**UNITED
      STATES**


**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, 2006





**OR**





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


**For
      the transition period from __________ to __________** ****





**OR**





**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 _________**





**Commission
      file number 0-30324**





**RADWARE
      LTD.**


**(Exact
      name of Registrant as specified in its charter)**





**Israel**


**(Jurisdiction
      of incorporation or organization)**





**22
      Raoul Wallenberg Street, Tel Aviv 69710, Israel**


**(Address
      of principal executive offices)**





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


**Title
                of each
                class**
            **Name
                of each exchange on which
                registered****Ordinary
                Shares,**
              **NIS
                0.1 par value per share**
            **NASDAQ
                Global Market**





**Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act:**


**None**


**(Title
      of Class)**





**Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:**


**None**


**(Title
      of Class)**





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:


**19,411.903
      Ordinary Shares, NIS 0.1 par value per share**








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


o Yes x No





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.


o Yes x No




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.


x Yes o No





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 o Accelerated Filer x Non-Accelerated Filer o





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


o Item
      17 x Item
      18





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).


o Yes x No





**INTRODUCTION**





As
      used
      in this annual report, the terms “we,” “us,” “our,” the “Company,” and “Radware”
mean Radware Ltd. and its subsidiaries, unless otherwise indicated. The
      references to "Companies Law" or the “Israeli Companies Law” are to the Israeli
      Companies Law, 5759-1999 (as amended).





**CAUTIONARY
      STATEMENT REGARDING**


**FORWARD-LOOKING
      STATEMENTS**





Except
      for the historical information contained herein, the statements contained in
      this annual report are forward-looking statements, within the meaning of the
      Private Securities Litigation Reform Act of 1995 with respect to our business,
      financial condition and results of operations. Actual results could differ
      materially from those anticipated in these forward-looking statements as a
      result of various factors, including all the risks discussed in “Risk Factors”
and elsewhere in this annual report.





We
      urge
      you to consider that statements which use the terms “believe,” “do not believe,”
“expect,” “plan,” “intend,” “estimate,” “anticipate,” and similar expressions
      are intended to identify forward-looking statements. These statements reflect
      our current views with respect to future events and are based on assumptions
      and
      are subject to risks and uncertainties. Except as required by applicable law,
      including the securities laws of the United States, we do not intend to update
      or revise any forward-looking statements, whether as a result of new
      information, future events or otherwise.





We
      have
      registered trademarks for “Web Server Director®,” “Cache Server Director®”,
“FireProof®”, “LinkProof®”, “Triangulation®”, “Smart Nat®”, “Get Certain®”,
“CertainT®”, “Peer Director®”,, “Synapps Architecture®”, “DefensePro®”,
“StringMatch Engine®” and “CID - Content Inspection Director®” and we have
      trademark applications pending for “UpLinkTM”, “RadwareTM”, “APSolute TM ”,
      “AppDirector”TM, “AppXCel”TM, “SecureFlow”TM, “SOADirector”TM, “SOASwitch”TM,
“SIPDirector”TM and “DFI- Deep Flow Inspection”TM. All other trademarks and
      tradenames appearing in this annual report are owned by their respective
      holders.





1


**TABLE
        OF CONTENTS**




**Page****PART
                  I**
              4ITEM
                  1. Identity of Directors, Senior Management and Advisors
              4ITEM
                  2. Offer Statistics and Expected Timetable
              4ITEM
                  3. Key Information
              5*Selected
                  Financial Data*
              5*Risk
                  Factors*
              6ITEM
                  4. Information on the Company
              17*History
                  and Development of the Company*
              17*Business
                  Overview*
              17*Organizational
                  Structure*
              26*Property,
                  Plants and Equipment*
              27ITEM
                  5. Operating and Financial Review and
                  Prospects
              27ITEM
                  6. Directors, Senior Management and Employees
              40*Directors
                  and Senior Management*
              40*Compensation*
              43*Board
                  Practices*
              44*Employees*
              49*Share
                  Ownership*
              50ITEM
                  7. Major Shareholders and Related Party Transactions
              52*A.
                  Major Shareholders*
              52*B.
                  Related Party Transactions*
              53*C.
                  Interests of Experts and Counsel*
              54ITEM
                  8. Financial Information
              54*A.
                  Consolidated Statements and other Financial
                  Information*
              54*B.
                  Significant Changes*
              55ITEM
                  9. The Listing
              56*A.
                  Listing Details*
              56*B.
                  Plan of Distribution*
              57*C.
                  Markets*
              57*D.
                  Selling Shareholders*
              57
  2
 *E.
                  Dilution*
              57*F.
                  Expenses of the Issue*
              57ITEM
                  10. Additional information
              57*A.
                  Share Capital*
              57*B.
                  Memorandum and Articles of Association*
              57*C.
                  Material Contracts*
              62*D.
                  Exchange Controls*
              62*E.
                  Taxation*
              62*F.
                  Dividends and Paying Agents*
              72*G.
                  Statement by Experts*
              72*H.
                  Documents on Display*
              73*I.
                  Subsidiary Information*
              73ITEM
                  11. Quantitative and Qualitative Disclosures about Market
                  Risk
              73ITEM
                  12. Description of Securities other than Equity Securities
              73**PART
                  II**
              74ITEM
                  13. Defaults, Dividend Averages and Delinquencies
              74ITEM
                  14. Material Modifications to the Rights of Security Holders and
                  Use of
                  Proceeds
              74ITEM
                  15. Controls and Procedures
              74ITEM
                  16. [Reserved]
              75**PART
                  III**
              78ITEM
                  17. Financial Statements
              78ITEM
                  18. Financial Statements
              78ITEM
                  19. Exhibits
              79





3


**PART
      I**





**ITEM
                1.**
            **Identity
                of Directors, Senior Management and
                Advisors**




Not
      applicable.




**ITEM
                2.**
            **Offer
                Statistics and Expected
                Timetable**




Not
      applicable.





4


**ITEM
                3.**
            **Key
                Information**


**Selected
      Financial Data**





The **** following **** tables present our
      consolidated statement of operations and balance sheet data for the periods
      and
      as of the dates indicated. We derived the statement of operations for the years
      ended December 31, 2004, 2005 and 2006 and the balance sheet data as at December
      31, 2005 and 2006 from our audited consolidated financial statements included
      elsewhere in this annual report, which
      have been prepared in accordance with generally accepted accounting principles
      in the United States (“U.S. GAAP”) .
      The selected
      consolidated **** statement
      of operations financial
      data for the
      years ended December 31, 2002 and 2003 and the balance sheet data for the years
      ended December 31, 2002, 2003 and 2004 are derived **** from **** our **** audited **** consolidated **** financial
      statements not **** included
      in this annual report, which have been prepared in accordance with U.S. GAAP. *You
      should read the following selected financial data together with the section
      of
      this annual report entitled “Operating and Financial Review and Prospects” and
      our consolidated financial statements together with the notes thereto included
      elsewhere in this annual report.* Please
      see notes 2Q and 12B of the notes to our consolidated financial statements
      for
      an explanation regarding the computation of basic and diluted net earnings
      (loss) per ordinary share.




**Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended****December
                31,**
            
            **December
                31,**
            
            **December
                31,**
            
            **December
                31,**
            
            **December
                31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****(US
                $ in thousands, except per share data)****Statement
                of Operations Data:**Revenues
            
            $
            43,663
            
            $
            54,780
            
            $
            68,439
            
            $
            77,584
            
            $
            81,410Cost
                of revenues
            
            
            7,946
            
            
            9,854
            
            
            12,184
            
            
            14,896
            
            
            15,791Gross
                profit
            
            
            35,717
            
            
            44,926
            
            
            56,255
            
            
            62,688
            
            
            65,619Operating
                expenses:Research
                and development, net
            
            
            7,809
            
            
            8,398
            
            
            10,342
            
            
            13,017
            
            
            17,659Sales
                and Marketing
            
            
            30,019
            
            
            29,753
            
            
            31,898
            
            
            40,002
            
            
            50,128General
                and administrative
            
            
            4,219
            
            
            4,120
            
            
            4,493
            
            
            5,244
            
            
            6,178Total
                operating expenses
            
            
            42,047
            
            
            42,271
            
            
            46,733
            
            
            58,263
            
            
            73,965Operating
                profit (loss)
            
            
            (6,330
            )
            
            2,655
            
            
            9,522
            
            
            4,425
            
            
            (8,346
            )Financial
                income, net
            
            
            4,240
            
            
            3,740
            
            
            4,565
            
            
            5,159
            
            
            7,422Income
                (loss) before income taxes
            
            
            (2,090
            )
            
            6,395
            
            
            14,087
            
            
            9,584
            
            
            (924
            )Income
                taxes
            
            
            -
            
            
            -
            
            
            (341
            )
            
            (240
            )
            
            (356
            )Minority
                interest in losses
              (earnings)
                of a subsidiary
            
            
            (23
            )
            
            (40
            )
            
            34
            
            
            -
            
            
            -Net
                income (loss)
            
            $
            (2,113
            )
            $
            6,355
            
            $
            13,780
            
            $
            9,344
            
            $
            (1,280
            )Basic
                net earnings (loss) per share
            
            $
            (0.13
            )
            $
            0.37
            
            $
            0.77
            
            $
            0.50
            
            $
            (0.07
            )Diluted
                net earnings (loss) per share
            
            $
            (0.13
            )
            $
            0.34
            
            $
            0.70
            
            $
            0.47
            
            $
            (0.07
            )




5





**Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended**
            
            **Year
                ended****December
                31,**
            
            **December
                31,**
            
            **December
                31,**
            
            **December
                31,**
            
            **December
                31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****(in
                thousands)**Weighted
                average number of ordinary shares used in computing basic net earnings
                (loss) per share
            
            
            16,655
            
            
            17,184
            
            
            17,995
            
            
            18,800
            
            
            19,325Weighted
                average number of ordinary shares used in computing diluted net earnings
                (loss) per share
            
            
            16,655
            
            
            18,666
            
            
            19,805
            
            
            20,072
            
            
            19,325





**December
                31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****(US
                $ in thousands)****Balance
                Sheet Data:**Cash
                and cash equivalents, short-termbank
                deposits and marketablesecurities
                and current maturities oflong-term
                bank deposits
            
            $
            52,274
            
            $
            62,882
            
            $
            109,020
            
            $
            126,901
            
            $
            140,375Long-term
                bank deposits, structured note and marketable securities
            
            
            73,027
            
            
            76,139
            
            
            48,021
            
            
            37,592
            
            
            23,756Working
                capital
            
            
            50,690
            
            
            60,477
            
            
            107,687
            
            
            124,005
            
            
            137,406Total
                assets
            
            
            142,998
            
            
            158,114
            
            
            183,241
            
            
            204,347
            
            
            215,668Shareholders’
                equity
            
            
            127,357
            
            
            140,246
            
            
            160,917
            
            
            177,426
            
            
            182,414




**Risk
      Factors**




*Our
      business, operating results and financial condition could be seriously harmed
      due to any of the following risks. The following risks are not the only risk
      factors facing our Company. Additional risks and uncertainties not presently
      known to us or that we currently deem immaterial may also affect our business.
      The trading price of our ordinary shares could decline due to any of these
      risks* .





**Risks
      Related to Our Business and Our Industry**





**We
      have incurred losses in the past, and may incur losses in the
      future**





While
      we
      were profitable in each of the years 2003-2005, we incurred losses in 2002
      and
      2006. We had net loss of approximately $1.3 million in 2006, and net income
      of
      $9.3 million in 2005, $13.8 million in 2004 and $6.4 million in 2003. We
      incurred net losses of approximately $2.1 million in 2002. We will need to
      generate increased revenues as well as manage our costs to return to and
      maintain profitability. In 2006 we incurred losses as a result of increased
      expenses incurred in our efforts to significantly increase our revenues, coupled
      with only moderate revenue growth for the year, mainly due to the inability
      of
      our US sales force to ramp up sales in the Americas. We cannot assure you that
      we will be able to return to or maintain profitability. Our gross margin is
      currently approximately 81%. As a result, any decrease in sales may have a
      significant effect on our profitability.





6


Our
      revenues may not grow or continue at their current level. For example, the
      growth rate in 2004 compared to 2003 was approximately 25%, whereas the growth
      rate in 2005 compared to 2004 was approximately 13% and the growth rate in
      2006
      compared to 2005 was approximately 5%. In addition, our operating expenses
      may
      continue to increase. Our decision to increase operating expenses and the scope
      of such increase will depend upon several factors, including the market
      situation and the results that our past expenditures produce. We may continue
      to
      make additional expenditures in anticipation of generating higher revenues,
      which we may not realize, if at all, until some time in the future. For example,
      during 2006 we restructured our sales force in the United States in an effort
      to
      increase the effectiveness of our sales efforts in this market. Our efforts
      as
      well as our expenditures in this restructuring may not result in increased
      revenues. If our revenues continue not to increase as anticipated, or if our
      expenses increase at a more rapid pace than revenues, we may continue to incur
      losses.





Our
      results for 2006 were benefited by financial income in an amount of
      approximately $7.4 million. We cannot assure you that we will be able to
      generate financial income in the future or that such financial income will
      remain at the same level.





**Volatility
      of the market for our products, including slow-down in expenditures by service
      providers, e-commerce** **** **businesses
      and other trends** **in** **our
      industry could** **have** **a
      material adverse effect on our results of operations.**





Our
      business is dependent on current and anticipated market demand for our products.
      Beginning in late 2000, market demand was
      negatively impacted by the general deterioration of the global economy and
      the
      economic uncertainties in the telecommunications market. These conditions,
      and
      the uncertainties surrounding the growth rates of economies worldwide, resulted
      in a curtailment of capital investment by companies in our target markets and
      caused our revenue growth to increase at a significantly slower pace during
      2001
      and 2002 relative to prior years. According to our estimates, in 2003, the
      market remained substantially flat and in 2004 through 2006 there was an
      improvement in the market. Due to the past volatility of the market it is
      difficult to predict the conditions of our market going forward. In addition,
      we
      believe that market conditions could cause our customers and potential customers
      to be more conservative in planning their spending. If the global conditions
      deteriorate, and companies in our target markets reduce capital expenditures,
      we
      may experience a reduction in sales, as well as downward pressure on the price
      of our products. In addition, if the market is flat and customers experience
      low
      visibility we may not be able to increase our sales. Each of the above scenarios
      would have a material adverse effect on our business, operating results and
      financial condition.





**We
      may experience significant fluctuations in our quarterly financial performance
      because of the factors discussed below and seasonal fluctuations in our sales.**





Our
      quarterly operating results have varied significantly in the past and may vary
      significantly in the future as a result of various factors, many of which are
      outside of our control. These factors include:





·
            Our
                limited order backlog;





·
            Our
                need to develop and introduce new and enhanced products; and





·
            The
                long sales cycles of our products.





As
      a
      result of the foregoing our results in any quarter may also fall below projected
      results. For example, in the first quarter of 2007 our revenues were
      approximately $1.5 million less than projected at the beginning of the
      quarter.





In
      addition, our quarterly operating results have been, and are likely to continue
      to be, influenced by seasonal fluctuations in our sales. Because our sales
      have
      grown significantly since inception, these fluctuations may not be apparent
      from
      our historical financial statements. However, we believe that our sales and
      sales growth have been, and will continue to be, affected by the seasonal
      purchasing patterns of some of our customers. For example, we believe that
      our
      sales may be reduced from the levels which we might otherwise have been able
      to
      attain during the third quarter of 2007 because of the slowdown in business
      activities during the summer months in Europe, and that our sales during the
      fourth quarter of 2007 may be increased because some of our customers tend
      to
      make greater capital expenditures towards the end of their own fiscal years.
      Because of these anticipated fluctuations, our sales and operating results
      in
      any quarter may not be indicative of future performance and it **** may
      be
      difficult for investors to properly evaluate our prospects.





7


**If
      the market for Application Delivery and Network Security solutions does not
      continue to develop, we will not be able to sell enough of our products to
      achieve and maintain profitability.**





The
      Application Delivery and Network Security markets in which we operate are
      rapidly evolving and we cannot assure you that they will continue to develop
      and
      grow or that our products and technology will keep
      pace
      with these changes .
      Market
      acceptance of Application Delivery and Network Security solutions may be
      inhibited by, among other factors, a lack of anticipated congestion and strain
      on existing network infrastructures and the availability of alternative
      solutions. If demand for Application Delivery and Network Security solutions
      does not continue to grow, we may not be able to sell enough of our products
      to
      achieve, maintain and increase profitability.





**Competition
      in the market for Application Delivery and Network Security solutions is
      intense. As a result, we may lose market share and we may be unable to achieve
      and maintain profitability.**





The
      Application Delivery and Network Security markets are highly competitive and
      we
      expect competition to intensify in the future. We may lose market share if
      we
      are unable to compete effectively with our competitors. Our principal
      competitors in the Application Delivery solutions market include: F5 Networks,
      Inc., Cisco Systems, Inc., Citrix Systems, Inc. Foundry Networks, Inc., and
      Juniper Networks, Inc. In addition, we face competitors in the Network Security
      space, with respect to our Intrusion Prevention Systems (IPS). Such principal
      competitors include Juniper Networks, Inc., 3Com Systems, Inc. (TippingPoint),
      McAfee, Inc., Sourcefire, Inc., and IBM Corporation (Internet Security Systems).
      We expect to continue to face additional competition as new participants enter
      the market. Larger companies with substantial resources, brand recognition
      and
      sales channels may form alliances with or acquire competing Application Delivery
      or Network Security solutions and emerge as significant competitors. For
      example, IBM Corporation became a competitor in the Network Security market
      by
      acquiring Internet Security Systems (ISS). Competition may result in lower
      prices or reduced demand for our products and a corresponding reduction in
      our
      ability to recover our costs, which may impair our ability to achieve, maintain
      and increase profitability. Furthermore, the dynamic market environment, which
      is demonstrated by the above acquisitions, poses a challenge in predicting
      market trends and expected growth.





**Most
      of our competitors have greater resources than us, which may limit our ability
      to effectively compete with them.**





Most
      of
      our competitors have greater financial, personnel and other resources than
      us,
      which may limit our ability to effectively compete with them. These competitors
      may be able to:





·
            respond
                more quickly to new or emerging technologies or changes in customer
                requirements;





·
            benefit
                from greater economies of scale;





·
            offer
                more aggressive pricing;





·
            devote
                greater resources to the promotion of their products;
                and/or





·
            bundle
                their products or incorporate an Application Delivery or Intrusion
                Prevention component into existing products in a manner that renders
                our
                products partially or fully
                obsolete.





**We
      must develop new products and enhancements to existing products to remain
      competitive. If we fail to develop new products and product enhancements on
      a
      timely basis, we may lose market share.**





The
      markets for Application Delivery and Network Security solutions are
      characterized by rapid technological change, frequent new product introductions,
      changes in customer requirements and evolving industry standards. Accordingly,
      our future success will depend to a substantial extent on our ability
      to:





·
            invest
                significantly in research and
                development;





·
            develop,
                introduce and support new products and enhancements on a timely basis;
                and





·
            gain
                and consecutively increase market acceptance of our
                products.





8


We
      are
      currently developing new products and enhancements to our existing products.
      We
      may not be able to successfully complete the development and market introduction
      of new products or product enhancements. If we fail to develop and deploy new
      products and product enhancements on a timely basis, or if we fail to gain
      market acceptance of our new products, our revenues will decline and we may
      lose
      market share to our competitors. For example, during 2006, we introduced
      additions to our next generation APSolute application delivery product family. During
      2006, we also invested, and plan to continue to invest in 2007, in developing
      or
      when appropriate, acquiring, capabilities to advance our APSolute product family
      and market vision for application-smart networking. As evidence of 2007
      investments, we
      acquired Covelight Systems, Inc. (“Covelight”) in April for their web channel
      intelligence technology that allows business events to be captured in real-time
      on the network. This strategic move is intended to increase the market relevance
      of our APSolute product portfolio. We also released v3.10 of our DefensePro
      software with support for IPv6 and worm propagation prevention and added web
      application firewall (WAF) services to our AppXcel service platform through
      an
      OEM partnership with Imperva. These investments are part of our new positioning
      initiative branded as “business-smart networking”. There
      is
      no assurance that we will be successful in marketing and selling our next
      generation Application Delivery and Network Security solutions or the Covelight
      solutions, or that we will be able to grow revenues to justify our investments.





**We
      may make acquisitions or pursue mergers that could disrupt our business and
      harm
      our financial condition.**




As
      part
      of our business strategy, we may invest in or acquire other businesses,
      technologies or assets, or we may enter into joint ventures or other
      strategic relationships with third parties. For example, in the last two years
      we acquired the businesses of V-Secure and Covelight. We may assume liabilities
      or write-offs, incur amortization expenses related to intangible
      assets or realize large and immediate write-offs in connection with future
      acquisitions. In addition, the future valuation of these acquisitions may
      decrease from the market price paid by us, which may result in the writing-off,
      or impairment, of the relevant assets. In addition, our operation of any
      acquired or merged businesses, technologies or assets could involve numerous
      risks, including:





·
            Post-merger
                integration problems resulting from the combination of any acquired
                operations with out own operations or from the combination of two
                or more
                operations into a new merged
                entity;





·
            Diversion
                of management’s attention from our core
                business;





·
            Substantial
                expenditures, which could divert funds from other corporate
                uses;





·
            Entering
                markets in which we have little or no experience;
                and





·
            Loss
                of key employees of the acquired
                operations.





We
      cannot
      be certain that our recent acquisitions or any future acquisition or merger
      will
      be successful. If the operation of the business of any recent or future
      acquisitions or mergers disrupts our operations, our business may suffer. In
      addition, even if we successfully integrate the acquired business with our
      own,
      we may not receive the intended benefits of the acquisition.





**We
      have a very limited order backlog. If revenue levels for any quarter fall below
      our expectations, our earnings wil** **l
      decrease.**





We
      have a
      very limited order backlog, which makes revenues in any quarter dependent on
      orders received and delivered in that quarter. A delay in the recognition of
      revenue may have a significant negative impact on our results of operations
      for
      a given period. We base our decisions regarding our operating expenses on
      anticipated revenue trends, and our expense levels are relatively fixed, or
      require some time for adjustment. Because only a small portion of our expenses
      varies with our revenues, if revenue levels fall below our expectations, our
      earnings will decrease.





