Annual Report on Form 20-F

Foreign Currency Risk

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

     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. The Company monitors its foreign currency exposures periodically to maximize the overall effectiveness of its foreign currency hedge positions. If these 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.

     As of December 31, 2003, the Company's management believes that because the above transactions are carried out with well-established institutions, liabilities owing to the Company will be fulfilled. Total outstanding zero cost collar contracts and forward contracts to hedge customers' balances to sell/purchase U.S. dollars in exchange for Japanese Yen were in the amount of $ 9.3 million. Total outstanding transactions to sell/purchase Euro in exchange for U.S. dollars were in the amount of $4.0 million. The above transactions were for a period of up to three months. As of December 31 2003, the Company expects to reclassify during the following three months an insignificant amount of unrealized losses from accumulated other comprehensive loss to expenses.

Interest Rate Risk

     The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment in marketable securities. The Company's marketable securities are comprised of U.S. and European government and corporate debt instruments. The fair value of the Company's long and short-term securities is based upon their market values as of December 31, 2003.

     In 2001, the Company has entered into forward rate agreements (“FRA”,) in the amount of $125 million that effectively convert a portion of its floating rate investments to a fixed rate basis for a 12 month period beginning one year after the date of the agreements, thus reducing the impact of the interest rate changes on future interest income. The agreements were executed in November 2002, resulting in a total gain of approximately $3.4 million presented in the statement of income as financial income. In August 2003, the company has entered into an additional FRA agreement in the amount of $25 million for a 12 month period beginning one year after the date of the agreement. As of December 31, 2003, the unrealized gain in respect of this agreement amounted to $0.2 million.

Not applicable.