 20-F

OR

OR

OR

TABLE OF CONTENTS

PART I

Currency of presentation and certain defined terms

Selected financial data

RISK FACTORS

Risks Related to Our Business and Our Market

We may not be able to successfully compete.

Risks relating to acquisitions.

Our operating margins may decline.

Indemnification of directors and officers.

Risks Related to Our Operations in Israel

Industry background

Technologies

Products

Revenues by category of activity and geographic area

Sales and marketing

Customer service and support

Research and product development

Competition

Proprietary rights

Effect of government regulation on our business

Organizational structure

Property, plants and equipment

Principal capital expenditures and divestitures

Overview

Critical accounting policies and estimates

Results of Operations

Quarterly Results of Operations

Recently Issued Accounting Standards

Liquidity and capital resources

Research and development, patents and licenses, etc.

Trend information

Off-balance sheet arrangements

Disclosure of contractual obligations

Directors and senior management

Board practices

Employees

Share Ownership

Equity incentive plans

Consolidated financial statements

Legal proceedings

Articles of association and Israeli Companies Law

NASDAQ National Market corporate governance rules

Material Contracts

Israeli taxation, foreign exchange regulation and investment programs

United States federal income tax considerations

Documents on display

Foreign currency risk

Interest rate risk

PART II

Fees and services

PART III

SIGNATURES

DIRECTOR INSURANCE, INDEMNIFICATION AND EXCULPATION AGREEMENT

SCHEDULE A

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

2005 ISRAEL EQUITY INCENTIVE PLAN

CHECK POINT SOFTWARE TECHNOLOGIES LTD.

2005 UNITED STATES EQUITY INCENTIVE PLAN

CHECK POINT SOFTWARE TECHNOLOGIES LTD. EMPLOYEE STOCK PURCHASE PLAN

Schedule A

Corporations Participating in Employee Stock Purchase Plan As of the Effective Time

APPENDIX

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

CHECK POINT SOFTWARE TECHNOLOGIES, LTD.,

CHECK POINT SOFTWARE TECHNOLOGIES, INC.,

SEYFERT ACQUISITION CORPORATION,

AND

SOURCEFIRE, INC.

Dated as of October 5, 2005

AGREEMENT AND PLAN OF MERGER

RECITALS

ARTICLE 1. Definitions

ARTICLE 2. The Merger

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

DIRECTOR INSURANCE, INDEMNIFICATION
AND EXCULPATION AGREEMENT

CHECK POINT SOFTWARE TECHNOLOGIES LTD.
EMPLOYEE STOCK PURCHASE PLAN

Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time

ARTICLE 1.
Definitions

ARTICLE 2.
The Merger

ARTICLE 3.
Representations and Warranties of the Company

ARTICLE 4.
Representations and Warranties of Parent, Buyer and Merger Sub

ARTICLE 5.
Covenants and Additional Agreements

ARTICLE 8.
Indemnification

ARTICLE 9.
Miscellaneous