9


**We
      depend upon independent distributors to sell our products to customers. If
      our
      distributors do not succeed in selling our products, our revenues will
      suffer.**





We
      sell
      our products primarily to independent distributors, including value added
      resellers, original equipment manufacturers and systems integrators. These
      distributors resell our products to the ultimate customers. We currently have
      over 200 active independent distributors and resellers that sell our products.
      We are highly dependent upon our distributors’ active marketing and sales
      efforts. Our distribution agreements generally are non-exclusive, one-year
      agreements with no obligation on the part of our distributors to renew the
      agreements. Typically, our distribution agreements do not prevent our
      distributors from selling products of other companies, including products that
      may compete with our products, and do not contain minimum sales or marketing
      performance requirements. As a result, our distributors may give higher priority
      to products of other companies or to their own products, thus reducing or
      discontinuing their efforts to sell our products. We may not be able to maintain
      our existing distribution relationships. If our distributors terminate their
      relationships with us, we may not be successful in replacing them. In addition,
      we may need to develop new distribution channels for new products and we may
      not
      succeed in doing so. Any changes in our distribution channels, or our inability
      to establish distribution channels for new products, will impair our ability
      to
      sell our products and result in the loss of revenues.





**Our
      products generally have long sales cycles, which increase our costs in obtaining
      orders and reduces the predictability of our earnings.**





Our
      products are technologically complex and are typically intended for use in
      applications that may be critical to the business of our customers. As a result,
      our sales process is often subject to delays associated with lengthy approval
      processes that typically accompany the design and testing of new equipment.
      The
      sales cycles of our products to new customers can last as long as twelve months
      from initial presentation to sale. This delays the time in which we recognize
      revenue, and results in our having to invest significant resources in marketing
      and sales.





Long
      sales cycles also subject us to risks not usually encountered in a short sales
      cycle, including our customers’ budgetary constraints and internal acceptance
      reviews and processes prior to purchase. In addition, orders expected in one
      quarter could shift to another because of the timing of our customers’
procurement decisions. Furthermore, customers may defer orders in anticipation
      of new products or product enhancements introduced by us or by our competitors.
      These factors complicate our planning processes and reduce the predictability
      of
      our earnings.





**We
      must manage our anticipated growth effectively in order to achieve
      profitability.**





We
      have
      actively expanded our operations in the past and may continue to expand them
      in
      the future in order to gain market share in the evolving market for Application
      Delivery and Network Security solutions. This expansion has required, and may
      continue to require, managerial, operational and financial
      resources.





We
      cannot
      assure you that we will continue to expand, or that we will be able to offer
      and
      expand our operations successfully. If we are unable to manage our expanding
      operations effectively, our revenues may not increase, our cost of operations
      may rise and we may not be profitable.





As
      we
      grow we may need new or enhanced systems, procedures or controls. For example,
      at the beginning of 2007, we implemented a company-wide Oracle ERP system,
      with
      a substantial investment of resources, in order to increase our efficiencies
      of
      our operations in the fields of finance, operations, customer support and order
      management. The transition to new systems, procedures or controls, as well
      as
      any delay in transitioning to new or enhanced systems, procedures or controls,
      may seriously harm our ability to accurately forecast sales demand, manage
      our
      product inventory and record and report financial and management information
      on
      a timely and accurate basis.





**Our
      international sales may expose us to additional risks**





We
      currently offer our products in over 40 countries in addition to the United
      States. In fiscal years 2005 and 2006 our sales outside the Americas represented
      approximately 59% and 66%, respectively, of our total sales. Our international
      business activity involves varying degrees of risk and uncertainty inherent
      in
      doing business in so many different jurisdictions. Such risks, among others,
      may
      include: the possibility of unfavorable circumstances arising from host country
      laws or regulations, including unexpected changes of interpretations thereof;
      partial or total expropriation; export duties and quotas; local tax exposure;
      insurrection or war; and differences in business practices. For example, we
      are
      required to comply
      with European Union Directives with respect to product
      quality assurance standards and environmental standards. In
      2006,
      we were required to modify certain of our products in order to comply with
      Directive 2002/95/EC on Restriction of the Use of Certain Hazardous Substances
      in Electrical and Electronic Equipment (known as the “RoHs” Directive), which
      requires products sold in Europe to meet certain design
      specifications . We
      incurred costs and expenses and were required to spend management time and
      resources in the redesign of our products to meet the RoHs
      Directive.





10


**Currency
      exchange rates and fluctuations of exchange rates could have a material adverse
      effect on our results of operations.**





We
      are
      impacted by exchange rates and fluctuations thereof in a number of ways,
      including:





·
            A
                significant portion of our expenses, principally salaries and related
                personnel expenses, are paid in Israel shekels, whereas most of our
                revenues are generated in dollars and Euros. We have recently witnessed a
                significant strengthening of the shekel against the dollar, which
                has
                considerably increased the dollar value of our expenses in Israel.
                Should
                the shekel continue to maintain, or increase, its strength in comparison
                to the dollar, the dollar value of these expenses will continue to
                be
                high, and our results of operations will be adversely affected.





·
            A
                portion of our international sales are denominated in currencies
                other
                than dollars, such as the Euro, thereby exposing us to gains and
                losses on
                non-U.S. currency transactions.





·
            A
                substantial proportion of our international sales are denominated
                in
                dollars. Accordingly, devaluation in the local currencies of our
                customers
                relative to the dollar could cause customers to decrease orders or
                default
                on payment, which could harm our results of operations.





**Our
      success depends on our ability to attract, train and retain highly qualified
      sales, technical and customer support personnel.**





As
      we
      grow, we may need to increase our research and development, sales and marketing,
      and support staff. Our products require a sophisticated marketing and sales
      effort targeted at several levels within a prospective customer’s organization.
      The integration of these solutions into existing networks and ongoing support
      can be complex. Accordingly, we need highly-trained sales, marketing and
      customer support personnel. Competition for qualified sales personnel, as well
      as technical and customer support personnel is intense, and we may not be able
      to hire sufficient personnel to support our research and development and sales
      and marketing efforts. Our success depends upon our ability to attract, train
      and retain highly qualified personnel.





**We
      are dependent on Roy Zisapel, our President and Chief Executive Officer, the
      loss of whom would negatively affect our business.**





Our
      future success depends in large part on the continued services of our senior
      management and key personnel. In particular, we are highly dependent on the
      services of Roy Zisapel, our President and Chief Executive Officer. Although
      we
      have employment contracts with our senior management and key personnel, we
      do
      not carry life insurance on our senior management or key personnel. Any loss
      of
      the services of Roy Zisapel, other members of senior management or other key
      personnel could negatively affect our business.





**Undetected
      hardware defects and software errors may increase our costs and impair the
      market acceptance of our products.**





Our
      products have occasionally contained, and may in the future contain, undetected
      defects or errors, especially when first introduced or when new versions are
      released, due to defects or errors we fail to detect, including in components
      supplied by third parties. These defects or errors may be found after the
      commencement of commercial shipments. In addition, our customers integrate
      our
      products into their networks with products from other vendors. As a result,
      when
      problems occur in a network, it may be difficult to identify the product that
      has caused the problem. Regardless of the source of these defects or errors,
      we
      will then need to divert the attention of our engineering personnel from our
      product development efforts to address the detection and correction of these
      errors and defects. In the past, we have not incurred significant warranty
      or
      repair costs, nor have we been subject to liability claims for damages related
      to product errors or defects nor experienced any material lags or delays as
      a
      result thereof. However, we cannot assure you that we will not incur these
      costs
      or liabilities or experience these lags or delays in the future. Any insurance
      policies that we may have may not provide sufficient protection should a claim
      be asserted. Moreover, the occurrence of errors and defects, whether caused
      by
      our products or the components supplied by another vendor, may result in
      significant customer relations problems and injure our reputation, thus
      impairing the market acceptance of our products.





11


**We
      rely on third-party manufacturing vendors to provide key components of our
      products. If USR Technologies and Electronics (2003) Ltd., or USR, is not able
      to provide us with adequate supplies of the principal component used in our
      products, we may not be able to deliver sufficient quantities of our products
      to
      satisfy demand, or may have a delay in fulfilling orders.**





We
      rely
      on USR to supply us with circuit boards. These circuit boards are a principal
      component, which we use in the manufacture of our products. If we are unable
      to
      acquire circuit boards from USR on acceptable terms, or should USR cease to
      supply us with circuit boards for any reason, we may not be able to identify
      and
      integrate an alternative source of supply in a timely fashion or at the same
      costs. Any transition to one or more alternate suppliers would likely result
      in
      delays, operational problems and increased costs, and may limit our ability
      to
      deliver our products to our customers on time for such transition period. We
      entered into agreements with two additional suppliers, but to date have only
      purchased relatively small quantities from those suppliers. If we would need
      to
      rely on the alternate suppliers, there is no assurance that we will be able
      to
      obtain the quantities we require at lead times and pricing competitive to
      USR .





**A
      shortage of components or manufacturing capacity could cause a delay in our
      ability to fulfill orders or increase our manufacturing
      costs**





Our
      growth and ability to meet customer demands depend in part on our ability to
      obtain timely deliveries of parts from our suppliers and contract manufacturers.
      We may experience a shortage of certain component parts as a result of our
      own
      manufacturing issues, manufacturing issues at our suppliers or contract
      manufacturers, capacity problems experienced by our suppliers or contract
      manufacturers, or strong demand in the industry for those parts, especially
      if
      the economy grows. Growth in the economy is likely to create greater pressures
      on us and our suppliers to accurately project overall component demand and
      component demands within specific product categories and to establish optimal
      component levels. If shortages or delays persist, the price of these components
      may increase, or the components may not be available at all, and we may also
      encounter shortages if we do not accurately anticipate our needs. We may not
      be
      able to secure enough components at reasonable prices or of acceptable quality
      to build new products in a timely manner in the quantities or configurations
      needed. Accordingly, our revenues and gross margins could suffer until other
      sources can be developed. Our operating results would also be adversely affected
      if, anticipating greater demand than actually develops, we commit to the
      purchase of more components than we need. There can be no assurance that we
      will
      not encounter these problems in the future. Although in many cases we use
      standard parts and components for our products, certain components are presently
      available only from a single source or limited sources. We may not be able
      to
      diversify sources in a timely manner, which could harm our ability to deliver
      products to customers and seriously impact present and future sales.





**Our
      profitability could suffer if third parties infringe upon our proprietary
      technology.**





Our
      profitability could suffer if third parties infringe upon our intellectual
      property rights or misappropriate our technologies and trademarks for their
      own
      businesses. Our success depends upon the protection of our proprietary software
      installed in our products, our trade secrets and our trademarks. To protect
      our
      rights to our intellectual property, we rely on a combination of trademark
      and
      patent law, trade secret protection, confidentiality agreements and other
      contractual arrangements with our employees, affiliates, distributors and
      others. In the United States, we have registered trademarks for “Web Server
      Director®,” “Cache Server Director®”, “FireProof®”, “LinkProof®”,
“Triangulation®”, “Smart Nat®”, “Get Certain®”, “CertainT®”, “Peer Director®”,
“Synapps Architecture®”, “DefencePro®”, StringMatch Engine®” and “CID - Content
      Inspection Director®”. We also have trademark applications pending for
“UpLinkTM”, “RadwareTM”, “APSolute TM ”,
      “AppDirector”TM, “AppXCell”TM, “SecureFlow”TM, “SOADirector”TM, “SOASwitch”TM,
“SIPDirector”TM and “DFI- Deep Flow Inspection”TM. In addition, we have registered
      patents in the United States for our triangle redirection method used for the
      global load balancing, for our mechanism for efficient management and
      optimization of multiple links used in our LinkProof product, for our method
      for
      load balancing by global proximity used in our WSD product and for our method
      for controlling traffic on links between autonomous BGP systems. We also have
      pending patent applications and provisional patents in connection with several
      features used in our products. The protective steps we have taken may be
      inadequate to deter misappropriation of our proprietary information. We may
      be
      unable to detect the unauthorized use of our proprietary technology or take
      appropriate steps to enforce our intellectual property rights. Effective
      trademark, patent and trade secret protection may not be available in every
      country in which we offer, or intend to offer, our products. Failure to
      adequately protect our intellectual property could devalue our proprietary
      content and impair our ability to compete effectively. Furthermore, defending
      our intellectual property rights could result in the expenditure of significant
      financial and managerial resources. For example, in 2004 we sued F5 networks
      Inc. for patent infringement and we settled in 2005. Although the lawsuit did
      not result in a significant expenditure we spent time and resources litigating
      and settling the claim.





12


**Our
      products may infringe on the intellectual property rights of
      others.**





Third
      parties may assert against us infringement claims or claims that we have
      violated a patent or infringed a copyright, trademark or other proprietary
      right
      belonging to them. As a result we may incur costs defending ourselves or
      settling lawsuits even if we believe we do not infringe third parties
      rights. For
      example, in 2003, F5
      Networks, Inc. filed a lawsuit against us for patent infringement which was
      settled in 2004. The
      settlement included a license of the F5 patent.





**Our
      non-competition agreements with our employees may not be enforceable in certain
      jurisdictions. If any of these employees leaves our Company and joins a
      competitor, our competitor could benefit from the expertise our former employee
      gained while working for us.**





We
      currently have non-competition agreements with all of our employees. These
      agreements prohibit our employees, in the event they cease to work for us,
      from
      directly competing with us or working for our competitors for a limited period
      after termination of employment. The laws of the U.S., Israel and other
      countries in which we have employees, may limit or prohibit our ability to
      enforce these non-competition agreements, or may allow us to enforce them only
      to a limited extent. In the event that we are unable to enforce any of these
      agreements, competitors that employ our former employees could benefit from
      the
      expertise our former employees gained while working for us.





**Some
      of our deposits and other investments may be in excess of insured limits and
      are
      not insured in other jurisdictions.**





The
      majority of our cash and cash equivalents, and short-term and long-term bank
      deposits are invested in banks in the United States and the U.K.. Some of these
      deposits may be in excess of insured limits and are not otherwise insured.
      If
      one or more of these financial institutions were to become insolvent, the loss
      of these investments would have a material adverse effect on our financial
      condition.





**Risks
      Related to the Market for Our Ordinary Shares**





**Two
      shareholders may exert significant influence in the election of our directors
      and over the outcome of matters requiring shareholder
      approval.**





As
      of
      June 3, 2007, Mr. Yehuda Zisapel, a member of our Board of Directors,
      beneficially owned 13.57% of the ordinary shares outstanding and Roy Zisapel,
      our Chief Executive Officer, President and director, and Mr. Yehuda Zisapel’s
      son beneficially owns approximately 5.18% of our ordinary shares outstanding
      (See “Item 6 - Share Ownership”). As a result, these shareholders may exert
      significant influence in the outcome of various actions that require shareholder
      approval, such as the election of our directors, and the approval or rejection
      of a merger and similar corporate transactions.





13


**If
      we are characterized as a passive foreign investment company, our U.S.
      shareholders may suffer adverse tax consequences.**





Generally,
      if for any taxable year 75% or more of our gross income is passive income,
      or at
      least 50% of our assets are held for the production of, or produce, passive
      income, we would be characterized as a passive foreign investment company,
      or
      PFIC, for U.S. federal income tax purposes. This characterization could result
      in adverse U.S. tax consequences to our U.S. shareholders, including having
      gain
      realized on the sale of our ordinary shares treated as ordinary income, as
      opposed to capital gain income, and having potentially punitive interest charges
      apply to such sales proceeds. U.S. shareholders should consult with their own
      U.S. tax advisors with respect to the U.S. tax consequences of investing in
      our
      ordinary shares.





We
      reasonably believe we were not a PFIC for our 2006 tax year.  It
      is
      possible that the Internal Revenue Service will attempt to treat us as a PFIC
      for 2006 or prior years. The tests for determining PFIC status are applied
      annually and it is difficult to make accurate predictions of future income
      and
      assets, which are relevant to this determination. Accordingly, there can be
      no
      assurance that we will not become a PFIC in 2007 or in subsequent years. For
      a
      discussion of the rules relating to passive foreign investment companies and
      related tax consequences, please see the section of this annual report entitled
      “Item 10 - Additional Information - Taxation — United States Federal Income Tax
      Considerations.”





**Risks
      Related to Oper** **ations
      in Israel** ****





**Conditions
      in Israel affect our operations and may limit our ability to produce and sell
      our products.**





We
      are
      incorporated under Israeli law and our principal offices and manufacturing
      and
      research and development facilities are located in Israel. Accordingly, our
      operations and financial results could be adversely affected if political,
      economic and military events curtailed or interrupted trade between Israel
      and
      its present trading partners or if major hostilities involving Israel should
      occur in the Middle East.





Since
      the
      establishment of the State of Israel in 1948, a number of armed conflicts have
      taken place between Israel and its Arab neighbors. A state of hostility, varying
      in degree and intensity, has led to security and economic problems for Israel.
      Since October 2000, there has been a high level of violence between the
      Palestinians and Israel, which has strained Israel’s relationship with its Arab
      citizens, Arab countries and, to some extent, with other countries around the
      world. The establishment in early 2006 of a government in the Palestinian
      Authority by representatives of the Hamas militant group created additional
      unrest and uncertainty in the region. In July and August 2006, an armed conflict
      has taken place between Israel and Hezbollah, an Islamic movement based in
      Lebanon, which included the firing of multiple rockets by Hezbollah throughout
      northern Israel as well as retaliatory attacks by Israel throughout Lebanon.





We
      do not
      believe that the political and security situation has had a material impact
      on
      our business to date, however, there is no assurance that this will always
      be
      the case in the future. We could be adversely affected by any major hostilities,
      including acts of terrorism or any other hostilities involving or threatening
      Israel, the interruption or curtailment of trade between Israel and its trading
      partners or a significant downturn in the economic or financial condition of
      Israel. Furthermore, several countries restrict business with Israel and Israeli
      companies, and additional countries or companies may restrict doing business
      with Israel and Israeli companies as the result of the aforementioned
      hostilities. No predictions can be made as to whether or when a final resolution
      of the area’s problems will be achieved or the nature thereof and to what extent
      the situation will impact Israel’s economic development or our
      operations.





**Some
      of our directors and officers as well as many of our Israeli employees are
      obligated to perform annual military reserve duty in Israel. We cannot assess
      the potential impact of these obligations on our business.**





Some
      of
      our directors, officers and employees are, unless exempt, obligated to perform
      annual military reserve duty, depending upon their age and prior position in
      the
      army. They may also be further subject to being called to active duty at any
      time under emergency circumstances. Directors, officers, and key employees
      falling within these requirements include Roy Zisapel, our Chief Executive
      Officer and President, Amir Peles, our Chief Technical Officer, and Yuval
      Pemper, our Vice President, Research and Development. Our operations could
      be
      disrupted by the absence, for a significant period, of one of more of these
      officers or other key employees due to military service, and any disruption
      in
      our operations would harm our business. The full impact on our workforce or
      business if some of our officers and employees will be called upon to perform
      military service, especially in times of national emergency, is difficult to
      predict.





14


**The
      rate of inflation in Israel and the change in the exchange rate between the
      New
      Israeli Shekel against the U.S. dollar and/or the U.S. dollar against the Euro
      is volatile, and may negatively impact our costs.**





Most
      of
      our revenues are denominated in U.S. dollars or are dollar-linked, but we incur
      a portion of our expenses, principally salaries and related personnel expenses,
      in other currencies mainly in Israel, in New Israeli Shekels (“NIS”) and in
      Europe, in Euros. In 2006, we sold in Euros in most European countries. In
      this
      respect, we are exposed to the following risks: the rate of inflation in Israel
      may exceed the rate of devaluation of the NIS in relation to the dollar, the
      timing of this devaluation may lag behind inflation in Israel, or the NIS may
      increase in value relative to the dollar. In such events, the dollar cost of
      our
      operations in Israel will increase and our dollar-measured results of operations
      will be adversely affected. In addition, if the Euro increases in value relative
      to the dollar and sales in Euros do not exceed expenses incurred in Euros,
      the
      dollar cost of our operations in Europe will increase and our operating profit
      will be adversely affected. If the Euro decreases in value relative to the
      dollar and sales in Euros exceed expenses incurred in Euros, our operating
      profit will be negatively affected as a result of a decrease in the dollar
      value
      of our sales. In 2006, the value of the dollar decreased in relation to the
      NIS
      by 8.2%, the inflation rate in Israel was -0.1%, and the value of the dollar
      decreased in relation to the Euro by 10.2%. As a result, during 2006, we had
      an
      increase in expenses (as a result of the increase in the Euro exchange rate
      relative to the dollar), which was offset by the increase we had in our sales
      due to the fact that our sales to the EU countries are also denominated in
      Euro.
      We cannot provide assurances that we will not be materially adversely affected
      by the rate of inflation in Israel or exchange rate fluctuations in the future.





**The
      tax benefits we may receive in connection with our approved enterprise program
      require us to satisfy prescribed conditions and may be terminated or reduced
      in
      the future. This would increase taxes and decrease our net profit**





The
      Investment Center has granted us an approval to establish an “Approved
      Enterprise” program at our Tel Aviv and Jerusalem facilities. An Approved
      Enterprise is eligible for tax benefits on taxable income derived from its
      Approved Enterprise programs. The benefits available to an Approved Enterprise
      are dependent upon the fulfillment of conditions stipulated in applicable law
      and in the certificate of approval. If we fail to comply with these conditions,
      in whole or in part, with respect to any Approved Enterprise program we
      establish, or if we voluntarily decide to cease the Approved Enterprise program,
      we may be required to pay additional taxes for the period in which we benefited
      from the tax exemption or reduced tax rates and we would likely be denied these
      benefits in the future. One criterion for establishing the level of tax benefits
      is the percentage of holdings by foreign (i.e. non-Israeli) investors in our
      shares. A decrease in the level of foreign investors’ holdings may increase our
      tax rate.





An
      amendment to the Investment Law, which was published on April 1, 2005 (the
      “Amendment") has changed certain provisions of the Investment Law. As a result
      of the Amendment, the Company is no longer obliged to obtain an Approved
      Enterprise status in order to receive the tax benefits previously available
      under the Alternative Benefits provisions, and therefore there is no need to
      apply to the Investment Center for this purpose (Approved Enterprise status
      remains mandatory for companies seeking grants). Rather, the Company may claim
      the tax benefits offered by the Investment Law directly in its tax returns,
      provided that its facilities meet the criteria for tax benefits set out by
      the
      Amendment. The Company is also granted a right to approach the Israeli Tax
      Authority for a pre-ruling regarding their eligibility for benefits under the
      Amendment. Tax benefits are available under the Amendment to production
      facilities (or other eligible facilities), which are generally required to
      derive more than 25% of their business income from export (referred to as a
      “Benefited Enterprise” under the Amendment). In order to receive the tax
      benefits, the Amendment states that the Company must make an investment in
      the
      Benefited Enterprise exceeding a minimum amount specified in the Law. Such
      investment may be made over a period of no more than three years ending at
      the
      end of the year in which the Company requested to have the tax benefits apply
      to
      the Benefited Enterprise (the “Year of Election”). Where the Company requests to
      have the tax benefits apply to an expansion of existing facilities, then only
      the expansion will be considered a Benefited Enterprise and the Company’s
      effective tax rate will be the result of a weighted combination of the
      applicable rates. In this case, the minimum investment required in order to
      qualify as a Benefited Enterprise is required to exceed a certain percentage
      of
      the Company’s production assets before the expansion.




15


Our
      approved program and tax benefits thereunder may not continue in the future
      at
      their current levels or at any level. The termination or reduction of these
      tax
      benefits would likely increase our taxes. The amount, if any, by which our
      taxes
      would increase will depend upon the rate of any tax increase, the amount of
      any
      tax benefit reduction, and the amount of any taxable income that we may earn
      in
      the future.





**Provisions
      of Israeli law could delay, prevent, or make difficult, a change of control,
      thereby depressing the price of our ordinary shares.**





Provisions
      of Israeli Corporate and tax law may have the effect of delaying, preventing
      or
      making an acquisition of our Company more difficult. For example, under the
      Companies Law, upon the request of a creditor of either party to a proposed
      merger, the court may delay or prevent the merger if it concludes that there
      is
      a reasonable concern that, as a result of the merger, the surviving company
      will
      be unable to satisfy the obligations of any of the parties to the merger. These
      provisions could cause our ordinary shares to trade at prices below the price
      for which third parties might be willing to pay to gain control over us. Third
      parties who are otherwise willing to pay a premium over prevailing market prices
      to gain control of us may be unwilling to do so because of these provisions
      of
      Israeli law. For additional information on this topic, see “Item 10B -
      Additional Information - Memorandum and Articles of Association - Mergers and
      Acquisitions under Israeli law.”





**It
      may be difficult to enforce a U.S. judgment against us and/or our officers
      and
      directors, or to assert U.S. securities laws claims in Israel.**





We
      are
      incorporated under the laws of the State of Israel. Service of process upon
      us,
      our Israeli subsidiaries and affiliates, and our directors and officers named
      herein substantially all of whom reside outside the United States, may be
      difficult to obtain within the United States. Furthermore, because the majority
      of our assets and investments, and substantially all of our directors and
      officers are located outside the United States, any judgment obtained in the
      United States against us or any of them may not be collectible within the United
      States.





It
      may be
      difficult to assert U.S. securities law claims in original actions instituted
      in
      Israel. Israeli courts may refuse to hear a claim based on a violation of U.S.
      securities laws because Israel is not the most appropriate forum to bring such
      a
      claim. In addition, even if an Israeli court agrees to hear a claim, it may
      determine that Israeli law and not U.S. law is applicable to the claim. If
      U.S.
      law is found to be applicable, the content of applicable U.S. law must be proved
      as a fact, which can be a time-consuming and costly process. Certain matters
      of
      procedure will also be governed by Israeli law. There is little binding case
      law
      in Israel addressing these matters.





Subject
      to specified time limitations and legal procedures, under the rules of private
      international law currently prevailing in Israel, Israeli courts may enforce
      a
      U.S. final judgment in a civil matter, including a judgment based upon the
      civil
      liability provisions of the U.S. securities laws and including a monetary or
      compensatory judgment in a non-civil matter, provided that:





·
            The
                judgment is enforceable in the state in which it was
                given;





·
            Adequate
                service of process has been effected and the defendant has had a
                reasonable opportunity to present his arguments and
                evidence;





·
            The
                judgment and its enforcement are not contrary to the law, public
                policy,
                security or sovereignty of the State of
                Israel;





16


·
            The
                judgment was not obtained by fraud and does not conflict with any
                other
                valid judgment in the same matter between the same parties;
                and





·
            An
                action between the same parties in the same matter is not pending
                in any
                Israeli court at the time the lawsuit is instituted in the U.S.
                court.




**ITEM
                4.**
            **Information
                on the Company**





**History
      and Development of the Company**





Radware
      Ltd. was organized in May 1996 as a corporation under the laws of the State
      of
      Israel, and commenced operations in April 1997. Our principal executive offices
      are located at 22 Raoul Wallenberg Street, Tel-Aviv 69710, Israel and our
      telephone number is 972-3-766-8666. Our website address is www.radware.com. *Information
      contained on our website does not constitute a part of this annual
      report.*





As
      of
      January 1, 1999, we established a wholly-owned subsidiary in the United States,
      Radware Inc., which conducts the sales and marketing of our products in the
      Americas and is our authorized representative and agent in the United States.
      The principal offices of Radware Inc. are located at 575 Corporate Dr., Lobby
      2,
      Mahwah, NJ 07430 and its telephone number is 201-512-9771.





We
      also
      have several wholly owned subsidiaries world-wide handling local support and
      promotion activities.





For
      a
      discussion of our capital expenditures and divestitures, see “Item 5—Operating
      and Financial Review and Prospects - Liquidity and Capital
      Resources.”





**Business
      Overview**





**General**





We
      develop, manufacture and market Application Delivery and Network Security
      (“business-smart networking”) solutions that provide end-to-end availability,
      performance and security of mission critical networked applications. Radware’s
      integrated Application Front-End, Application Access and Network Security
      solutions enable enterprises and carriers to deliver their mission critical
      applications successfully between data centers and remote locations, over all
      critical points in the network.





Our
      Application Delivery and Network Security solutions enable customers to manage
      their network infrastructure, bypass systems failures, scale their application
      performance, and secure their Internet protocol (“IP”) traffic. Our products
      align network behavior with business process to improve productivity and extract
      the greatest value from investments in network infrastructures by intelligently
      distributing traffic within the network, optimizing the use of available network
      resources and protecting applications, networks and users at high speeds. Over
      the years, our products have won a number of awards for performance, including
      Network Computing Editor’s Choice, SC Magazine Recommended Buy Award, Network
      Computing Well-Connected, Internet World Best of Show, PC Magazine Editor’s
      Choice and Network Magazine Product of the Year. All of our products are
      Underwriters Laboratories (UL) compliant and our products have also achieved
      significant industry certification such as the Common
      Criteria Evaluation & Validation Scheme (CCEVS) EAL 3
      through the National Security Agency (NSA) program and FIPS 140-2 through the
      National Institute of Standards (NIST). In addition, we have been recognized
      as
      among the top industry players in our respective markets by independent,
      third-party IT analysts - for example, Forrester Research, Frost & Sullivan,
      Gartner, IDC, and Yankee Group.





In
      April
      2007, we acquired Covelight, a U.S. based company, which provides web
      channel intelligence technology that allows business events to be captured
      in
      real-time on the network. This strategic move is intended to increase the market
      relevance of our APSolute product portfolio by moving from the
      "application-smart" approach to a new, more business-centric approach, which
      we
      position as "business-smart networking".





17


**Products,
      Operating System (OS), Management Tool, Platforms, and Subscription
      Services**





Radware
      sells application delivery and network security products (“devices”) that run
      different configurations of software to deliver features specific to the
      intended operation of the appliance. These products utilize the proprietary
      APSolute OS (operating system), which embeds common operating logic into each
      product. Multiple Radware devices can be managed through the APSolute OS common
      management tool and dashboard (Insite) and are delivered via hardware switching
      platforms (AS1 - AS5) with various levels of processing power, throughput,
      port
      density, and speed depending on selected model. In addition, Radware offers
      a
      security update subscription service. Its products, operating system, management
      tools, switching platforms, and subscription services are all marketed under
      the
      APSolute brand.





***Products
      (APSolute Product Suite)***





The
      APSoluteTM product
      suite consists of the following product families:





·  *AppDirectorTM
      Intelligent Application Delivery Controller* for
      data
      center optimization with advanced Layer 4-7 policies and granular packet
      classification to eliminate traffic surges, server bottlenecks, connectivity
      disconnects and downtime for ensured business continuity.





·  *AppXcelTM)
      Application Accelerator* performs
      web compression and Hypertext Transfer Protocol (HTTP) multiplexing, and
      accelerates web applications for high performance content serving and Secure
      Sockets Layer (“SSL”) encryption and decryption, providing secure and effective
      SSL processing.





·  *LinkProof®* manages
      Internet traffic for networks, commonly referred to as multi-homed networks,
      which access the Internet through multiple connections via several Internet
      Service Providers, to provide fault tolerant and cost effective Internet
      connectivity.





·  *LinkProof®
      Branch* manages
      the operation of multiple links across all remote office links, allowing large,
      multi-branched enterprises to control and reduce the costs of their connectivity
      and Virtual Private Networks (VPN) between headquarters and branch offices.





·  *DefensePro* ®
      Intrusion Prevention and Denial of Service products protect against worms,
      bots,
      viruses, malicious intrusions and Denial of Service attacks at up to 6-Gigabit
      speeds, preventing attacks in real-time for intrusion prevention and multi-layer
      application defense.





·  *SecureFlowTM* simplifies
      the management and optimizes performance of best of breed enterprise security
      tools t *o* enable
      transparent, selective integration of content inspection, anti-virus, VPN,
      Intrusion Detection Systems (IDS) and firewalls into a unified switched
      architecture to eliminate the security/performance tradeoff.





**·*InflightTM*  delivers
      real-time business events to backend analytic engines (e.g. enterprise fraud,
      compliance, business intelligence, marketing, etc.) by performing passive
      identity-based monitoring of critical web channel application transaction
      activity. With Inflight, companies can optimize
      their business processes, offer new products and services on-the-fly to
      customers, and halt identity theft or fraudulent online behavior





·  *CID
      -
      Content Inspection Director* ®
managed
      service delivery platform for carriers that enables centralized and optimized
      IP
      value added service deployment. With Content Inspection Director, carriers
      can
      extend high-performance security and media services to customers, customizing
      delivery, guaranteeing SLAs and generating a new source of
      revenues.





***Operating
      System (APSolute OS)***





APSolute
      OS is a modular operating system built around Radware’s core software engines,
      the Application Classifier and Flow Manager that are used to classify traffic
      based on an extensive and granular set of application intelligence. Users can
      define classes of traffic and policies for how network resources should handle
      that traffic based on any combination of network, application, content and
      user
      information. APSolute OS service modules (each as described below), which are
      available on our hardware products, include: Advanced Health Monitoring, Traffic
      Redirection, Bandwidth Management, Application Acceleration, Intrusion
      Prevention and DoS Protection. With APSolute OS, enterprises and carriers can
      address existing and emergent application service requirements across server
      farms, security and connectivity layers.




18


·
            *APSolute
                OS Application-Smart Classification and Flow
                Management*


Radware’s
      innovative APSolute OS features a unique classification and flow management
      engine that is used to classify traffic based on the industry’s most extensive
      and granular set of application intelligence. Users can define classes of
      traffic and policies for how network resources should handle that traffic based
      on any combination of network, application, content and user information.
      APSolute OS tracks the flow of traffic end-to-end and implements multi-step
      decisions at every critical point across the transaction path to ensure
      optimized application delivery.





·
            *APSolute
                OS Health Monitoring and Failure
                Bypassing*


APSolute
      OS Health Monitoring continuously checks all network resources detecting
      failures in real-time and automatically redirecting traffic to the highest
      performing resources to bypass failures and guarantee high application
      availability and continuous operations.





·
            *APSolute
                OS Traffic Redirection*


APSolute
      OS Traffic Redirection intelligently distributes traffic across network devices
      to optimize the utilization of local and global resources, and ensure service
      availability and redundancy. APSolute
      OS Traffic Redirection enables maximum utilization of IT infrastructure
      capacities across farms, local and global sites using an extensive array of
      traffic redirection algorithms to dispatch traffic including cyclic
      distribution, least users, least packets and least bytes.





·
            *APSolute
                OS Bandwidth Management*


APSolute
      OS Bandwidth Management extends granular classification and control over
      bandwidth resource allocation, prioritizing all network traffic and guaranteeing
      service levels for mission critical applications across the entire network
      (with
      TOS and Diffserv marking).





·
            *APSolute
                OS Application Acceleration*


The
      APSolute OS advanced Layer 4-7 application acceleration technologies include:
      SSL offloading, Transmission Control Protocol (TCP) optimization, caching and
      reverse proxy, HTTP compression and advanced image and content
      compression.





·
            *APSolute
                OS Intrusion Prevention*


Automatically
      secures application network resources by continuously monitoring and inspecting
      all network traffic including SSL traffic, APSolute OS Intrusion Prevention
      immediately terminates suspicious sessions by implementing user/application/
      content policies to completely safeguard applications. On-the-fly SSL inspection
      and IP reassembly provide an additional layer of protection against hacker
      evasion techniques.





·
            *APSolute
                OS DoS Protection*


Identifies
      and stops debilitating Denial of Service (DoS), Distributed Denial of Service
      (DDoS), and Structured Query Language (SQL) injections and protocol/traffic
      anomalies, protecting the network from service failures and downtime. Using
      advanced technologies including behavior-based analysis, APSolute OS DoS
      Protection automatically detects abnormal requests and thwarts network attacks
      before they undermine server operations, all the while ensuring secure traffic
      operations for uninterrupted service continuity.





19


***Management
      Tool (APSolute Insite)***





The
      common application management tool which runs across all Radware products is
      APSolute Insite. APSolute
      Insite is a unified management tool with an intuitive Graphical User Interface
      (GUI) that provides end-to-end network visibility, control and policy management
      of all application switching devices .





Based
      on
      an easy-to-use site map interface, APSolute Insite lets users draw their
      network, configure Radware Application-smart switching devices and set-up the
      APSolute OS Services (as described above) to address end-to-end IP application
      service requirements. APSolute Insite’s statistics module provides real-time and
      historical views of actual application performance levels for monitoring
      site-wide operations and simple pinpointing of vulnerabilities and failures,
      affording complete visibility and control over the performance of Web and
      Application Servers, security tools, cache servers, anti-virus tools and
      Internet links. Based on this information, network administrators can decide
      to
      add resource capacities, tune bandwidth policies or relocate devices to better
      manage actual traffic loads and IP application performance requirements. Insite
      is also offered as a standalone network device under the Insite ManagePro
      label.





***Application
      Switch Platforms***





All
      Radware products are powered by our Application Switch platforms. Radware
      purpose-built Application Switching hardware offers scalable and flexible
      throughput performance to meet the broad range of enterprise and carrier
      end-to-end application delivery requirements.





Radware's
      Application Switch 1 combines ASIC-based switching, CPU processing power and
      APSolute OS Services to deliver the performance and service breadth to address
      all IP application requirements across network layers 4-7. Designed to guarantee
      application availability, security and performance, Application Switch 1 bridges
      the gap between IT infrastructure and IP Applications for comprehensive control
      of all critical operations across the enterprise.





Application
      Switch 2 is powered by a multi-layered switching architecture designed to
      address the widest set of protocols and service requirements across network
      layers 4-7 while boosting IP application performance to Gigabit Speeds.
      Delivering accelerated processing speeds with the ability to optimize routing
      decisions based on specific applications, web requests and content, Application
      Switch 2 provides reliability, performance and security across IP applications,
      for complete control over enterprise operations.








Application
      Switch 3 is a 3-tier processing architecture designed to meet the high capacity
      processing requirements for the most intensive layer 4-7 switching operations.
      Dual network processors in the second tier of the Application Switch 3
      architecture, accelerate traffic redirection, load-balancing, quality of service
      control, real-time intrusion prevention and DoS mitigation for application
      security to multi-Gigabit speeds. The third-tier in the Application Switch
      3
      architecture is the powerful RISC processor that is responsible for managing
      and
      prioritizing all active application sessions.





Application
      Switch 4 is a three-tier processing architecture designed to meet the high
      capacity processing requirements for the most intensive intelligent application
      switching operations. Application
      Switch 4 features 44Gb connectivity, multi-Gigabit network processors and a
      strong 1.3-GHZ CPU. Driving
      application switching performance to up to 3-Gigabit speeds, AS4 affords
      complete control over mission critical applications and explosive transactions
      across the most demanding networking environments.





In
      2006,
      we introduced our latest high-end platform for large enterprises and carriers,
      Application Switch 5, which doubles the throughput capacity of Application
      Switch 4 released in 2005. Application
      Switch 5 features an 88Gb switching backbone, multi-Gigabit network processors,
      strong 1.7-GHZ CPU and a dual power supplies to provide the industry’s fastest
      Layer 7 performance and highest port density. We are also offering a new switch
      for our entry-level DefensePro® IPS/DoS x02 model series, the Security Platform
      1.





20


Our
      products are compatible with any system that uses the Internet protocol and
      can
      operate with various network structures, configurations and operating systems.
      Our products support a wide variety of IP-based applications, including web
      services, e-mail, voice, P2P, Enterprise Resource Planning (ERP), Customer
      Relationship Management tools, database and file transfers.





***Security
      Update Service***





The
      Security Update Service, available as an optional subscription service, consists
      of Periodic Updates, Emergency Updates, and Custom Filters, which are supported
      by a Security Operations Center (Vulnerability & Exploit Detection; Security
      Risk Assessment, and Threat Mitigation). The service provides immediate and
      ongoing security updates to protect customers against the latest threats.





**Customers
      and End-Users**





With
      the
      exception of our limited direct sales efforts to select customers, we sell
      our
      products through distributors or resellers who then sell our products to end
      users.





We
      have a
      globally diversified end-user base, consisting of corporate enterprises
      including banks, insurance companies, manufacturing and retail, government
      agencies, media companies and service providers, such as telecommunication
      carriers, Internet service providers and application service providers.
      Customers in these different vertical markets deploy Radware for availability,
      performance and security of their applications from headquarters to branch
      offices.





In
      2006,
      approximately 34% of our sales were in the Americas (principally in the United
      States), 34% were in EMEA (Europe, Middle East and Africa) and 32% in
      Asia-Pacific. Other than the United States, no single country accounted for
      more
      than 10% of our sales for 2006. ****





For
      the
      years ended December 31, 2006, 2005 and 2004, one single customer (a
      distributor) accounted for 12%, 16% and 11% of our sales, respectively. As
      of
      December 31, 2006 and 2005, no single customer represented more than 10% of
      the
      trade receivables balance.





**Sales
      and Marketing**





*Sales.* We
      market
      and sell our products primarily through an indirect sales channel that consists
      of distributors and resellers located in North America, Europe and Asia. In
      addition, we generate direct sales to select customers. Our sales channels
      are
      supported by our sales managers who are also responsible for recruiting
      potential distributors and resellers and for initiating and managing marketing
      projects in their assigned regions. The sales managers are supported by our
      internal sales support staff that help generate and qualify leads for the sales
      managers. As of December 31, 2006, we employed a total of 38 sales managers
      and
      sales staff in the Americas with locations in various states. We also employed
      70 sales managers and sales staff based in the rest of the world, who are
      responsible for developing and maintaining distribution channels outside the
      Americas. We have subsidiaries and representative offices and branches in
      several countries, which promote and market our products and provide customer
      support in their respective regions.





*Marketing
      Strategy.* Our
      marketing strategy is to enhance brand recognition and maintain our reputation
      as a provider of technologically advanced, quality Application Delivery and
      Network Security solutions. We seek to build upon our marketing and branding
      efforts globally to achieve greater worldwide sales. Our sales force and
      marketing efforts are principally directed at developing brand awareness and
      providing sales support to our distributors. We participate in major trade
      shows
      and offer support to our distributors who participate in regional trade shows
      and events. We also invest in web based and print advertising campaigns as
      well
      as a global media and public relations campaign. In addition to our independent
      marketing efforts, we invest in joint marketing efforts with our distributors,
      value added resellers and other companies that have formed strategic alliances
      with us.





We
      have
      entered into co-marketing arrangements with companies in other complementary
      segments, including:





-
            Aladdin
                Knowledge Systems Ltd.;


-
            Avaya,
                Inc.;


-
            Aventail
                Corporation;





21


-
            BEA
                Systems, Inc.;


-
            BMC
                Software Inc.;


-
            CA,
                Inc.;


-
            Finjan
                Software;


-
            Hewlett
                Packard Company;


-
            IBM,
                Inc.;


-
            Microsoft
                Corporation;


-
            Oracle
                Corporation; and


-
            SAP
                AG.





*Strategic
      Alliances and Original Equipment Manufacturer Agreements.* We
      have
      entered into strategic alliances and original equipment manufacturer agreements
      with other software and hardware vendors, including Forum Systems, Inc. and
      Imperva, Inc. as well as mutual channel information sharing arrangements. We
      believe that these companies have significant customer relationships and offer
      products which complement our products. The products are branded with the names
      of these companies or co-branded with our name. These agreements are standard
      distributor agreements, purchase agreements, OEM (original equipment
      manufacturer) agreements or other specific agreements and are terminable by
      either party at will. We plan to further invest in the development of strategic
      alliances in order to provide greater access to our target markets and enhance
      our brand name.





**Technical
      Management**





Our
      technical team, which consists of 110 employees worldwide as of December 31,
      2006, supports our sales force during the sales process, assists our customers
      and distributors with the initial installation, set-up and ongoing support
      of
      our products, trains distributors and customers to use our products and provides
      software updates and product upgrades for our products. In addition, our
      technical team trains and certifies our distributors to provide limited
      technical support in each of the geographical areas in which our products are
      sold, and is directly responsible for remote support. Our Certainty Support
      Program provides offerings which allow customers to automatically get new
      software versions of their products and obtain optimized performance by
      purchasing any of the following five optional offerings: extended warranty,
      software updates, 24x7 help-desk (directly to our customers and through our
      distributors), on-site support and unit replacement.





**Research
      and Development**





In
      order
      to maintain our share of the Application Switching market, we place considerable
      emphasis on research and development to expand the capabilities of our existing
      products, develop new products and improve our existing technologies and
      capabilities. We believe that our future success will depend upon our ability
      to
      maintain our technological expertise, enhance our existing products and
      introduce, on a timely basis, new commercially viable products that will
      continue to address the needs of our customers. Accordingly, we intend to
      continue devoting a significant portion of our personnel and financial resources
      to research and development. In order to identify market needs and to define
      appropriate product specifications, as part of the product development process
      we seek to maintain close relationships with current and potential distributors,
      customers and vendors in related industry segments.





As
      of
      December 31, 2006, our research and development staff consisted of 163
      employees. Research and development activities take place at our facilities
      in
      Israel. We employ established procedures for the requirement management,
      development and quality assurance of our new product developments. Our research
      and development organization is divided according to our existing products.
      Each
      product group is headed by a group leader and includes team leaders and
      engineers. In
      addition, we have a hardware and platform software department responsible for
      the development of the Radware hardware platforms and platform software, which
      are the basis for all products, serving all product groups, which consists
      of a
      senior group leader, group leaders, team leaders, and engineers. We also have
      an
      application infrastructure software group responsible for the software which
      is
      common to all our products (such as the management tools), which consists of
      a
      group leader, team leaders and engineers. We furthermore have a quality
      assurance department, which assists all product groups, and includes a QA
      director, group leaders, team leaders and quality control engineers and
      technicians.





22


We
      occasionally use third-party subcontractors for the development of portions
      of
      research and development projects.





**Manufacturing
      and Suppliers**





USR
      Technologies and Electronics (2003) Ltd. (“USR”) manufactures most of the
      circuit boards which are the principal hardware component used in our products.
      It supplies us with finished circuit boards for final assembly. The other
      components and subassemblies included in our products are supplied to USR from
      a
      limited group of suppliers and subcontractors. USR monitors each stage of the
      circuit board production process, including the selection of components and
      subassembly suppliers. USR is ISO 9002 certified, indicating that its
      manufacturing processes adhere to established quality standards.





We
      install our proprietary software onto the circuit boards we receive from USR.
      Quality assurance testing, final assembly and packaging and shipping operations
      are primarily performed at our facility in Jerusalem, Israel.





These
      circuit boards are the principal component which we use in the manufacture
      of
      our products. If we are unable to acquire circuit boards from USR on acceptable
      terms, or should USR cease to supply us with circuit boards for any reason,
      we
      may not be able to identify and integrate an alternative source of supply in
      a
      timely fashion or at the same costs. Any transition to one or more alternate
      suppliers would likely result in delays, operational problems and increased
      costs, and may limit our ability to deliver our products to our customers on
      time for such transition period. We entered into agreements with two additional
      suppliers, but to date have only purchased relatively small quantities from
      those suppliers. If we would need to rely on the alternate suppliers, there
      is
      no assurance that we will be able to obtain the quantities we require at lead
      times and pricing competitive to USR .





Our
      activities in Europe require that we comply with European Union Directives
      with
      respect to


product
      quality assurance standards and environmental standards.





**Proprietary
      Rights**





We
      rely
      on patent, trademark and trade secret laws, as well as confidentiality
      agreements and other contractual arrangements with our employees, distributors
      and others to protect our technology. We have a policy that requires our
      employees to execute employment agreements, including confidentiality and
      non-compete provisions.





We
      have
      registered trademarks for “Web Server Director®,” “Cache Server Director®”,
“FireProof®”, “LinkProof®”, “Triangulation®”, “Smart Nat®”, “Get Certain®”,
“CertainT®”, “Peer Director®”,“Synapps Architecture®”, “DefensePro®”,
“StringMatch Engine®” and “CID - Content Inspection Director®” and we have
      trademark applications pending for “UpLinkTM”, “RadwareTM”, “APSolute TM ”,
      “AppDirector”TM, “AppXCel”TM , “SecureFlow”TM, “SOADirector”TM, “SOASwitch”TM,
“SIPDirector”TM and “DFI- Deep Flow Inspection”TM. We do not currently own any
      registered copyrights. We have registered patents in the United States for
      our
      triangle redirection method used for the global load balancing, for our
      mechanism for efficient management and optimization of multiple links used
      in
      our LinkProof product, for our method for load balancing by global proximity
      used in our WSD product and for our method for controlling traffic on links
      between autonomous BGP systems. We have pending patent applications and
      provisional patents in connection with several methods and features used in
      our
      products. These applications may not result in any patent being issued, and,
      if
      issued, the patents may not provide adequate protection against competitive
      technology and may not be held valid and enforceable if challenged. In addition,
      other parties may assert rights as inventors of the underlying technologies,
      which could limit our ability to fully exploit the rights conferred by any
      patent that we receive. Our competitors may be able to design around any patent
      we receive and other parties may obtain patents that we would need to license
      or
      circumvent in order to exploit our patents.





The
      protective steps we have taken may be inadequate to deter misappropriation
      of
      our technology and information. We may be unable to detect the unauthorized
      use
      of, or take appropriate steps to enforce, our intellectual property rights.
      Some
      of the countries in which we sell our products do not protect intellectual
      property to the same extent as the United States and Israel. In addition, our
      competitors may independently develop technologies that are substantially
      equivalent or superior to our technology. Any licenses for intellectual property
      that might be required for our services or products may not be available on
      reasonable terms.





23


**Competition**





The
      Application Delivery and Network Security markets are highly competitive and
      we
      expect competition to intensify in the future. We may lose market share if
      we
      are unable to compete effectively with our competitors. Our principal
      competitors in the Application Delivery solutions market include: F5 Networks,
      Inc., Cisco Systems, Inc., Citrix Systems, Inc. Foundry Networks, Inc., and
      Juniper Networks, Inc. In addition, we face competitors in the Network Security
      space, with respect to our Intrusion Prevention Systems (IPS). Such principal
      competitors include Juniper Networks, Inc., 3Com Systems, Inc. (TippingPoint),
      McAfee, Inc., Sourcefire, Inc., and IBM Corporation (Internet Security Systems),
      We expect to continue to face additional competition as new participants enter
      the market. Larger companies with substantial resources, brand recognition
      and
      sales channels may form alliances with or acquire competing Application Delivery
      or Network Security solutions and emerge as significant competitors. For
      example, IBM Corporation became a competitor in the Network Security market
      by
      acquiring Internet Security Systems (ISS). Competition may result in lower
      prices or reduced demand for our products and a corresponding reduction in
      our
      ability to recover our costs, which may impair our ability to maintain and
      increase profitability. Furthermore, the dynamic market environment, which
      is
      demonstrated by the above acquisitions, poses a challenge in predicting market
      trends and expected growth.





We
      believe that our success will depend primarily on our ability to provide more
      technologically advanced and cost-effective Application Delivery and Network
      Security solutions, and more responsive customer service and support, than
      our
      competitors. However, we cannot assure you that the products we offer will
      compete successfully with those of our competitors. Furthermore, should
      competition intensify, we may have to reduce the prices of our products which
      will negatively impact our business and financial condition.





**I** **sraeli
      Office of Chief Scientist**





From
      time
      to time, eligible participants may receive grants under programs of the Office
      of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor,
      or
      the Chief Scientist. Grants received are generally repaid through a mandatory
      royalty based on revenues from the sale of products (and ancillary services)
      incorporating know-how developed, in whole or in part, with the grants. This
      governmental support is conditioned upon the participant’s ability to comply
      with certain applicable requirements and conditions specified in the Chief
      Scientist’s program and with the provisions of the Law for the Encouragement of
      Research and Development in the Industry, 1984, and the regulations promulgated
      thereunder, or the Research and Development Law. Under the Research and
      Development Law, research and development programs that meet specified criteria
      and are approved by the Research Committee of the Chief Scientist are eligible
      for grants usually of up to 50% of certain approved expenditures of such
      programs, as determined by said committee. In exchange, the recipient of such
      grants is required to pay the Chief Scientist royalties from the revenues
      derived from products incorporating know-how developed within the framework
      of
      each such program or derived therefrom (including ancillary services in
      connection therewith), up to an aggregate of 100% of the dollar-linked value
      of
      the total grants received in respect of such program, plus interest.





The
      Israeli government is currently in the process of formulating a proposed
      amendment to the royalty regulations promulgated under the Research and
      Development Law. The amendment is expected to include changes to
      the royalty rates, which would vary from company to company based on the
      amount of its revenues and approval date of its program, up to a rate
      of 6%, and, as of 2006, to increase the rate of interest
      accruing on grants by 1% per year. The amendment
      was expected to have retroactive effect from January 1, 2006,
      although there is no assurance as to whether and when it will
      be adopted. The Research and Development Law generally requires that the
      product developed under a program be manufactured in Israel. However, upon
      notification to the Chief Scientist, up to 10% of the manufacturing volume
      may
      be performed outside of Israel; furthermore, upon the approval of the Chief
      Scientist, a greater portion of the manufacturing volume may be performed
      outside of Israel, provided that the grant recipient pays royalties at an
      increased rate, which may be substantial, and the aggregate repayment amount
      is
      increased up to 300% of the grant, depending on the portion of the total
      manufacturing volume that is performed outside of Israel. The Research and
      Development Law further permits the Chief Scientist, among other things, to
      approve the transfer of manufacturing rights outside Israel in exchange for
      an
      import of different manufacturing into Israel as a substitute, in lieu of the
      increased royalties. The Research and Development Law also allows for the
      approval of grants in cases in which the applicant declares that part of the
      manufacturing will be performed outside of Israel or by non-Israeli residents
      and the Research Committee is convinced that doing so is essential for the
      execution of the program. This declaration will be a significant factor in
      the
      determination of the Chief Scientist whether to approve a program and the amount
      and other terms of benefits to be granted. For example, the increased royalty
      rate and repayment amount will be required in such cases.





24


By
      December 31, 2001, we repaid by way of royalties the full amount we owed to
      the Chief
      Scientist.  In
      2004,
      we applied, together with another company, to obtain a grant from the Chief
      Scientist under the “joint R&D project” track. The Chief Scientist approved
      the maximum grant to the project of approximately $0.2 million. In 2005, we
      applied to obtain an additional grant from the Chief Scientist, under the same
      project. The Chief Scientist approved an additional grant to the project in
      an
      additional maximum amount of approximately $0.2 million. During 2005 and 2006
      we
      have received an aggregate amount of $0.4 million for this project from the
      Chief Scientist.





The
      Research and Development Law also provides that know-how developed under an
      approved research and development program may not be transferred to third
      parties in Israel without the approval of the Research Committee. Such approval
      is not required for the export of any products resulting from such research
      or
      development. The Research and Development Law further provides that the know-how
      developed under an approved research and development program may not be
      transferred to third parties outside Israel, except in certain circumstances
      and
      subject to the Chief Scientist’s prior approval. The Chief Scientist may approve
      the transfer of Chief Scientist-funded know-how outside Israel, generally in
      the
      following cases: (a) the grant recipient pays to the Chief Scientist a portion
      of the sale price paid in consideration for such Chief Scientist-funded know-how
      (according to certain formulas), or (b) the grant recipient receives know-how
      from a third party in exchange for its Chief Scientist-funded know-how, or
      (c)
      such transfer of Chief Scientist-funded know-how arises in connection with
      certain types of cooperation in research and development
      activities.





The
      Research and Development Law imposes reporting requirements with respect to
      certain changes in the ownership of a grant recipient. The law requires the
      grant recipient and its controlling shareholders and foreign interested parties
      to notify the Chief Scientist of any change in control of the recipient or
      a
      change in the holdings of the means of control of the recipient that results
      in
      a non-Israeli becoming an interested party directly in the recipient and
      requires the new interested party to undertake to the Chief Scientist to comply
      with the Research and Development Law. In addition, the rules of the Chief
      Scientist may require additional information or representations in respect
      of
      certain of such events. For this purpose, “control” is defined as the ability to
      direct the activities of a company other than any ability arising solely from
      serving as an officer or director of the company. A person is presumed to have
      control if such person holds 50% or more of the means of control of a company.
      “Means of control” refers to voting rights or the right to appoint directors or
      the chief executive officer. An “interested party” of a company includes a
      holder of 5% or more of its outstanding share capital or voting rights, its
      chief executive officer and directors, someone who has the right to appoint
      its
      chief executive officer or at least one director, and a company with respect
      to
      which any of the foregoing interested parties owns 25% or more of the
      outstanding share capital or voting rights or has the right to appoint 25%
      or
      more of the directors. Accordingly, any non-Israeli who acquires 5% or more
      of
      our ordinary shares will be required to notify the Chief Scientist that it
      has
      become an interested party and to sign an undertaking to comply with the
      Research and Development Law.





The
      Israeli authorities have indicated in the past that the government may further
      reduce or abolish the Chief Scientist grants in the future. Even if these grants
      are maintained, we cannot presently predict what would be the amounts of future
      grants, if any, that we might receive.





25


**Organizational
      Structure**





As
      of
      January 1, 1999, we established a wholly-owned subsidiary in the United States,
      Radware Inc., which conducts the sales and marketing of our products in America. We
      also
      have subsidiaries in Australia, France, Germany, the United Kingdom, Italy,
      Japan, Singapore, Korea, Canada, Switzerland and India. We have also established
      representative offices in China, Taiwan and Russia. All
      of
      our subsidiaries are wholly-owned. All our subsidiaries and branches promote
      and
      offer support for our products. In April 2007 we purchased Covelight Systems,
      Inc., a Delaware corporation, which develops and manufactures the APSolute
      Inflight product. Our subsidiaries include:




**Name
                of Subsidiary**
            **Country
                of Incorporation**Radware
                Inc.
            New
                Jersey, United States of AmericaRadware
                UK Limited
            United
                KingdomRadware
                France
            FranceRadware
                Srl
            ItalyRadware
                GmbH
            GermanyNihon
                Radware KK
            JapanRadware
                Australia Pty. Ltd.
            AustraliaRadwareSingapore Pte. Ltd.
            SingaporeRadware
                Korea Ltd.
            KoreaRadware
                Canada Inc.
            CanadaRadware
                GmbH
            SwitzerlandRadware
                India Pvt. Ltd.
            IndiaCovelight
                Systems, Inc.(*)
            Delaware,
                United States of America


(*)
      Purchased during 2007





Yehuda
      Zisapel is a co-founder and shareholder of Radware. Yehuda Zisapel is also
      a
      member of the Board of Directors of Radware. Individually or together with
      his
      brother, Zohar Zisapel, he is also a founder, director and/or principal
      shareholder of several other companies which, together with Radware and our
      subsidiaries listed above are known as the RAD-Bynet Group. These corporations
      include:




AB-NET
                Communications Ltd.
              BYNET
                Data
              Communications
                Ltd.
              BYNET
                Electronics Ltd.
              BYNET
                SEMECH (outsourcing) Ltd.
              Bynet
                Software Systems Ltd.
              Bynet
                System Applications Ltd.
            Ceragon
                Networks Ltd.
              Commex
                Technologies Ltd.
              Packetlight
                Networks Ltd.
              RAD-Bynet
                Properties and Services (1981) Ltd.
              RADCOM
                Ltd.
              RAD
                Data
              Communications
                Ltd.
            WISAIR
                Inc.
              Sanrad
                Inc.
              RADLive
                Ltd.
              RADView
                Software Ltd.
              RADVision
                Ltd.
              RADWIN
                Ltd.
              RiT
                Technologies Ltd.
              Silicom
                Ltd.




The
      group
      also includes several other holdings, real estate companies, biotech and
      pharmaceutical companies . The
      above
      list does not constitute a complete list of the investments of Messrs. Yehuda
      and Zohar Zisapel.





In
      addition to engaging in other businesses, members of the RAD-Bynet Group are
      actively engaged in designing, manufacturing, marketing and supporting data
      communications products, none of which currently compete with our products.
      Some
      of the products of members of the RAD-Bynet Group are complementary to, and
      may
      be used in connection with, our products. See also “Item 7 - Major Shareholders
      and Related Party Transactions - Related Party Transactions”.





26


**Property,
      Plants and Equipment**





*Israel.* Our
      headquarters and principal administrative, finance, research and development
      and
      marketing operations are located in approximately 48,420 square feet of leased
      office space in Tel Aviv, Israel. The lease expires in October 2007. The
      facilities are leased from affiliated companies owned by Messrs. Yehuda and
      Zohar Zisapel. For more information see - “Item 7 -Major Shareholders and
      Related Parties Transactions.” We also lease office space in a nearby location
      in Israel, of which approximately 2,590 square feet are leased from the same
      related party and approximately 5,920 square feet are leased from an
      unaffiliated party.





We
      also
      sublease approximately 5,482 square feet of space in Jerusalem for our
      manufacturing facility from USR. The sublease with respect to 2,150 square
      feet
      expires in April 2009 and the sublease with respect to the remaining 3,332
      square feet expires in December 2007.





The
      aggregate annual rent for the premises in Israel for 2006 was approximately
      $686,000.





*Other
      locations.* In
      the
      United States, we lease approximately
      12,382  square
      feet in Mahwah, New Jersey from a company owned by Yehuda and Zohar Zisapel,
      which lease will expire in April 2010. We also lease 4,916 square feet
      from an unaffiliated party in Costa Mesa, California, which lease expired in March
      2007 and is renewable on a month to month basis. We also
      lease 3,024 square feet in Dallas, Texas from an unaffiliated party, which
      lease
      expires in February 2009. In addition, we lease facilities for the operation
      of
      our subsidiaries and representative offices in several locations in the United
      States, Europe and Asia Pacific.





The
      aggregate annual rent for the premises in locations outside Israel in 2006
      was
      approximately $1,262,000.





*Outlook.* We
      may
      need additional space if we expand our business. In the event that additional
      or
      substitute offices and facilities are required, we believe that we could obtain
      such offices and facilities at commercially reasonable rates.





**ITEM
              4A.**
            **UNRESOLVED
                STAFF COMMENTS**




None.




**ITEM
                5.**
            **OPERATING
                AND FINANCIAL REVIEW AND PROSPECTS******





**General**





**Our
      discussion and analysis of our financial condition and results of operation
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the United States.
      Our operating and financial review and prospects should be read in conjunction
      with our financial statements, accompanying notes thereto and other financial
      information appearing elsewhere in this annual report.**





We
      are a
      provider of integrated application delivery and network security solutions,
      assuring availability, performance and security of business critical networked
      applications. We began selling our products in 1997, and currently have local
      offices, subsidiaries or branches in 15 countries in Asia-Pacific, Europe and
      the Americas.





We
      sell
      mainly through sales channels such as resellers and distributors. Most of our
      direct sales are to strategic customers in the United States. The web channel
      intelligence technology acquired from Covelight Systems in April 2007
      (“Inflight”) will be sold under the existing APSolute product portfolio through
      primarily direct sales channels in the first phase and through resellers and
      distributors in subsequent phases.





27


Most
      of
      our revenues are generated in U.S. dollars or are dollar-linked and the majority
      of our expenses are incurred in dollars and, as such, we use the dollar as
      our
      functional currency. Our consolidated financial statements are prepared in
      dollars and in accordance with U.S. GAAP.





*Revenues.* Our
      revenues are derived primarily from sales of our products and, to a lesser
      extent, from sales of post-contract customer support through our Certainty
      Support program and sales of a security subscription service the “Security
      Update Service” (“SUS”). We generally recognize product revenue when persuasive
      evidence of an arrangement exists, delivery has occurred, the fee is fixed
      or
      determinable, no further obligation exists and collectability is probable.
      Post-contract customer support and the SUS service, which represents mainly
      software update subscriptions, help-desk support and unit repairs or
      replacements, is recognized ratably over the contract period .





*Cost
      of Sales.* Cost
      of
      sales refers to both products and service revenues and consists primarily of
      the
      cost of circuit boards and other components required for the assembly of our
      products, salaries and related personnel expenses for those engaged in the
      final
      assembly and maintenance service of our products and other overhead costs.
      Most
      of our Cost of Sales expenses are not fixed costs and are directly related
      to
      our revenues.





*Research
      and Development Expenses.* Research
      and development (“R&D”) expenses consist primarily of salaries and related
      personnel expenses, costs of subcontractors and prototype expenses related
      to
      the design, development, quality assurance and enhancement of our products,
      and
      depreciation of equipment purchased for the development and testing processes.
      All research and development costs are expensed as incurred. We believe that
      continued investment in research and development is critical to attaining our
      strategic product objectives and therefore we plan to invest additional
      resources in 2007 in expanding our R&D organization, including new hires and
      purchase of new and advanced testing and development equipment.





*Marketing
      and Selling Expenses.* Marketing and selling expenses consist primarily of salaries, commissions and
      related personnel expenses for those engaged in the sales and marketing of
      our
      products as well as the cost of operating the offices which are located outside
      Israel and are engaged in the promotion, marketing and support of our products,
      in addition to the related trade shows, advertising, promotions, web site
      maintenance and public relations expenses.





*General
      and Administrative Expenses.* General
      and administrative expenses consist primarily of salaries and related personnel
      expenses for executive, accounting and administrative personnel, professional
      fees (which include legal, audit, expenses related to the implementation of
      Section 404 of the Sarbanes-Oxley Act, and additional consulting fees), bad
      debt
      expenses and other general corporate expenses.





*Amortization
      of stock-based compensation.* Our
      expenses also included amortization of stock-based compensation, which is
      allocated among cost of sales, research and development expenses, marketing
      and
      selling expenses and general and administrative expenses, based on the division
      in which the recipient of the option grant is employed. ** The
      stock-based compensation is being amortized to operating expenses over the
      vesting period of the individual options.





On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123 (R) ”),
      which
      is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R) is
      similar to the approach described in SFAS No. 123. However, SFAS No. 123
      permitted, but did not require, share-based payments to employees to be
      recognized based on their fair values while SFAS No. 123(R) requires all
      share-based payments to employees to be recognized, as of the first quarter
      of
      2006, based on their fair values. SFAS No. 123 (R) also
      revises, clarifies and expands guidance in several areas, including measuring
      fair value, classifying an award as equity or as a liability and attributing
      compensation cost to reporting periods.





SFAS
      No.
      123(R) permits public companies to adopt its requirements using one of two
      methods: (i) a “modified prospective” method in which compensation cost is
      recognized beginning with the effective date (a) based on the requirements
      of
      Statement SFAS No. 123(R) for all share-based payments granted after the
      effective date and (b) based on the requirements of SFAS No. 123 for all awards
      granted to employees prior to the effective date of SFAS No. 123(R) that remain
      unvested on the effective date; (ii) a “modified retrospective” method which
      includes the requirements of the modified prospective method described above,
      but also permits entities to restate based on the amounts previously recognized
      under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior
      periods presented or (b) prior interim periods of the year of adoption.





28


We
      adopted the new statement effective January 1, 2006, using the “modified
      prospective” method. The adoption of SFAS No. 123(R) in 2006 resulted in
      operating expenses of $4.5 million and 24 cents loss per diluted share. The
      impact of SFAS 123(R) on our results of operations in future period may be
      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, expected forfeiture
      rate and employee stock option exercise patterns.





*Financial
      Income (Expenses), Net.* Financial
      income, net consists primarily of interest earned on short-term and long-term
      bank deposits, and of amortization of premiums, accretion of discounts and
      interest earned on investment in marketable securities of proceeds from the
      issuance of our shares to the public, from the exercise of options to purchase
      our shares, from cash generated from our operations and from income and expenses
      from the translation of monetary balance sheet items denominated in non-dollar
      currencies





*Taxes,* Israeli
      companies are generally subject to corporate tax on their taxable income at
      the
      rate of 31% for the 2006 tax year. Following an amendment to the Israeli Income
      Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect
      on January 1, 2006, the corporate tax rate is scheduled to decrease as follows:
      29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax
      year
      and 25% for the 2010 tax year and thereafter. Israeli companies are generally
      subject to capital gains tax at a rate of 25% for capital gains (other than
      gains deriving from the sale of listed securities) derived after January 1,
      2003. However, we have established an approved enterprise program (the
”Program”), which is eligible for the tax benefits for operational profit,
      described below under the heading ”Corporate Tax Rate”. These benefits result in
      part of our income being tax exempt or taxed at a lower rate for some time
      after
      we begin to report taxable income. The tax rate depends upon the percentage
      of
      our income derived at that time from the Approved Enterprise program. The tax
      benefits depend on our meeting the requirements of the Program and there is
      no
      assurance we will be able to obtain such benefits. We have carry-forward capital
      losses for tax purposes and we anticipate to utilize these losses in 2007 and
      subsequent years. We have recorded a deferred tax asset in relation to these
      losses. Our U.S. subsidiary and two other subsidiaries have carry-forward tax
      losses to offset against future taxable profit. We have recorded a deferred
      tax
      asset in relation to these carry-forward tax losses and we anticipate that
      we
      will utilize part of these tax losses in 2007 and after. We have also recorded
      a
      valuation allowance in connection with these deferred tax assets. Other
      subsidiaries of ours are taxed according to the laws in their countries of
      incorporation and tax expenses are recorded accordingly. We may incur, for
      accounting purposes, tax expenses in 2007 which we anticipate to be at a rate
      of
      up to 10% of our operating income.





*Market
      Trends.* According to IT analyst estimations, the IT market in 2006 continued to grow
      slightly but at a lesser rate than 2005. In terms of geographical variances,
      the
      U.S. experienced less overall IT spending growth than Western Europe and Asia
      Pacific, with China and India reaching double-digit growth percentage levels.
      While networking equipment drove growth in IT spending in 2005, it reached
      mature market conditions in 2006 and therefore had a slower share of
      contribution to overall IT spending than in previous years. Due to the slowing
      rate of growth in the market it is difficult to predict the conditions of our
      market going forward. In addition, we believe that market conditions cause
      our
      customers and potential customers to be more conservative in planning their
      spending. If the global conditions deteriorate, and companies in our target
      markets continue to reduce capital expenditures, we may experience a reduction
      in sales, as well as downward pressure on the price of our products. In
      addition, if the market continues to be flat and customers continue to
      experience low visibility we may not be able to increase our sales. Each of
      the
      above scenarios would have a material adverse effect on our business, operating
      results and financial condition .





Furthermore,
      at the end of 2005 and throughout the course of 2006 several acquisitions took
      place in our space which resulted in continuous changes in the competitive
      landscape. F5
      acquired Swan Labs in the third quarter of 2005 for WAN optimization
      capabilities. Citrix continued its acquisition pattern in 2006 following its
      NetScaler (application acceleration) and Terros (application firewall)
      acquisitions in 2005, by acquiring Reflectent Software (application performance
      monitoring) and Orbital Data (WAN Optimization). And, IBM became a competitor
      in
      the Intrusion Prevention space by acquiring Internet Security Systems (ISS)
      in
      August of 2006. The dynamic market environment, which is demonstrated by the
      above acquisitions, poses a challenge in predicting market trends and expected
      growth.





29


We
      intend
      to continue our investment in the marketing and branding of our APSolute product
      family, in order to broaden market acceptance of such products. Such investment includes recruitment of skilled
      personnel, participation in trade shows, testing of our products by leading
      firms in the industry, investment in brand awareness and online advertising,
      and
      so forth. There is no assurance that we will be successful in such marketing
      and
      selling activities and that the increase in revenues, if any, will justify
      the
      investment.





*Business
      Combinations.* In
      December 2005, we acquired the business of V-Secure which included the
      acquisition of intellectual property, technology, customers relationship and goodwill. The
      initial consideration for the acquisition was $9,168,000, out of which an amount
      of $ 9,011,000 was paid in cash; and $148,000 was paid by issuance of fully
      vested warrants to V-Secure to purchase 45,454 ordinary shares of the Company.
      The remaining balance was related to acquisition costs payable. Additional
      cash
      consideration of $3,000,000 was paid as part of the purchase agreement during
      2006 and V-Secure waived any claim or demand for additional payments.
      Accordingly, the total consideration for the acquisition amounted to
      $12,168,000.





The
      purchase price for the above acquisition was allocated to the identifiable
      intangible assets acquired (which have been valued by a third party valuation
      specialist) based upon their estimated fair values. The acquisition was
      accounted for under the purchase method of accounting. During 2006, no
      impairment loss was recorded in connection with the acquired intangible assets.
      See also Note 1e to our Consolidated Financial Statements included in this
      annual report.





In
      April
      2007 we acquired Covelight Systems, Inc. (“Covelight”) by way of merger. The
      total consideration for this acquisition is up to $16 million, of which $7.5
      million was paid in cash and an additional amount of up to $8.5 million, which
      is contingent upon sales performance targets, may be due by April
      2008.





We
      have
      engaged a third-party valuation specialist to evaluate the identifiable assets
      of Covelight for the purpose of purchase price allocation. The financial
      statements for the second quarter of 2007 will reflect the
      acquisition.





**Critical
      Accounting Policies** ******





Our
      consolidated financial statements are prepared in accordance with U.S. GAAP.
      These accounting principles require management to make certain estimates,
      judgments and assumptions based upon information available at the time that
      they
      are made, historical experience and various other factors that are believed
      to
      be reasonable under the circumstances. These estimates, judgments and
      assumptions can affect the reported amounts of assets and liabilities as of
      the
      date of the financial statements, as well as the reported amounts of revenues
      and expenses during the periods presented.





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





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





·
            Revenue
                recognition;





·
            Accounting
                for doubtful accounts;





30


·
            Inventory
                valuation;





·
            Goodwill
                and intangible assets valuation;





·
            Stock
                based compensation;





·
            Income
                taxes; and





·
            Legal
                contingencies.





*Revenue
      Recognition* .
      The
      Company and its subsidiaries generate revenues from selling their products
      and
      post-contract customer support primarily through distributors and resellers,
      all
      of which are considered as end-users. In North America (and rarely in the rest
      of the world), the Company also generates revenues from direct sales to select
      end users.





Revenues
      from product sales are recognized when delivery has occurred, persuasive
      evidence of an agreement exists, the fee is fixed or determinable, no further
      obligation exists and collectability is probable.





Revenues
      in arrangements with multiple deliverables are recognized under the “residual
      method” when Vendor specific objective evidence (“ VSOE”)
      of
      fair value exists for all undelivered elements, no VSOE exists for the delivered
      elements, and all other revenue recognition criteria are satisfied. VSOE for
      post-contract customer support is determined based on the price when it is
      sold
      separately in similar arrangements. The price may vary in the territories and
      vertical markets in which the Company conducts business. Price is determined
      by
      using a consistent percentage of the product price.





Revenue
      derived from post-contract customer support, which represents mainly software
      subscription, SUS and unit replacement and repair services, is recognized
      ratably over the contract period, which is typically one year.





Revenues
      from training and installation, which are considered as not essential to the
      functionality of the product, included in multiple elements arrangements are
      recognized at the time they are rendered. We do not have material revenues
      from
      training and installations.





The
      Company and its subsidiaries provide a provision for product returns and stock
      rotation based on their experience with historical sales returns, analysis
      of
      credit memo data and other known factors, in accordance with SFAS No. 48
“Revenue Recognition When Right of Return Exists”. If the historical data used
      to calculate these estimates does not properly reflect future returns,
      additional provision for sales returns may be required, and revenues in that
      period could be adversely affected.





Deferred
      revenue includes unearned amounts received under post-contract customer support
      and SUS.





*Accounting
      for Doubtful Accounts* .
      Our
      accounts receivable are derived from our sales to our customers located all
      over
      the world. We perform periodic credit evaluations of our customers’ financial
      condition. We maintain an allowance for doubtful accounts for estimated losses,
      which may result from the inability of our customers to make required payments.
      Management exercises judgment as to its ability to collect outstanding
      receivables. Allowances for doubtful accounts are made based upon a specific
      review of all significant outstanding invoices. For those invoices not
      specifically reviewed, allowances for doubtful accounts are made based upon
      the
      age of the receivable. In determining the allowance, we analyze our historical
      collection experience and current economic trends. If the historical data used
      to calculate the allowances for doubtful accounts do not reflect the future
      ability to collect outstanding receivables, additional allowances for doubtful
      accounts may be needed and the future results of operations could be materially
      affected.





*Inventory
      Valuation.* At each
      balance sheet date, we evaluate our inventory balance for excess quantities
      and
      obsolescence. This evaluation includes an analysis of sales levels by product
      and projections of future demand. In addition, we write off inventories that
      are
      considered obsolete. Remaining inventory balances are adjusted to the lower
      of
      cost or market value. If future demand for our old or new products, or market
      conditions are less favorable than our projections, additional inventory
      write-downs may be required and would be reflected in cost of sales for such
      period. During the first quarter of 2007 we performed an inventory write-off
      in
      an amount of $1.4 million in connection with the anticipated release of our
      new
      generation platforms.





31


*Goodwill
      and Intangible assets.* Goodwill
      represents excess of the costs over the fair value of net assets of businesses
      acquired. Under SFAS No. 142, goodwill is not amortized. SFAS No. 142 requires
      goodwill to be tested for impairment on adoption and at least annually
      thereafter or between annual tests in certain circumstances, and written down
      when impaired, rather than being amortized as previous accounting standards
      required. Goodwill is tested for impairment by comparing the fair value with
      its
      carrying value. Fair value is determined using discounted cash flows and market
      multiples. During the year ended December 31, 2006 no such impairment losses
      were recorded.





Intangible
      assets are amortized over their useful life using a method of amortization
      that
      reflects the pattern in which the economic benefits of the intangible assets
      are
      consumed or otherwise used up, in accordance with SFAS No. 142. Acquired
      technology and customer relationships are amortized using the straight-line
      method over an estimated period between six to ten years during which benefits
      are expected to be received. During 2006, an amount of $ 450,000 was recorded
      as
      amortization expenses, included in cost of revenues and sales and marketing
      expenses. As of December 31, 2006, no impairment losses have been
      identified.





*Stock-based
      compensation.* For a
      discussion of the accounting of stock-based compensation - see “Item 5 -
      Operating and Financial Review and Prospects - General - Amortization
      of stock-based compensation ”,
      and
      note 2n to the financial statements.





*Income
      Taxes.* We
      account for income taxes in accordance with SFAS No. 109, “Accounting for Income
      Taxes”. This statement prescribes the use of the liability method whereby
      deferred tax assets 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. We provide a valuation allowance,
      if necessary, to reduce deferred tax assets to their estimated realizable value
      if it is more likely than not that a portion or all deferred tax assets would
      not be realized.





In
      evaluating our ability to recover our deferred tax assets, we consider all
      available positive and negative evidence including our past operating results,
      the existence of cumulative losses in the most recent fiscal years and our
      forecast of future taxable income on a jurisdiction by jurisdiction basis.
      In
      determining future taxable income, we are responsible for assumptions utilized,
      the reversal of temporary differences and the implementation of feasible and
      prudent tax planning strategies. These assumptions require significant judgment
      about the forecasts of future taxable income and are consistent with the plans
      and estimates we use to manage the underlying business. We are in the process
      of
      evaluating the possible impact of the adoption of FASB Interpretation No. 48,
      “Accounting for Uncertainty in Income Taxes” (“FIN 48”) - see “Impact of
      recently issued Accounting Policies” below.





*Legal
      Contingencies.* We
      are a
      party to a few litigation proceedings as described in “Item 8 - Financial
      Information - Legal Proceedings”.





*Impact
      of recently issued Accounting Standards*





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (“FIN 48”). FIN 48 creates a single model to address uncertainty
      in tax positions. FIN 48 clarifies the accounting for income taxes by
      prescribing the minimum recognition threshold a tax position is required to
      meet
      before being recognized in the financial statements. FIN 48 also provides
      guidance on de-recognition, measurement, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. In addition, FIN
      48
      clearly scopes out income taxes from Financial Accounting Standards Board
      Statement No. 5, “Accounting for Contingencies.” FIN 48 utilizes a two-step
      approach for evaluating tax positions. Recognition (step one) occurs when an
      enterprise concludes that a tax position, based solely on its technical merits,
      is more-likely-than-not to be sustained upon examination. Measurement (step
      two)
      is only addressed if step one has been satisfied (i.e., the position is
      more-likely-than-not to be sustained). FIN 48 applies to all tax positions
      related to income taxes subject to Financial Accounting Standards Board
      Statement No. 109, “Accounting for Income Taxes.” This includes tax positions
      considered to be “routine” as well as those with a high degree of uncertainty.
      De-recognition of a tax position that was previously recognized would occur
      when
      a company subsequently determines that a tax position no longer meets the
      more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits
      the use of a valuation allowance as a substitute for derecognition of tax
      positions. FIN 48 is effective for fiscal years beginning after December 15,
      2006. We
      are in
      the process of evaluating the possible impact of the adoption of FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) –
see “Impact of recently issued Accounting Policies” below





32


In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007
      and interim periods within those fiscal years. We believe that SFAS No. 157
      will
      not have a material effect on our consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits
      companies to choose to measure certain financial instruments and other items
      at
      fair value that are not currently required to be measured at fair value. SFAS
      No. 159 is effective for fiscal years beginning after November 15, 2007. We
      will
      adopt SFAS No. 159 no later than January 1, 2008. We have not yet determined
      the
      effect that the adoption of SFAS No. 159 will have on our consolidated financial
      statements.





**A.**
            **Operating
                Results**





The
      following table sets forth, for the periods indicated, certain financial data
      expressed as a percentage of sales:


Year
                ended
            
            Year
                ended
            
            Year
                ended
            
            Year
                ended
            
            Year
                endedDecember
                31,
            
            December
                31,
            
            December
                31,
            
            December
                31,
            
            December
                31,2002
            
            2003
            
            2004
            
            2005
            
            2006Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            18.2
            
            
            18.0
            
            
            17.8
            
            
            19.2
            
            
            19.4Gross
                profit
            
            
            81.8
            
            
            82.0
            
            
            82.2
            
            
            80.8
            
            
            80.6Operating
                expenses:Research
                and development, net
            
            
            17.9
            
            
            15.3
            
            
            15.1
            
            
            16.8
            
            
            21.7Sales
                and marketing
            
            
            68.7
            
            
            54.3
            
            
            46.6
            
            
            51.5
            
            
            61.6General
                and administrative
            
            
            9.7
            
            
            7.6
            
            
            6.6
            
            
            6.8
            
            
            7.6Total
                operating expenses
            
            
            96.3
            
            
            77.2
            
            
            68.3
            
            
            75.1
            
            
            90.9Operating
                profit (loss)
            
            
            (14.5
            )
            
            4.8
            
            
            13.9
            
            
            5.7
            
            
            (10.3
            )Financial
                income, net
            
            
            9.7
            
            
            6.9
            
            
            6.7
            
            
            6.6
            
            
            9.1Income
                (loss) before income taxes
            
            
            (4.8
            )
            
            11.7
            
            
            20.6
            
            
            12.3
            
            
            (1.2
            )Income
                taxes
            
            
            -
            
            
            -
            
            
            (0.5
            )
            
            (0.3
            )
            
            (0.4
            )Minority
                interest in earnings of a subsidiary
            
            
            -
            
            
            (0.1
            )
            
            -
            
            
            -
            
            
            -Net
                income (loss)
            
            
            (4.8
            )%
            
            11.6
            %
            
            20.1
            %
            
            12.0
            %
            
            (1.6
            )%





33


*Geographical
      Distribution of Revenues*




The
      Company operates in one reportable segment. Its total revenues are attributed
      to
      geographic areas based on the location of the end-users.





Following
      is the breakdown of the Company’s total revenues by geographical distribution
      both in U.S. dollars and as a percentage of total revenues for the years ended
      December 31, 2004, 2005 and 2006:


**Year
                Ended**
              **December
                31,**
              **2004**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
            
            **Year
                Ended**
              **December
                31,**
              **2006****(in
                thousands of U.S. $)**
            
            **(by
                percentage)**
            
            **(in
                thousands of U.S. $)**
            
            **(by**
              **percentage)**
            
            **(in
                thousands of U.S. $)**
            
            **(by
                percent-age)****North,
                Central and South Americas (principally the United
                States)**
            
            
            28,984
            
            
            42.4
            %
            
            31,900
            
            
            41.1
            %
            
            27,646
            
            
            34.0
            %**EMEA
                (Europe, the Middle East and Africa)**
            
            
            20,450
            
            
            29.9
            %
            
            24,074
            
            
            31.0
            %
            
            27,529
            
            
            33.8
            %**Asia
                Pacific**
            
            
            19,005
            
            
            27.7
            %
            
            21,610
            
            
            27.9
            %
            
            26,235
            
            
            32.2
            %





*Breakdown
      of Total Revenues by Products and Services*





The
      following table provides the breakdown of the Company’s total revenues by
      products and services both in U.S. dollars and as a percentage of total revenues
      for the years ended December 31, 2004, 2005 and 2006:


**Year
                Ended**
              **December
                31,**
              **2004**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
            
            **Year
                Ended**
              **December
                31,**
              **2006****(in
                thousands of U.S. $)**
            
            **(by
                percentage)**
            
            **(in
                thousands of U.S. $)**
            
            **(by
                percentage)**
            
            **(in
                thousands of U.S. $)**
            
            **(by
                percentage)****Products**
            
            
            52,206
            
            
            76.3
            %
            
            55,902
            
            
            72.1
            %
            
            57,335
            
            
            70.4
            %**Services**
            
            
            16,233
            
            
            23.7
            %
            
            21,682
            
            
            27.9
            %
            
            24,075
            
            
            29.6
            %





**Executive
      Summary - Year Ended December 31, 2006**





Sales
      in
      2006 were approximately $81.4 million, an increase of 5% compared with sales
      of
      $77.6 million in 2005. In 2006 we continued the trend of sequential increase
      in
      sales, year over year, since our inception. The cost of sales as percentage
      of
      revenues stayed approximately at the same level as it was in 2005. In order
      to
      continue to strengthen and broaden our product lines we have increased our
      investments in research and development during 2006, mainly increasing the
      manpower engaged in the development of our products. In order to increase market
      acceptance of our new products and to strengthen our branding and market
      penetration in certain regions, we increased our sales and marketing expenses
      throughout the year. Our sales increased at a lower rate than the increase
      of
      our operating expenses. As a result of the aforementioned, and as a result
      of
      the adoption of SFAS No. 123(R) for the first time in 2006, our operating
      results in 2006 reflected a loss of $8.3 million, compared to an operating
      profit of $4.4 million in 2005. The financial income increased due to the
      increase in our average cash balance throughout the year, due to the increase
      in
      interest rates and due to gains from foreign currency translation differences.
      Such differences resulted mainly from the increase in the value of the Euro
      relative to the Dollar during 2006.





34


In
      2007
      we intend to continue and increase investment in the development of new products
      and directions as well as in the improvement of existing products, to support
      continued growth in our sales and enhancement of market acceptance for our
      offerings, including in the branding and market penetration of the Covelight
      technology which become a part of our product suite starting May 2007. As a
      result our cost of sales, research and development and sales and marketing
      expenses are expected to increase compared to 2006. There is no assurance that
      our investment in new products and market penetration will increase our revenues
      and justify the additional expense.





**Year
      Ended December 31, 2006 Compared with Year Ended December 31,
      2005**





*Revenues.* Sales in
      2006 were approximately $81.4 million, including sales of products of $57.3
      million and services revenue of $24.1 million, an increase of approximately
      5%
      compared with sales of approximately $77.6 million in 2005 which included sales
      of products of $55.9 million and services revenue of $21.7 million. The increase
      in sales was comprised of an increase of 3% in products sales and an increase
      of
      11% in services revenue. The increase in services revenue is attributed mainly
      to renewal of service contracts. During 2006 we moderately increased our sales
      compared to 2005 but less then we expected. We attribute this to a period of
      uncertainty in the market following some mergers and acquisition in our industry
      (such as Internet Security Systems (ISS by IBM and Reflectent Software and
      Orbital Data by Citrix) and due to changes in our Americas sales team that
      was
      restructured in the fourth quarter of 2006. During 2006 the portion of our
      sales
      in North America decreased to 34% of our sales, compared to 41% in 2005, which
      led to the reorganization at the end of the year.





*Cost
      of Sales.* Cost of
      sales was approximately $15.8 million in 2006, comprised of $10.3 million as
      cost of products sales and $5.5 million as cost of services revenue, compared
      with cost of sales of approximately $14.9 million in 2005 which was comprised
      of
      $9.3 million of cost of products sales and $5.6 million as cost of services
      revenue. Cost of products sales as a percentage of products sales was 17.9
      % in
      2006, compared to approximately 16.7% in 2005. As some of the products we offer
      have stronger performance, the manufacturing costs for these products are
      higher, but these higher costs are partially offset by higher sales prices
      charged to our customers. Cost of sales related to services revenues in 2006
      was
      22.9% compared to 25.7% in 2005. As a major portion of these costs are fixed
      costs (mainly salaries of technical personnel), the increase in sales did not
      translate into the same rate of costs increase. In addition, renewal service
      agreements require fewer resources and as the portion of the renewal support
      sales is increasing, the related costs are decreasing as a percentage of sales.





*Research
      and Development Expenses.* Research
      and development expenses were approximately $17.7 million in 2006, an increase
      of 36% compared with research and development expenses of approximately $13.0
      million in 2005. The increase is primarily due to hiring of new R&D
      personnel, the increase in salary level needed to obtain high level personnel
      and the devaluation of the dollar against the NIS, due to the depreciation
      of
      R&D equipment purchased during 2006 and due to the increased use of
      subcontractors and consultants to assist with and promote certain R&D
      projects. Additional R&D employees were hired during 2006 in order to
      support the development of new platforms and products, including enhancement
      of
      our quality assurance department. All R&D salaries were paid in NIS. A
      material part of the increase (in an amount of $1.1 million) is also attributed
      to the adoption for the first time of SFAS No. 123(R) in 2006. We expect our
      R&D expenses to increase in 2007 due to the recruitment of additional
      personnel and salary increases of existing personnel.





35


*Sales
      and Marketing Expenses.* Sales
      and marketing expenses were approximately $50.1 million in 2006, an increase
      of
      25% compared with sales and marketing expenses of approximately $40.0 million
      in
      2005. Percentage-wise, the share of sales and marketing expenses of total
      revenues increased from 51.5% in 2005 to 61.6% in 2006. The increase of our
      sales and marketing expenses in 2006 is related to the continued investment
      in
      market acceptance of new products and our next generation APSolute product
      family, and investment in strengthening the sales teams in some of our offices
      in the U.S., Asia-Pacific and EMEA. The increase is also related to the adoption
      for the first time of SFAS No. 123(R) in 2006, which resulted in an additional
      expense of $2.5 million..We anticipate increasing sales and marketing expenses
      also in 2007 primarily for the purposes of (i) increasing brand awareness and
      market acceptance of our new products (by participation in trade shows and
      seminars, testing and certification of our products by leading firms in the
      industry and receiving top analysts coverage for our products and strategy);
      and
      (ii) strengthening our international presence (by adding sales and marketing
      personnel, as well as technical support personnel).





*General
      and Administrative Expenses.* General
      and administrative expenses were approximately $6.2 million in 2006, compared
      with general and administrative expenses of approximately $5.2 million in 2005.
      This increase is primarily due to the increase of salaries expenses which
      resulted from hiring of new personnel, salary adjustments, the devaluation
      of
      the U.S. dollar against the NIS (as most of the general and administrative
      salaries are paid in NIS) and the first adoption of SFAS No. 123(R) in 2006,
      which added an expense of approximately $0.8 million





*Financial
      Income, Net.* Financial income, net was approximately $7.4 million in 2006, an
      increase of approximately 42.3% compared
      with financing income, net of approximately $5.2 million in 2005. This increase
      is attributable to the increase in the average balance of our cash and cash
      equivalents, bank deposits and marketable securities during the year, before
      $11.1 million was invested in the buy-back of our shares, an increase in
      interest rates and gains from foreign currency translation
      differences.





*Income
      Taxes* .
      Income
      taxes were approximately a $0.4 million benefit in 2006 (in and outside Israel),
      compared to approximately a $0.2 million benefit in 2005. This amount derives
      mainly from current taxes and change in deferred taxes.





**Year
      Ended December 31, 2005 Compared with Year Ended December 31,
      2004**





*Revenues.* Sales in
      2005 were approximately $77.6 million, including sales of products of $55.9
      million and services revenue of $21.7 million, an increase of approximately
      13%
      compared with total sales of approximately $68.4 million in 2004 which included
      sales of products of $52.2 million and services revenue of $16.2 million. The
      growth in sales during 2005 is primarily attributable to the expansion of our
      sales and marketing activities, and a slight improvement in the market
      environment and corporate spending, as well as an increase resulting from sales
      of service renewal contracts related to the a larger installed units
      base.





*Cost
      of Revenues.* Cost of
      sales was approximately $14.9 million in 2005, comprised of $9.3 million as
      cost
      of product sales and $5.6 million as cost of services revenue, compared with
      cost of sales of approximately $12.2 million in 2004 which was comprised of
      $8.1
      million of cost of products sales and $4.1 million as cost of services revenue.
      Cost of products sales as a percentage of products sales was 16.7 % in 2005,
      compared to approximately 15.5% in 2004. This increase is primarily attributable
      to the introduction of new products as well as a different mix of products.
      Cost
      of sales related to services revenues in 2005 was 25.7% compared to 25.3% in
      2004.





*Research
      and Development Expenses.* Research
      and development expenses were approximately $13.0 million in 2005, an increase
      of 26% compared with research and development expenses of approximately $10.3
      million in 2004. The increase is primarily due to hiring of new R&D
      personnel. Additional R&D employees were hired during 2005 in order to
      support our Application Delivery and Network Security capabilities and
      development of new platforms and products, including enhancement of our quality
      assurance department. A small part of the increase was offset due to the
      decrease in the U.S. dollar cost of our salaries for our research and
      development staff caused by the decrease in value of the NIS against the dollar.
      All these salaries were paid in NIS.





*Sales
      and Marketing Expenses.* Sales
      and marketing expenses were approximately $40.0 million in 2005, an increase
      of
      25% compared with sales and marketing expenses of approximately $31.9 million
      in
      2004. Percentage-wise, the share of sales and marketing expenses of total
      revenues increased from 46.6% in 2004 to 51.5% in 2005. The increase of our
      sales and marketing expenses in 2005 is related to the increase in sales as
      well
      as the continued investment in market acceptance of new products and our next
      generation APSolute product family, and investment in new geographical markets,
      mainly in Europe and the Far East.





36


*General
      and Administrative Expenses.* General
      and administrative expenses were approximately $5.2 million in 2005, an
      increase of approximately 16.7% compared
      with general and administrative expenses of approximately $4.5 million in 2004.
      This increase is primarily attributable to the actions we have taken in order
      to
      improve our information systems and to professional services received in order
      to prepare our Company to comply with the Sarbanes-Oxley Act of 2002.





*Financial
      Income, Net.* Financial income, net was approximately $5.2 million in 2005, an
      increase of approximately 13% compared
      with financing income, net of approximately $4.6 million in 2004. This increase
      is attributable to the total increase in cash and cash equivalents, bank
      deposits and marketable securities and increase in interest rates which was
      partially offset by a loss from foreign currency translation differences which
      are included in financial income, caused mainly by a decrease in the value
      of
      the Euro relative to the dollar.





*Income
      Taxes* .
      Income
      taxes were approximately $0.3 million in 2005 (in and outside Israel), the
      same
      as in 2004. This amount derives mainly from current taxes and change in deferred
      taxes.





**B.**
            **Liquidity
                and Capital Resources**





In
      our
      opinion, the Company’s working capital is sufficient for the Company’s present
      requirements. Since our inception, we have financed our operations through
      a
      combination of issuing debt and/or equity securities, including two public
      offerings, research and development and/or marketing grants from the Government
      of Israel and cash generated by operations. We raised approximately $12.9
      million in two private placements, in November 1997 and June 1999. In October
      1999, we raised net proceeds of approximately $56.8 million in the initial
      public offering of our ordinary shares. In January 2000, we raised net proceeds
      to the Company of approximately $59.8 million in a public offering of our
      ordinary shares.





Capital
      expenditures for the years ended December 31, 2004, 2005 and 2006 were
      approximately $2.4 million , $3.6 million and $5.8 million, respectively. These
      expenditures were mainly comprised of machinery and equipment, computers, lab
      equipment and testing tools and ERP systems. During
      2006 we invested in purchasing and implementing a new ERP system which became
      operational in the beginning of 2007. Additional
      investments related to the implementation of the ERP system and to the purchase
      and implementation of additional modules are expected to take place during
      2007.
      We may have additional capital spending consistent with possible growth in
      our
      operations, infrastructure and personnel.





Net
      cash
      provided by operating activities was approximately $7.3 million for the year
      ended December 31, 2006, compared with $ 13.9 million for the year ended
      December 31, 2005 and $15.2 million for the year ended December 31, 2004. Net
      cash provided by operating activities for the years 2006, 2005 and 2004 changed
      primarily due to the changes in our operating profit and loss in these years,
      mainly as a result of the increase in operating expenses - which, for example,
      in 2006 and in 2005 exceeded the pace of increase in sales. Net cash provided
      by
      operating activities for 2006 consisted primarily of net loss plus amortization
      of stock based compensation, plus depreciation and amortization, plus increase
      in trade payables and deferred revenues, offset by an increase in trade
      receivables and in inventories. Net cash provided by operating activities for
      the year 2005 consisted primarily of net income plus an increase in deferred
      revenues and other payables and accrued expenses, offset by an increase in
      trade
      receivables and inventories. Net cash provided by operating activities for
      2004
      consisted primarily of net income plus an increase in deferred revenues, offset
      by an increase in trade receivables and inventories.





Net
      cash
      used in investing activities was approximately $39.8 million for 2006, compared
      to net cash provided by investing activities of approximately $26.3 million
      for
      2005, and to net cash used in investing activities of approximately $45.0
      million for 2004. Cash was used in 2006 mainly for the purchase of marketable
      securities and also for purchase of property and equipment, and for the
      completion of the acquisition of V-Secure Technologies Inc., partially offset
      by
      the sale and redemption of marketable securities and bank deposits. Cash was
      provided in 2005 mainly from redemption of long-term bank deposits which was
      partially offset by the purchase of marketable securities and by the acquisition
      of the business
      of V-Secure Technologies Inc. and other property
      and equipment. Cash was used in 2004 mainly to purchase long-term marketable
      securities and for capital expenditures.





37


Net
      cash
      provided by financing activities was $1.6, $7.3 and $6.9 million for the years
      ended December 31, 2006, 2005 and 2004, respectively, generated from options
      exercised by our employees under the Key Employee Share Option Plans and
      Employee Stock Purchase Plans (see “Item 6 - Directors Senior Management and
      Employees - Key Employee Share Incentive Plan and Employee Stock Purchase
      Plan” *).* In
      2006
      the amount generated from options exercises was nearly fully offset by the
      repurchase of our shares. **





As
      of
      December 31, 2006, we had cash and cash equivalents, including short-term and
      long-term bank deposits and marketable securities of approximately $164.1
      million, as compared to approximately $164.5 million as of December 31, 2005.
      Our capital requirements depend on numerous factors, including market acceptance
      of our products and the resources we allocate to our operating expenses. Since
      our inception, we have experienced substantial increases in our expenditures
      consistent with growth in our operations and personnel, and we may increase
      our
      expenditures in the foreseeable future in order to execute our strategy. We
      anticipate that operating activities as well as capital expenditures will demand
      the use of our cash resources. We believe that cash balances will provide
      sufficient cash resources to finance our operations and the projected expansion
      of our marketing and sales activities and research and development efforts
      for a
      period of no less than the next twelve months.





**Related
      Parties**





We
      have
      entered into a number of agreements with certain companies, of which Yehuda
      and
      Zohar Zisapel are co-founders, directors and/or principal shareholders,
      collectively known as the RAD-Bynet Group. Of these agreements, the lease for
      our headquarters in Tel-Aviv is material to our operations. We believe that
      the
      terms of the transactions in which we have entered with members of the RAD-Bynet
      Group are not different in any material respect from terms we could obtain
      from
      unaffiliated third parties. The pricing of the transactions was arrived at
      based
      on negotiations between the parties. Members of our management reviewed the
      pricing of the lease agreements and confirmed that they were not different
      than
      that which could have been obtained from unaffiliated third parties. We believe,
      however, that due to the affiliation between us and the RAD-Bynet Group, we
      have
      greater flexibility in certain terms than might be available from unaffiliated
      third parties on similar issues. In the event that the transaction with members
      of the RAD-Bynet Group is terminated and we enter into similar transactions
      with
      unaffiliated third parties, that flexibility may not be available to us.





In
      addition, the Company purchases different services from third parties at special
      rates offered to the RAD-Bynet Group, such as car leases, maintenance, insurance
      and communication services. In the event that we cease to be a member of the
      RAD-Bynet Group, we may not be able to obtain the current rates for such
      services.





**Impact
      of Inflation and Currency Fluctuations**





A
      devaluation of the U.S. dollar against the NIS and or appreciation or
      depreciation of the Euro to the dollar has direct influence on the US dollar
      cost of our operations. Most of our sales are denominated in dollars or are
      dollar-linked and we incur a portion of our expenses, principally salaries
      and
      related personnel expenses, in Israel - in NIS, and in Europe - in Euros. An
      appreciation of the NIS, or, unless offset by a devaluation of the NIS,
      inflation in Israel, will have a negative effect on our profitability.
      Conversely, devaluations of the NIS relative to the U.S. dollar at a rate in
      excess of the rate of inflation in Israel could have a positive effect on our
      profitability. In 2004 we began selling to the European Union countries in
      Euros
      instead of dollars in order to reduce the exposure to fluctuations in the Euro
      exchange rate. We are still exposed to the risk of an appreciation of the Euro
      in the event our expenses in Euros exceed our sales in Euros. In addition,
      if
      the Euro devaluates relative to the U.S. dollar and sales in Euros exceed
      expenses incurred in Euros, our operating profit may be negatively affected
      as a
      result of a decrease in the U.S. dollar value of our sales.





38





The
      following table presents information about the rate of inflation in Israel
      and
      the changes in the exchange rates of the U.S. dollar relative to the
      NIS:





**Year
                ended December 31,**
            
            **Israeli
                inflation rate**
            
            **U.S.
                dollar against NIS**2002
            
            
            6.5
            %
            
            7.3
            %2003
            
            
            (1.9
            )%
            
            (7.6
            )%2004
            
            
            1.2
            %
            
            (1.6
            )%2005
            
            
            2.4
            %
            
            6.8
            %2006
            
            
            (0.1
            )%
            
            (8.2
            )%





We
      cannot
      assure you that we will not be materially and adversely affected in the future
      if inflation in Israel exceeds the devaluation of the NIS against the dollar
      or
      if the timing of the devaluation lags behind inflation in Israel, or if there
      will be a revaluation of the NIS or a revaluation or devaluation of the Euro
      against the U.S. dollar. Because exchange rates between the NIS and the dollar
      and between the Euro and the dollar fluctuate continuously, exchange rate
      fluctuations and especially larger periodic devaluations or revaluations will
      have an impact on our profitability and period-to-period comparisons of our
      results. The effects of foreign currency re-measurements are reported in our
      consolidated financial statements in the statement of operations.





**Market
      Risk**





We
      do not
      invest in, or otherwise hold, for trading or other purposes, any financial
      instruments subject to market risk, with the exception of the following:
      Approximately 6% of our investment portfolio is invested in a structured note
      with guaranteed principal and changing interest. An increase in short-term
      interest rates will negatively affect the income received from this note.
      Approximately 70% of our investment portfolio is invested in high-rated
      marketable securities, mainly U.S. government and agency bonds, and corporate
      bonds. Since these investments carry fixed interest rates, interest income
      over
      the holding period is not sensitive to changes in interest rates. We have no
      debt.





**C.**
            **Research
                and Development, Patents and
                License**





In
      order
      to accommodate the rapidly changing needs of our markets, we place considerable
      emphasis on research and development projects designed to improve our existing
      product lines, develop new product lines and customize our products to meet
      our
      customers’ needs. As of December 31, 2006, we had 163 employees engaged
      primarily in research and development activities, compared to 122 employees
      at
      the end of 2005.





For
      a
      discussion regarding the benefits provided under programs of the Office of
      the
      Chief Scientist of the Israeli Ministry of Industry, Trade and Labor - see
“Item
      4 - Information on the Company - Business Overview - Israeli Office of Chief
      Scientist”.





**D.**
            **Trend
                Information**





For
      a
      discussion of recent market trends - see “Item 5 - Operating and Financial
      Review and Prospects - General - Market Trends.”


39





**E.**
            **Tabular
                Disclosure of Contractual
                Obligations**





Our
      principal commitments consist of outstanding operating leases for the Company’s
      facilities. The lease agreements expire in the years 2007 to 2010 (some with
      renewal options). Our future minimum payments under non-cancelable operating
      lease agreements at December 31, 2006, are approximately as
      follows:




**Payments
                Due By Period (US$ in thousands)****Total**
            
            **Less
                than 1 year**
            
            **1-3
                years**
            
            **3-5****years**
            
            **More
                than 5 years**Operating
                leases
            
            
            2,735
            
            
            1,606
            
            
            1,069
            
            
            60
            
            
            -Total
                contractual cash obligations
            
            
            2,735
            
            
            1,606
            
            
            1,069
            
            
            60
            
            
            -





We
      operate from leased premises mainly in Tel Aviv and Jerusalem in Israel and
      New
      Jersey and California in the United States. We also lease premises for our
      subsidiaries’, representative offices’ and branches’ activities, in several
      locations in the United States, Europe and Asia Pacific. Our aggregate annual
      rent obligations under these leases were approximately $1,948,000 for 2006.




**ITEM
                6.**
            **Directors,
                Senior Management and
                Employees**





**Directors
      and Senior Management** ****





The
      following table lists our current directors and executive officers:





**Name**
            
            **Age**
            
            **Position**Christopher
                McCleary(1)
            
            54
            
            Executive
                Chairman of the Board of DirectorsRoy
                Zisapel(2)
            
            36
            
            Chief
                Executive Officer, President and DirectorMeir
                Moshe
            
            53
            
            Chief
                Financial OfficerLarry
                Marino
            
            50
            
            President,
                Radware Inc.Vered
                Raviv-Schwarz
            
            38
            
            General
                Counsel and SecretaryChristine
                Aruza
            
            39
            
            VP
                Corporate MarketingAmir
                Peles
            
            35
            
            Vice
                President, Chief Technology OfficerYuval
                Pemper
            
            36
            
            Vice
                President, Research and DevelopmentYehuda
                Zisapel (3)
            
            64
            
            DirectorZohar
                Gilon (3)(4)(5)(6)
            
            59
            
            DirectorOrna
                Berry(3)(4)(5)(6)
            
            58
            
            DirectorLiora
                Katzenstein (2)(5)(6)
            
            50
            
            DirectorHagen
                Hultzsch (1)(5)
            
            66
            
            DirectorHerbert
                Anderson (7)
            
            68
            
            Director





(1)
            Term
                as director expires at the annual meeting of shareholders to be held
                in
                2008.


(2)
            Term
                as director expires at the annual meeting of shareholders to be held
                in
                2007.


(3)
            Term
                as director expires at the annual meeting of shareholders to be held
                in
                2009.


(4)
            External
                Director, as defined in the Israeli Companies Law.


(5)
            Qualified
                as an Independent Director, as determined under the Nasdaq
                rules.


(6)
            Serves
                on the Audit Committee of the Board of Directors.


(7)
            Nominated
                until the next annual meeting and therefore is not a part of any
                class.





40





**Christopher
      McCleary** has
      served as our Chairman of the Board of Directors since August 2006, and as
      a
      director since February 2000. Beginning June 1, 2007, Mr. McCleary serves as
      our
      Executive Chairman. From January 2004 until May 31, 2007, Mr. McCleary was
      a
      Partner at Blue Chip Venture Company since January 2004. He was previously
      the
      founder, Chairman and CEO of Evergreen Assurance, Incorporated from January
      2002
      to January 2004. During the years 2001, Mr. McCleary was non-executive Chairman
      of USinternetworking Inc. and served as the Chairman and Chief Executive Officer
      of USi from January 1998 until June 2000. Prior to founding USi, he was the
      Chairman and Chief Executive Officer of DIGEX, Inc. from January 1996 to
      December 1997. From October 1990 to January 1996, Mr. McCleary served as Vice
      President and General Manager for Satellite Telephone Service at American Mobile
      Satellite Corporation, a satellite communications company. Mr.
      McCleary currently serves as Chairman and a director of
      JackBe, Inc. and chairman and a director of SaaS Capital, Inc. He
      also
      serves on the Board of The State of Maryland Venture Fund and the City of
      Baltimore Emerging Technology Center. Mr.
      McCleary has a Bachelor of General Studies from the University of
      Kentucky.





**Roy
      Zisapel** ,
      co-founder of our Company, has served as our President and Chief Executive
      Officer and a director since our inception in May 1996. Mr. Zisapel also serves
      as a director of Radware Inc. and other subsidiaries. From February 1996 to
      March 1997, Mr. Zisapel was a team leader of research and development projects
      for RND Networks Ltd. From July 1994 to February 1996, Mr. Zisapel was employed
      as a software engineer for unaffiliated companies in Israel. Mr. Zisapel has
      a
      B.Sc. degree in mathematics and computer science from Tel Aviv University.
      Roy
      Zisapel is the son of Yehuda Zisapel, who is a director of the
      Company.





**Meir
      Moshe** has
      served as our Chief Financial Officer since June 1999. From June 1997 to June
      1999, Mr. Moshe was Chief Financial Officer, Secretary and Treasurer of ForSoft
      Ltd. Mr. Moshe holds a B.Sc. in economics and accounting from Tel Aviv
      University and is a certified public accountant.





**Larry
      Marino** joined
      us
      in January 2006 as President of Radware, Inc. Previously, Mr. Marino held
      various executive positions at AT&T and has over 25 years of experience in
      the telecommunications industry. Mr. Marino holds a BS in Electrical Engineering
      from Worcester Polytechnic Institute and an M.B.A. from the University of
      Pennsylvania, Wharton School of Business.





**Vered
      Raviv-Schwarz** has
      served as our General Counsel since July 2000. From May 1995 to June 2000,
      Mrs.
      Raviv-Schwarz was an Associate at the law firm of M. Seligman & Co. Mrs.
      Raviv-Schwarz has LL.B. and LL.M. degrees from Tel Aviv University.





**Christine
      D. Aruza** has
      served as our Vice President of Corporate Marketing since January 2007. From
      June 2006 to December 2006, Ms. Aruza served as our Director of Corporate
      Communications. Prior to joining Radware, Ms. Aruza had her own marketing
      consultancy from January 2005 - June 2006 and was SVP of Marketing at Enamics,
      Inc. from November 2002 to January 2005. During her career, she has also held
      management positions in sales, marketing and business development with companies
      ranging from fast-growth start-ups to the Fortune 50 (Hewlett-Packard). Ms.
      Aruza is a 2004 CMO Council inductee and graduated magna cum laude with a B.A.
      in liberal arts & sciences from the University of Florida.





**Amir
      Peles** has
      served as our Vice President, Chief Technology Officer since April 2000. From
      July 1997 through March 2000, Mr. Peles served as our Vice President of Research
      and Development since July 1997. From July 1996 to July 1997, Mr. Peles was
      a
      senior team leader at Amdocs Corporation. Mr. Peles has a B.Sc. degree in
      computer science, statistics and operations research from Tel Aviv
      University.





**Yuval
      Pemper** has
      served as Radware’s Vice President of R&D since July 2006. Mr. Pemper joined
      Radware in November 2001 and previously served as CertainT 100 Development
      Team
      Leader, Application Infrastructure Development Group Leader and Director of
      Hardware and Software Infrastructure. Prior to his tenure at Radware, Mr. Pemper
      worked for various startups and for Comverse Network Systems. He is a graduate
      of the Israeli military’s prestigious Talpiyot program and served as a research
      and development officer in the Israeli Navy for 5 years between 1991 and 1996.
      Mr. Pemper holds a B.Sc. cum laude in physics and mathematics from the Hebrew
      University, Jerusalem, and a M.Sc. cum laude in electrical engineering, physical
      electronics from Tel Aviv University.





41


**Yehuda
      Zisapel** ,
      co-founder of our Company, has served as a member of our Board of Directors
      since our inception in May 1996 and served as Chairman of our Board of Directors
      until August 2006. In addition, Mr. Zisapel serves as a director of Radware
      Inc.
      Mr. Zisapel is also a founder and a director of RAD Data Communications Ltd.,
      a
      worldwide data communications company headquartered in Israel, and BYNET Data
      Communications Ltd., a distributor of data communications products in Israel,
      Chairman of the Board of Directors of RIT Technologies Ltd., and a director
      of
      other companies in the RAD-Bynet Group, including SILICOM Ltd., and several
      private companies. Mr. Zisapel has a B.Sc. and an M.Sc. degree in electrical
      engineering as well as an Award of Honorary Doctorate (DHC-Doctor Honoris Causa)
      from the Technion, Israel Institute of Technology and an M.B.A. degree from
      Tel
      Aviv University. Yehuda Zisapel is the father of Roy Zisapel director, President
      and Chief Executive Officer of the Company.





**Prof.
      Liora Katzenstein** has
      served as a director since January 2001. In 1996 Prof. Katzenstein founded
      and
      has since served as President of ISEMI - Israel School of Entrepreneurial
      Management and Innovation (Part of Swinburne University of Technology’s
      (Australia) Graduate School of Entrepreneurship). Prof. Katzenstein also
      lectured in Business Administration at the Harvard Business School, Tel Aviv
      University, Nanyang Technological University (Singapore), the Technion, Israel
      Institute of Technology and in the Israeli Management Center. From 1995 to 1996,
      Prof. Katzenstein was an Associate Dean at TISOM - Tel Aviv International School
      of Business, and from 1992 to 1995 she was a Senior Lecturer at the Tel Aviv
      University Recanati Graduate School of Business Administration. Prof.
      Katzenstein also serves as a director in RiT Technologies Ltd., Polysac Ltd.,
      Palafric Investments Ltd., Clal Insurance Company and Degem Systems Ltd. Prof.
      Katzenstein has a ‘License’ and a Ph.D. in International Economics from the
      Graduate Institute of International Studies, University of Geneva, and an MALD
      in Law and Diplomacy from the Fletcher School of Law and Diplomacy, Tufts
      University.





**Dr.
      Hagen Hultzsch** has
      served as a director since January, 2005. Dr. Hultzsch served on the Board
      of
      Management of Deutsche Telekom AG from 1993 until 2001. Since 2001, Dr.
      Hultzsch has served on the Boards or Advisory Boards of
      several companies and academic institutions. Dr. Hultzsch serves as a
      Board Member of the following companies: TranSwitch Corporation Inc.,
      SCM-Microsystems Inc. and RIT Ltd. and he is a member of the advisory boards
      of
      several private and public technology companies. Dr. Hultzsch holds a
      PhD. from Mainz University **.**





**Zohar
      Gilon** has
      served as a director since October 2006. Mr. Gilon serves as a General Partner
      and Managing Director of Tamar Technologies Ventures, a venture capital fund
      investing in Israel and the United States. From 1993 until 1995, Mr.
      Gilon served as President of W.S.P. Capital Holdings Ltd., which provides
      investment banking and underwriting services in Israel and invests in real
      estate and high-technology investments in Israel and abroad. Currently ,
      Mr.
      Gilon serves as a director of the following companies: RADCom Ltd., Orsense
      Ltd., Wisair Ltd., Oberon Media Inc., Axerra Networks, Inc., Syncho
      Ltd., PayoneerInc. and RADVentures, an investment fund for RAD Data
      Communications employees. Mr. Gilon holds a B.Sc. degree in electrical
      engineering from the Technion, Israel Institute of Technology, and an M.B.A.
      degree from Tel Aviv University.





**Dr.
      Orna Berry** has
      served as a director since October 2006. Dr Berry has been a Venture
      Partner in Gemini Israel funds since  August  2000.
      Since December
      2005 ,
      she has
      served as the Chairperson of Prime Sense Ltd., and since January 2005, as the
      Chairperson of Adamind Ltd., a UK public company. Dr. Berry is a member of
      the
      European Union Research Advisory Board (EURAB) and a member of the Association
      of Computing Machines’ (ACM) task force on job migration and globalization
      (TFJM). From 1997 to  2000
      she
      acted as Chief Scientist and Director of the Industrial R&D Administration
      of the Ministry of Industry, Trade and Labor of the Government of
      Israel. In 1993 she co-founded ORNET Data Communication Technologies Ltd.
      and served as co-president of
      ORNET
      until 1997 . Dr.
      Berry holds a Ph.D. in computer science from the University of Southern
      California, and M.A. and B.A. degrees in statistics and mathematics from Tel
      Aviv University and Haifa University, respectively. Currently, she
      serves as a director of the following companies: Aladdin
      Knowledge Systems Ltd., Poalim Capital Markets ,
      Mer
      Telemanagement Solutions Ltd., Commtouch Software Ltd and Prime Sense
      Ltd.





**Herbert
      Anderson** was
      nominated to He will be considered for election for a three year period at
      the
      Company’s annual meeting expected to be held in July 2007. our Board of
      Directors in January 2007. Mr. Anderson served as Corporate Vice President
      of
      Northrop Grumman Corporation and President of Northrop Grumman Information
      Technology until his retirement in 2004. Mr. Anderson first joined Northrop
      in
      1984 as Vice President of Information Resources Management for the company's
      former B-2 division, after holding senior management positions with the Western
      Gear, McGraw-Edison and Eaton corporations. Mr. Anderson is a former member
      of
      the President's National Security Telecommunications Advisory Committee and
      of
      the Secretary of the Air Force Advisory Group, and a former board member of
      the
      Professional Services Council and the United Services Organization. Mr. Anderson
      currently serves on the Board of CACI, International. Mr. Andersen holds a
      B.Sc.
      degree in business management from the University of Wisconsin.





42


Except
      as
      described above, there are no family relationships between any of the directors
      or members of senior management named above.





Under
      Nasdaq requirements, commencing July 31, 2005, a majority of the members of our
      Board
      of Directors are
      required to be “independent,” as defined thereunder. We currently satisfy this
      requirement as Mr. Zohar Gilon, Dr. Orna Berry, Prof. Liora Katzenstein, Mr.
      Herbert Anderson and Dr .
      Hagen
      Hultzsch, i.e., five out of our eight directors, qualify as independent
      directors under such Nasdaq rules.





**Compensation**





Under
      our
      articles of association, no director may be paid any remuneration by the company
      for his services as director except as may be approved pursuant to the
      provisions of the Companies Law, which generally require the approval of the
      Audit Committee, the Board of Directors and then the approval of the
      shareholders of the company, in that order. An external director is entitled
      to
      consideration and reimbursement of expenses only as provided in regulations
      promulgated under the Israeli Companies Law and is otherwise prohibited from
      receiving any other compensation, directly or indirectly, in connection with
      his
      service as an external director.





The
      following table sets forth all compensation we paid with respect to all of
      our
      directors and officers as a group for the year ended December 31, 2006. The
      table does not include any amounts we paid to reimburse any of our affiliates
      for costs incurred in providing us with services during such period.




**Salaries,
                fees, commissions and bonuses**
            
            **Pension,
                retirement**
              **and
                other similar benefits**All
                directors and officers as a group, consisting of 14
                persons
            
            $
            1,532,000
            
            $
            130,000




As
      of
      June 3, 2007, our directors and officers as a group, consisting of 14 persons,
      held options to purchase an aggregate of 1,181,500 ordinary shares. Beginning
      January 2006, our non-employee directors are entitled to the following
      compensation: (a) an annual fee of $20,000; and (b) a grant of options under
      our
      stock option plans to purchase 10,000 ordinary shares for each year in which
      such non-employee director holds office. The options will be granted for three
      (3) years in advance, and therefore every director will receive an initial
      grant
      of options to purchase 30,000 ordinary shares, which shall vest over a period
      of
      three years, with a third (10,000) to vest upon each anniversary of service,
      provided that the director still serves on the Company’s Board of Directors on
      such date. The grant will be made on the date of the director’s election, and
      thereafter, every three years, if reelected, an additional grant of options
      to
      purchase an additional 30,000 ordinary shares will be made on the date of each
      annual meeting in which such director is reelected. The exercise price of all
      options shall be equal to the fair market value of the ordinary shares on the
      date of the grant (i.e., an exercise price equal to the market price of our
      ordinary shares on the date of the annual meeting approving the election or
      reelection of a director); (c) a special attendance fee of $3,000 for the
      director’s attendance (in person) at a meeting of the Board of Directors held
      outside his/her country of residence; and (d) an annual fee of $5,000 for each
      director who presides as a chairman of any committee of the Board of Directors.





The
      above
      compensation policy was approved by our Compensation Committee, Board of
      Directors, Audit Committee and shareholders.





43


During
      2006, we granted to our directors and officers options to purchase 240,500
      ordinary shares, in the aggregate, at a weighted average exercise price of
      $15.64. The options expire sixty-two months after grant.





*Chief
      Executive Officer Compensation*





On
      October 4, 2006 our shareholders approved the increase of the Chief Executive
      Officer’s compensation, entitling him to a base salary in NIS equivalent to
      $200,000 per annum and, effective as of the year 2007, an annual bonus of up
      to
      $100,000, subject to achievement of certain milestones to be determined by
      the
      Compensation Committee and approved by the Audit Committee and the Board of
      Directors before the beginning of each year. The Compensation Committee
      determined the following milestones for the year 2007 - 75% of the bonus will
      be
      based on achievement of the target revenue. 25% will be based on the earnings
      per share (with $750 being paid for each 1 cent of earnings per share), but
      will
      be paid only if the annual revenue target is met.





**Board
      Practices**





**Introduction**





According
      to the Israeli Companies Law and our articles of association, the oversight
      of
      the management of our business is vested in our Board of Directors. The Board
      of
      Directors may exercise all powers and may take all actions that are not
      specifically granted to our shareholders. As part of its powers, our Board
      of
      Directors may cause us to borrow or secure payment of any sum or sums of money
      for our purposes, at times and upon terms and conditions as it determines,
      including the grant of security interests in all or any part of our property.





Our
      articles of association provide for a Board of Directors of not less than five
      and not more than nine directors. Currently, our board consists of eight
      directors, including the external directors (as described below). In accordance
      with current
      Nasdaq requirements, nominees for election as directors are approved and
      recommended to the Board of Directors by a decision of a majority of our
      independent directors. Under
      the
      Companies Law, our Board of Directors is required to determine the minimum
      number of directors having accounting and financial expertise, as defined in
      regulations promulgated under the Companies Law, that our Board of Directors
      should have. In determining the number of directors required to have such
      expertise, the Board of Directors must consider, among other things, the type
      and size of the company and the scope and complexity of its operations. Our
      Board of Directors has determined that we require at least one director with
      the
      requisite financial and accounting expertise and that Zohar Gilon has such
      expertise.





Since
      our
      ordinary shares are listed for quotation on the Nasdaq Global Market, we are
      subject to the rules of the Nasdaq applicable to listed companies. In addition,
      since we are incorporated as an Israeli company, we are subject to the
      provisions of the Israeli Companies Law and the regulations adopted thereunder.





**Staggered
      Board**





In
      accordance with the terms of our articles of association, our Board of Directors
      (other than our external directors) is divided into three classes with each
      class serving until the third annual meeting following their election as
      follows:




**Class***
            
            **Term
                expiring at**
              **the
                annual meeting**
              **for
                the year**
            
            **Directors**Class
                I
            
            2009
            
            Yehuda
                ZisapelClass
                II
            
            2007
            
            Roy
                Zisapel and Prof. Liora KatzensteinClass
                III
            
            2008
            
            Christopher
                McCleary, Hagen Hultzsch





44


Mr.
      Herbert Anderson was nominated by the Board of Directors until the next annual
      meeting of shareholders.





At
      each
      annual meeting of shareholders after the initial classification, the successors
      to directors whose terms will then expire will be elected to serve from the
      time
      of election and qualification until the third annual meeting following the
      election. Directors, other than external directors, are elected by a simple
      majority of the votes cast, whereas their removal from office requires the
      vote
      of a majority of at least seventy-five percent of the voting power represented
      at the general meeting. Any additional directorships resulting from an increase
      in the number of directors will be distributed among the three classes so that,
      as nearly as possible, each class will consist of one-third of the directors.
      This classification of our Board of Directors may have the effect of delaying
      or
      preventing changes in control or management of our company.





The
      above
      classification does not apply to Mr. Zohar Gilon and Dr. Orna Berry, who were
      appointed as external directors whose term of appointment ends in
      2009.





**External
      Directors**





*Qualifications
      of External Directors*





Under
      the
      Companies Law, companies incorporated under the laws of Israel whose shares
      are
      listed for trading on a stock exchange or have been offered to the public in
      or
      outside of Israel are required to appoint at least two external directors.
      External directors are required to possess professional qualifications as set
      out in regulations promulgated under the Companies Law. The Companies Law
      provides that a person may not be appointed as an external director if the
      person or such person’s relative, partner, employer or any entity under the
      person’s control has, as of the person’s appointment to serve as an external
      director, or had during the two years preceding that date, any affiliation
      with:





·
            the
                Company;





·
            any
                entity controlling the Company; or





·
            any
                entity controlled by the Company or by this controlling
                entity.





The
      term
      affiliation includes:





·
            an
                employment relationship;





·
            a
                business or professional relationship maintained on a regular
                basis;





·
            control;
                and





·
            service
                as an office holder, excluding service as a director that was appointed
                to
                serve as an external director of a company that is about to make
                its
                initial public offering.





The
      Companies Law defines the term “office holder” of a company to include a
      director, the chief executive officer, the chief financial officer, a vice
      president and any officer of the company that reports directly to the chief
      executive officer.





No
      person
      can serve as an external director if the person's position or other business
      creates, or may create, a conflict of interest with the person's
      responsibilities as an external director or may otherwise interfere with the
      person’s ability to serve as an external director. Until the lapse of two years
      from termination of office as an external director, a company may not engage
      an
      external director to serve as an office holder and cannot employ or receive
      services from that person, either directly or indirectly, including through
      a
      corporation controlled by that person.





*Election
      of External Directors*





External
      directors are to be elected by a majority vote at a shareholders' meeting,
      provided that either:





·
            At
                least one third of the shares of non-controlling shareholders voted
                at the
                meeting in favor of the election;
                or





45


·
            The
                total number of shares voted against the election of the external
                director
                does not exceed one percent of the aggregate voting rights in the
                Company.





The
      initial term of an external director is three years and may be extended for
      one
      additional three year term. Thereafter, he or she may be reelected by our
      shareholders for additional periods of up to three years each only if the Audit
      Committee and Board of Directors confirm that, in light of the external
      director’s expertise and special contribution to the work of the Board of
      Directors and its committees, the reelection for such additional period is
      beneficial to the Company. External directors may be removed from office only
      by
      the vote of the same percentage of shareholders as is required for their
      election, or by a court only if they cease to meet the statutory qualifications
      for appointment or if they violate their duty of loyalty to the company. Each
      committee of a company’s board of directors is required to include at least one
      external director, except for the Audit Committee which is required to include
      all the external directors.





Currently,
      Mr.Zohar Gilon and Dr. Orna Berry qualify as external directors under the
      Companies Law and were elected by the general shareholders meeting held in
      October 2006, to serve as our external directors for a three-year term ending
      October 2009.





Pursuant
      to an amendment to the Companies Law, effective as of January 19, 2006, (1)
      an
      external director must have
      either “accounting and financial expertise” or “professional qualifications” (as
      such terms are defined in regulations promulgated under the Companies Law)
      and
      (2) at least one of the external directors must have “accounting and financial
      expertise.” These requirements will apply to us upon the election of
      one or more external directors.





**Board
      Meetings**





Our
      Board
      of Directors met 8 times during 2006 and all directors attended at least 75%
      of
      all Board meetings.





**Our
      Committees**





The
      Board
      of Directors appoints committees to help carry out its duties. Each committee
      reviews the results of its meetings with the full Board of Directors. The Board
      of Directors established its Audit and Share Incentive Committees in 1999,
      and
      its Compensation Committee (which replaced the Share Incentive Committee) in
      2004. Only non-employee directors serve on our Audit Committee and Compensation
      Committee.





**Audit
      Committee**





*Nasdaq
      Requirements*





Our
      ordinary shares are listed for quotation on the Nasdaq Global Market and we
      are
      subject to the rules of the Nasdaq applicable to listed companies. Under the
      Nasdaq rules, we are required to have an audit committee consisting of at least
      three independent directors, all of whom are financially literate and one of
      whom has accounting or related financial management expertise. The members
      of
      the Audit Committee, Mr. Zohar Gilon, Dr. Orna Berry and Prof. Liora Katzenstein
      qualify as independent directors under the current Nasdaq listing requirements.
      The Board of Directors has determined that each Audit Committee memberis
“financially literate” as such term is defined by the Nasdaq rules and that Mr.
      Zohar Gilon is an “audit committee financial expert” within the meaning of the
      current rules of the Securities and Exchange Commission. In accordance with
      Nasdaq listing requirements, the Audit Committee has adopted a charter, which
      sets forth the Committee’s responsibilities.





The
      Audit
      Committee assists the Board of Directors in fulfilling its responsibility for
      oversight of the quality and integrity of our accounting, auditing and financial
      reporting practices and financial statements and the independence qualifications
      and performance of our independent auditors. The Audit Committee also has the
      sole authority and responsibility to select, evaluate and, where appropriate,
      recommend to replace the independent auditors (or to nominate the independent
      auditors subject to shareholder approval) and to pre-approve audit engagement
      fees and all permitted non-audit services and fees.





The
      Audit
      Committee met 5 times during fiscal year 2006 and all members attended at least
      75% of all Audit Committee meetings.





46


*Israeli
      Companies Law Requirements*





Under
      the
      Companies Law, our Board of Directors is required to appoint an audit committee,
      comprised of at least three directors including all of the external directors,
      but excluding:





·
            the
                chairman of the Board of Directors;





·
            a
                controlling shareholder or a relative of a controlling shareholder;
                and





·
            any
                director employed by the Company or who provides services to the
                Company
                on a regular basis.





In
      accordance with the Companies Law, the duty of our Audit Committee is, in
      addition to the requirements imposed by Nasdaq rules (1) to identify
      irregularities in the business management of the Company, including in
      consultation with the internal auditor and/or the Company's independent
      accountants, and to recommend remedial measures to the Board of Directors;
      and
      (2) to review, and, where appropriate, approve certain interested party
      transactions specified under the Companies Law, as more fully described below.





*Approval
      of Interested Party Transactions*





The
      approval of the audit committee is required under the Israeli Companies Law
      to
      effect specified actions and transactions with office holders, controlling
      shareholders and entities in which they have a personal interest. An audit
      committee may not approve an action or a transaction with interested parties
      or
      with an office holder unless at the time of approval the two external directors
      are serving as members of the audit committee and at least one of whom was
      present at the meeting in which an approval was granted. The Companies Law
      defines the term “interested party” to include a person who holds 5% or more of
      the Company’s outstanding share capital or voting rights, a person who has the
      right to appoint one or more directors or the general manager, or any person
      who
      serves as a director or as the general manager.





**Compensation
      Committee**





Our
      compensation committee consists of two our independent directors, Dr. Hagen
      Hultzsch and Dr. Orna Berry. This committee was created in 1999 as the Share
      Incentive Committee and was renamed the Compensation Committee in 2004. The
      Compensation Committee met 5 times during fiscal year 2006 and all members
      attended at least 75% of the meetings. On March 8, 2005, our compensation
      committee adopted a charter, which sets forth the committee’s responsibilities.
      Pursuant to the charter, the compensation committee is authorized to make
      decisions regarding executive compensation and terms and conditions of
      employment, to follow
      market trends and provide recommendations to the Board of Directors in
      connection with the Company’s general compensation philosophy and policies, as
      well
      as to recommend that the Board of Directors issue options under our stock option
      plans . The
      Compensation Committee specifically approves and reviews, on behalf of the
      Board
      of Directors, the amounts and types of compensation to be paid to the Company’s
      executive officers and non-employee directors.





**Nomination
      of Directors**





Our
      Independent directors consider and vote upon nominations to our Board of
      Directors.





**Internal
      Auditor**





Under
      the
      Companies Law, the board of directors of a public company must appoint an
      internal auditor proposed by the audit committee. The role of the internal
      auditor is to examine, among
      other things ,
      whether
      the Company's conduct complies with applicable law and orderly business
      procedure. The internal auditor may participate in all audit committee meetings
      and has the right to demand that the chairman of the audit committee convene
      a
      meeting. Under the Companies Law, the internal auditor may be
      an
      employee of the Company but may not
      be an
      interested party, an office holder or a relative of any of the foregoing, nor
      may the internal auditor be the Company's independent accountant or its
      representative. Mrs. Sharon Vitkovski-Tabib, CPA, of BDO Ziv Haft, CPAs, is
      our
      internal auditor.





47


**Approval
      of Specified Related Party Transactions Under Israeli Law**





*Fiduciary
      Duties of Office Holders*





The
      Companies Law imposes a duty of care and a duty of loyalty on all office holders
      of a company.





The
      duty
      of care requires an office holder to act with the level of care with which
      a
      reasonable office holder in the same position would have acted under the same
      circumstances. The duty of care includes a duty to use reasonable means to
      obtain:





·
            Information
                regarding the advisability of a given action submitted for his approval
                or
                performed by him or her by virtue of his or her position; and





·
            All
                other important information pertaining to these
                actions.





The
      duty
      of loyalty of an office holder includes a duty to:





·
            Refrain
                from any conflict of interest between the performance of his/her
                duties in
                the Company and the performance of his other duties or his personal
                affairs;





·
            Refrain
                from any activity that is competitive with the
                Company;





·
            Refrain
                from exploiting any business opportunity of the company to receive
                a
                personal gain for himself or others;
                and





·
            Disclose
                to the company any information or documents relating to the Company's
                affairs which the office holder has received due to his/her position
                as an
                office holder.





*Disclosure
      of Personal Interest of an Office Holder*





The
      Companies Law requires that an office holder of a company disclose to the
      company any personal interest that he may have and all related material
      information known to him, in connection with any existing or proposed
      transaction by the company. The disclosure is required to be made promptly
      and
      in any event no later than the board of directors meeting in which the
      transaction is first discussed. If the transaction is an extraordinary
      transaction, the office holder’s duty to disclose also applies to a personal
      interest of a relative of the office holder.





Under
      the
      Companies law, an extraordinary transaction is a transaction:





·
            Other
                than in the ordinary course of business;





·
            Not
                on market terms; or





·
            That
                is likely to have a material impact on the company's profitability,
                assets
                or liabilities.





Once
      an
      office holder complies with the above disclosure requirement, the board of
      directors may approve a transaction between the company and an office holder,
      or
      a third party in which an office holder has a personal interest unless the
      articles of association provide otherwise. Nevertheless, a transaction that
      is
      adverse to the company's interest may not be approved.





If
      the
      transaction is an extraordinary transaction, approval is required of both the
      audit committee and the board of directors, in that order. Under specific
      circumstances, shareholder approval may also be required. A director who has
      a
      personal interest in a matter which is considered at a meeting of the board
      of
      directors or the audit committee may not be present at this meeting or vote
      on
      this matter, unless a majority of the members of the board of directors or
      the
      audit committee, as the case may be, has a personal interest in the matter.
      If a
      majority of members of the board of directors have a personal interest therein,
      shareholder approval is also required.





Under
      the
      Companies Law, all arrangements as to compensation of directors in public
      companies such as ours generally require the approvals of the audit committee,
      the board of directors and the shareholders, in that order.





48


*Disclosure
      of Personal Interests of a Controlling Shareholder*





Under
      the
      Companies Law, the disclosure requirements which apply to an office holder
      also
      apply to a controlling shareholder of a public company. A controlling
      shareholder is a shareholder who has the ability to direct the activities of
      a
      company, including a shareholder that owns 25% or more of the voting power
      in
      the company, if no other shareholder owns more than 50% of the voting power
      in
      the company, but excluding a shareholder whose power derives solely from his
      or
      her position on the board of directors or any other position with the company.
      Extraordinary transactions of a public company with a controlling shareholder
      or
      in which a controlling shareholder or with a third party has a personal
      interest, and the terms of engagement of a controlling shareholder as an office
      holder or employee, require the approval of the audit committee, the board
      of
      directors and the shareholders of the company in that order. The shareholder
      approval must be by a majority of the shares voted on the matter, provided
      that
      either:





·
            At
                least one-third of the shares of shareholders who have no personal
                interest in the transaction, and who are present and voting (in person,
                by
                proxy or by written ballot) vote in favor thereof;
                or





·
            The
                shareholders who have no personal interest in the transaction who
                vote
                against the transaction do not represent more than one percent of
                the
                voting power in the company.





Shareholders
      generally have the right to examine any document in a company's possession
      pertaining to any matter that requires shareholder approval.





*General
      Duties of Shareholders*





Under
      the
      Companies Law, each shareholder has a duty to act in good faith in exercising
      his rights and fulfilling his obligations toward the Company and other
      shareholders and to refrain from abusing his power in the Company, such as
      shareholder votes. Furthermore, specified shareholders have a duty of fairness
      toward the Company. These shareholders include any controlling shareholder,
      any
      shareholder who knows that he/it possesses the power to determine the outcome
      of
      a shareholder vote, and any shareholder who, pursuant to the provisions of
      the
      articles of association, has the power to appoint or to prevent the appointment
      of an office holder or any other power toward the Company. However, the
      Companies Law does not define the substance of this duty of
      fairness.





**Employees**





At
      the
      time of commencement of employment, our employees in North America generally
      sign offer letters specifying basic terms and conditions of employment, and
      our
      employees in Israel generally, including our executive officers, sign standard
      written employment agreements, which include confidentiality and non-compete
      provisions. The employees in our subsidiaries sign employment agreements which
      differ according to the country in which they are located.





As
      of
      December 31, 2006, we had 475 employees worldwide, of whom 229 ** were
      based in Israel, 96 were based in the United States and 150 were based in our
      other subsidiaries and offices. Of these 475 employees, 163 were employed in
      research and development, 237 were employed in sales, technical support,
      business development and marketing, and 75 were employed in management,
      operations and administration. As of December 31, 2005, we had 432 employees
      worldwide, of whom 191 ** were
      based in Israel, 118 were based in the United States and 123 were based in
      our
      other subsidiaries and offices, and as of December 31, 2004, we had 361
      employees worldwide, of whom 160 ** were
      based in Israel, 100 were based in the United States and 101 were based in
      our
      other subsidiaries and offices.





We
      are
      subject to Israeli labor laws and regulations with respect to our Israeli
      employees. These laws principally concern matters such as paid annual vacation,
      paid sick days, length of the workday and work week, minimum wages, pay for
      overtime, insurance for work-related accidents, severance pay and other
      conditions of employment.





Furthermore,
      we and our Israeli employees are subject to provisions of the collective
      bargaining agreements between the Histadrut, the General Federation of Labor
      in
      Israel, and the Coordination Bureau of Economic Organizations, including the
      Industrialists Association, by order of the Israeli Ministry of Labor and
      Welfare. These provisions principally concern cost of living increases,
      recreation pay and other conditions of employment. We provide our employees
      with
      benefits and working conditions above the required minimums. Our employees
      are
      not represented by a labor union. The employees of our subsidiaries are subject
      to local labor laws, regulations and/or collective bargaining agreements that
      vary from country to country.





49


We
      consider our relations with our employees to be good and we have never
      experienced a strike or work stoppage.




**Share
      Ownership**





The
      following table sets forth certain information regarding the beneficial
      ownership of our ordinary shares by our directors and officers as of June 3,
      2007. The percentage of outstanding ordinary shares is based on 19,455,532
      ordinary shares outstanding as of June 3, 2007.




**Name**
            
            **Number
                of ordinary shares**
            
            **Percentage
                of outstanding ordinary shares**Yehuda
                Zisapel
            
            2,645,727(1)
            
            13.57%Roy
                Zisapel
            
            1,028,841
                (2)
            
            5.18%Meir
                Moshe
            
            296,165(3)
            
            1.51%All
                directors and executive officers as a group (14 persons)
                (4)(5)
            
            4,103,324
            
            20.27%




(1)
            Consists
                of 2,605,727 shares and 40,000 options which are fully vested at
                the date
                of this Annual Report.




(2)
            Consists
                of 628,841 shares and 400,000 options which are fully vested or will
                be
                vested in the 60 days following the date of this Annual Report. In
                addition to the position stated in the table, Mr. Roy Zisapel is
                the
                beneficiary of a trust that, as of May 2006, the date on which the
                trust
                was established by him, held 229,142 ordinary shares. The trust is
                irrevocable and is scheduled to expire in May 2008. Mr. Zisapel does
                not
                control the trust and has limited access to information concerning
                activities and holdings of the trust. He disclaims beneficial ownership
                of
                the shares held in the trust.




(3)
            Consists
                of 86,165 shares and 210,000 options which are fully vested or which
                will
                be fully vested within the next 60 days.




(4)
            Consists
                of 3,322,324 shares and 781,000 options which are fully vested or
                which
                will be fully vested within the next 60 days.




(5)
            Each
                of the directors and executive officers not separately identified
                in the
                above table beneficially own less than 1% of our outstanding ordinary
                shares (including options held by each such party, and which are
                vested or
                shall become vested within 60 days of the date of this Annual Report)
                and
                have therefore not been separately disclosed.





50


**Nasdaq
      Listing Standards**





Our
      Ordinary Shares are currently listed on the Nasdaq Global Market and are thereby
      subject to the rules and regulations established by Nasdaq and applicable to
      listed companies. Rule 4350 of the NASDAQ Marketplace Rules imposes various
      corporate governance requirements on listed securities. Section (a)(1) of Rule
      4350 provides that foreign private issuers are required to comply with certain
      specific requirements of Rule 4350, but, as to the balance of Rule 4350, foreign
      private issuers may comply with the laws of their home jurisdiction in lieu
      of
      the requirements of such sections of Rule 4350.





We
      have
      chosen to follow the rules of our home jurisdiction, the Israeli Companies
      Law,
      in lieu of the requirement of Section 4350 (i)(1)(A) relating
      to the solicitation of shareholder approval prior to the issuance of designated
      securities when a stock option or purchase plan is to be established or
      materially amended. This requirement of Rule 4350 is not required under the
      Israeli Companies Law.





**Key
      Employee Share Incentive Plan**





In
      June
      1997, we adopted our Key Employee Share Incentive Plan. Options granted pursuant
      to our share option plan are for a term of sixty-two months from the date of
      the
      grant of the option. As of December 31, 2006, 8,087,071 ordinary shares have
      been reserved for option grants under the plan, of which we have granted options
      to purchase 7,391,802 ordinary shares, at a weighted average exercise price
      of
      $11.04 per ordinary share. The amount of reserved shares includes an increase
      of
      the number of shares reserved under the plan in an amount of 3% of our issued
      and outstanding stock approved by the Board of Directors meeting held on July
      13, 2006. We intend to grant further options under our share option plan to
      our
      executive officers and employees. In light of the new accounting standard SFAS
      No. 123(R), however, we may amend our option plan, reduce the number of options
      granted to the employees or suggest alternative compensation schemes.





Our
      share
      option plan is administered by the Compensation Committee of our Board of
      Directors. Pursuant to the plan, the committee has the authority to determine
      (subject to applicable law), or advise the Board of Directors, in its
      discretion:





·
            The
                persons to whom options are granted;





·
            The
                number of shares underlying each options award;





·
            The
                time or times at which the award shall be made;





·
            The
                exercise price, vesting schedule and conditions pursuant to which
                the
                options are exercisable; and





·
            Any
                other matter necessary or desirable for the administration of the
                plan.





Pursuant
      to our share option plan, all options, or shares issued upon exercise of
      options, are held in trust and registered in the name of a trustee which was
      selected by the share incentive committee. The trustee will not release the
      options or ordinary shares to the option holder before the options are vested
      (unless pre-approved by us) or before the lapse of a longer period if so
      required under local tax laws and regulations. Our Board of Directors may
      terminate or amend our share option plan, provided that any action by our Board
      of Directors which will alter or impair the rights of an option holder requires
      the prior consent of that option holder.





In
      order
      to comply with the provisions of Section 102 of the Israeli Income Tax Ordinance
      [New Version], 1961 (the “Tax Ordinance”), which was amended in January 2003, on
      March 5, 2003, our Board of Directors adopted an addendum to our share option
      plan with respect to options granted on or after January 1, 2003 to grantees
      who
      are residents of Israel. This addendum does not add to nor modify our share
      option plan in respect to grantees that are not residents of Israel.


51


**Directors
      and Consultants Option Plan**





On
      February 18, 2000 we adopted a Directors and Consultants Option Plan. Options
      granted pursuant to our share option plan are for a term of sixty-two months
      from the date of the grant of the option. The terms of the Directors and
      Consultants Option Plan are similar to the terms of the Key Employee Share
      Incentive Plan. The shares reserved for the Key Employee Share Incentive Plan
      provide for the Directors and Consultants Option Plan as well, and the same
      Compensation Committee administers the two plans. The Compensation Committee
      may
      not grant options to members of the Committee or to a shareholder of over 10%
      of
      our issued and outstanding shares. The shares reserved for the 1997 Key Employee
      Share Incentive Plan, are also used for option grants under the Directors and
      Consultants Option Plan.




**ITEM
                7.**
            **Major
                Shareholders and Related Party
                Transactions**





**A.**
            **Major
                Shareholders**





The
      following table sets forth certain information regarding the beneficial
      ownership of our ordinary shares as of June 3, 2007, by each person or entity
      known to own beneficially more than 5% of our outstanding ordinary shares based
      on information provided to us by the holders or disclosed in public filings
      with
      the Securities and Exchange Commission. The voting rights of all major
      shareholders are the same as for all other shareholders.




**Name**
            
            **Number
                of ordinary shares**
            
            **Percentage
                of outstanding ordinary shares**Yehuda
                Zisapel (1)
            
            2,645,727
            
            13.57%Roy
                Zisapel (2)
            
            1,028,841
            
            5.18%P.A.W.
                Capital Corp.(3)
            
            1,011,400
            
            5.12%FMR
                Corp. (4)
            
            1,637,300
            
            8.42%




(1)
      Includes 295,000  ordinary
      shares owned of record by Carm-AD Ltd., an Israeli company, which is controlled
      by Yehuda Zisapel, and 40,000 options which are fully vested at the date of
      this
      Annual Report.




(2)
      Includes 628, 841 shares and 400,000 options which are fully vested or will
      be
      vested in the 60 days following the date of this Annual Report. In addition
      to
      the position stated in the table, Mr. Roy Zisapel is the beneficiary of a trust
      that, as of May 2006, the date on which the trust was established by him, held
      229,142 ordinary shares. The trust is irrevocable and is scheduled to expire
      in
      May 2008. Mr. Zisapel does not control the trust and has limited access to
      information concerning activities and holdings of the trust. He disclaims
      beneficial ownership of the shares held in the trust.




(3)
      Includes 1,000,400 shares beneficially owned by P.A.W., Capital Corp., a
      Delaware corporation, and Peter W. Write, President of P.A.W. Capital
      Corp.




(4)
      Includes shares beneficially owned by Fidelity Management & Research
      Company, a wholly owned subsidiary of FMR Corp., as a result of acting as an
      investment advisor to various investment companies registered under Section
      8 of
      the Investment Company Act of 1940, shares beneficially owned by Fidelity
      Management Trust Company, a wholly owned subsidiary of FMR Corp., and a bank
      as
      defined in Section 3(a)(6) of the Securities Exchange Act of 1934, as a result
      of its serving as an investment manager of institutional accounts, and shares
      are held by Fidelity International Limited, an investment advisor to various
      investment companies, and various foreign-based subsidiaries. This
      information is based on FMR’s notification to the Company’s secretary dated
      April 26, 2007.




**Major
      Shareholders Voting Rights**




Our
      major
      shareholders do not have different voting rights.





52


**Record
      Holders**




Based
      on
      a review of the information provided to us by our transfer agent, as of May
      31,
      2007, there were 44 holders of record of our ordinary shares, of which 22 record
      holders, holding approximately 14% of our ordinary shares, had registered
      addresses in Israel. These numbers are not representative of the number of
      beneficial holders of our shares nor is it representative of where such
      beneficial holders reside.




**B.**
                **Related****Party
                    Transactions**





We
      have
      entered into a number of agreements with certain companies, of which Yehuda
      and
      Zohar Zisapel are co-founders, directors and/or principal stockholders,
      collectively known as the RAD-Bynet Group. Of these agreements, the lease for
      our headquarters in Tel Aviv is material to our operations. We believe that
      the
      terms of the transactions in which we have entered with members of the RAD-Bynet
      Group are not different in any material respect from terms we could obtain
      from
      unaffiliated third parties. The pricing of the transactions were arrived at
      based on negotiations between the parties. Members of our management reviewed
      the pricing of the lease agreement, and confirmed that they were not different
      than that which could have been obtained from unaffiliated third parties. In
      addition, the Company purchases different services from third parties at special
      rates offered to the RAD-Bynet Group, such as car leases, maintenance, insurance
      and communication services. In the event that we cease to be a member of the
      RAD-Bynet Group, we may not be able to obtain the current rates for such
      services. We believe, however, that due to the affiliation between us and the
      RAD-Bynet Group, we have greater flexibility in certain terms than might be
      available from unaffiliated third parties on similar issues. In the event that
      the transaction with members of the RAD-Bynet Group is terminated and we enter
      into similar transactions with unaffiliated third parties, that flexibility
      may
      not be available to us.





All
      transactions and arrangements with affiliated parties, including other members
      of the RAD-Bynet Group, require approval by the Audit Committee and our Board
      of
      Directors and may, in certain circumstances, require approval by our
      shareholders.





**Services
      and Equipment Furnished by members of the RAD-Bynet Group**





Some
      companies which are also members of the RAD-Bynet Group provide us with
      marketing, administrative and network management services, and we reimburse
      each
      for its costs in providing such services. The aggregate amount of the
      reimbursements to such companies amounted to approximately $441,000 in 2006.
      During 2006 we purchased from members of the RAD-Bynet Group computer and
      testing equipment in the amount of $939,000.





**Lease
      of Property**





We
      lease
      the office space for our headquarters and principal R&D, administrative,
      finance and marketing and sales operations from two private companies owned
      by
      Messrs. Zohar Zisapel and Yehuda Zisapel. The facilities are located in a
      five-story building in Tel Aviv, Israel, and consist of approximately 48,420
      square feet, plus storage and parking space. The monthly rent amounts to
      approximately $38,240. The lease expires in October 2007. We also lease from
      the
      same affiliated companies office space in a nearby location of which
      approximately 2,590 square feet for monthly rent of $2,892. We entered into
      an
      agreement with RAD Data Communications, Inc., a Company controlled by Yehuda
      and
      Zohar Zisapel, pursuant to which we will lease approximately 12,382  square
      feet in Mahwah, New Jersey, consisting of 8,121 square feet of office space
      and
      4,261  square
      feet of
      warehouse space, in consideration for monthly rent of approximately $17,000
      (including taxes, electricity and management fees). The lease expires on April
      20, 2010. ******





**Distribution** **Agreement**





Bynet
      Data Communications Ltd., a member of the RAD-Bynet Group, distributes our
      products in Israel on a non-exclusive basis. We have a written distributor
      agreement with Bynet Data Communications Ltd., according to which we provide
      them with discounts similar to the discounts provided to third-party
      distributors in the region in the ordinary course of business. The total sales
      to Bynet Data Communications amounted to $3,656,000  during
      2006.





53


**Compensation
      of Chief Executive Officer**





See
      discussion in Item 6 “Directors, Senior Management and Employees - Directors and
      Senior Management”.





**C.**
            **Interests
                of Experts and Counsel**





Not
      applicable.




**ITEM
                8.**
            **Financial
                Information**





**A.**
            Consolidated
                Statements and other Financial Information





See
“Item
      18 - Financial Statements”.





**A.7.**
            **Legal
                Proceedings**





In
      December 2001, we, our Chairman Yehuda Zisapel, our President, Chief Executive
      Officer and Director Roy Zisapel and our Chief Financial Officer Meir Moshe
      (the
“Individual Defendants”) and several underwriters in the syndicates for our
      September 30, 1999 initial public offering and January 24, 2000 secondary
      offering, were named as defendants in a class action complaint alleging
      violations of the federal securities laws in the United States District Court,
      Southern District of New York. The complaint seeks unspecified damages as a
      result of alleged violations of Section 11 of the Securities Act of 1933 against
      all the defendants and Section 15 of the Securities Act of 1933 against the
      Individual Defendants arising from activities purportedly engaged in by the
      underwriters in connection with our initial public offering and secondary
      offering. Plaintiffs allege that the underwriter defendants agreed to allocate
      stock in the Company's initial public offering and secondary offering to certain
      investors in exchange for excessive and undisclosed commissions and agreements
      by those investors to make additional purchases of stock in the aftermarket
      at
      pre-determined prices. An amended complaint filed on April 19, 2002, which
      is
      now the operative complaint, added a claim under Section 10(b) of the Securities
      Exchange Act of 1934 against the Company and a claim under Section 20(a) of
      the
      Securities Exchange Act of 1934 against the Individual Defendants. Plaintiffs
      allege that the Prospectuses for the Company's initial public offering and
      secondary offering were false and misleading because they did not disclose
      these
      arrangements. The action is being coordinated with approximately three hundred
      other nearly identical actions filed against other companies before one judge
      in
      the U.S. District Court for the Southern District of New York. A
      motion
      to dismiss addressing issues common to the companies and individuals who have
      been sued in these actions was filed on July 15, 2002. On October 9, 2002,
      the
      Court dismissed the Individual Defendants from the case without prejudice based
      upon Stipulations of Dismissal filed by the plaintiffs and the Individual
      Defendants. This dismissal disposed of the Section 15 and 20(a) control person
      claims without prejudice, since these claims were asserted only against the
      Individual Defendants.  On
      February 19, 2003, the Court denied the motion to dismiss with respect to the
      Company. ****  On
      October 13, 2004, the Court certified a class in six of the approximately 300
      other nearly identical actions and noted that the decision is intended to
      provide strong guidance to all parties regarding class certification in the
      remaining cases. The underwriter defendants appealed the decision and the Second
      Circuit vacated the district court’s decision granting class certification in
      those six cases on December 5, 2006. Plaintiffs filed a petition for rehearing.
      On April 6, 2007, the Second Circuit denied the petition, but noted that the
      plaintiffs could ask the district court to certify a more narrow class than
      the
      one that was rejected. Plaintiffs have not yet moved to certify a class in
      the
      Radware case.





Prior
      to
      the Second Circuit’s December 5, 2006 ruling, the
      Company approved a settlement agreement and related agreements which set forth
      the terms of a settlement between the Company, the Individual Defendants, the
      plaintiff class and the vast majority of the other approximately 300 issuer
      defendants. These agreements were submitted to the Court for approval. The
      settlement would have provided, among other things, a release of the Company
      and
      the Individual Defendants for the conduct alleged to be wrongful in the
      complaint in exchange for a guarantee from the Company’s insurers regarding
      recovery from the underwriter defendants and other consideration from the
      Company regarding its underwriters. In light of the Second Circuit opinion,
      liaison counsel for the issuers informed the district court that the settlement
      cannot be approved because the defined settlement class, like the litigation
      class, cannot be certified. We cannot predict whether we will be able to
      negotiate a settlement that complies with the Second Circuit’s mandate. Due to
      the inherent uncertainties of litigation, we cannot accurately predict the
      ultimate outcome of the matter. If the Company is found liable, we are unable
      to
      estimate or predict the potential damages that might be awarded, whether such
      damages would be greater than the Company’s insurance coverage, and whether such
      damages would have a material impact on our results of operations, cash flows
      or
      financial condition in any future period.





54


The
      Company’s French subsidiary, Radware France, is a party to two separate
      litigation proceedings before the Boulogne-Billancourt Employment Tribunal,
      brought against the subsidiary by two of its former employees claiming damages
      in connection with their dismissal. The hearings with respect to these matters
      are scheduled for January 10, 2008 and April 3, 2008, respectively. At this
      stage without receiving all file submissions we cannot asses the outcome or
      the
      risks associated with these two matters but in any event we do not expect them
      to have a material affect on the Company.





From
      time
      to time, we are involved in routine trade litigation. We are not subject to
      any
      additional material legal proceedings.





**Dividend
      Distribution Policy**




We
      have
      never paid and do not intend to pay cash dividends on our ordinary shares in
      the
      foreseeable future. Our earnings and other cash resources will be used to
      continue the development and expansion of our business. Any future dividend
      policy will be determined by our Board of Directors and will be based upon
      conditions then existing, including our results of operations, financial
      condition, current and anticipated cash needs, contractual restrictions and
      other conditions.




**B.**
            **Significant
                Changes**





Except
      as
      otherwise disclosed in this annual report, we are not aware of any significant
      changes since the date of the audited consolidated financial statements included
      in this annual report.




55


**ITEM
                9.**
            **The
                Listing******




**A.**
            **Listing
                Details******





Our
      ordinary shares have been listed for quotation on the Nasdaq Global Market
      as of
      September 30, 1999, and, since May 12, 2004 on the Tel Aviv Stock Exchange,
      or TASE, both under the symbol “RDWR”.





The
      following table sets forth the high and low closing price for our ordinary
      shares as reported by the Nasdaq Global Market and TASE for the periods
      indicated:




**Annual
                High and Low**
            
            **Nasdaq
                Global Market**
            
            **Tel
                Aviv Stock Exchange****High**
            
            **Low**
            
            **High**
            
            **Low****2002**
            
            $
            12.95
            
            $
            6.5
            
            
            --
            
            
            --**2003**
            
            $
            28.54
            
            $
            7.97
            
            
            --
            
            
            --**2004**
            
            $
            32.42
            
            $
            14.94
            
            
            NIS118.00
            
            
            NIS
                69.60


**Quarterly
                High and Low****2005**First
                Quarter
            
            $
            26.56
            
            $
            22.24
            
            
            NIS
                115.00
            
            
            NIS
                98.07Second
                Quarter
            
            $
            24.65
            
            $
            18.08
            
            
            NIS
                108.90
            
            
            NIS
                82.97Third
                Quarter
            
            $
            19.49
            
            $
            15.19
            
            
            NIS
                90.27
            
            
            NIS
                67.93Fourth
                Quarter
            
            $
            19.43
            
            $
            17.03
            
            
            NIS
                89.41
            
            
            NIS
                79.29ANNUAL
            
            $
            26.56
            
            $
            15.19
            
            
            NIS
                115.00
            
            
            NIS
                67.93**2006**First
                Quarter
            
            $
            21.49
            
            $
            17.63
            
            
            NIS
                101.10
            
            
            NIS
                84.49Second
                Quarter
            
            $
            16.60
            
            $
            12.84
            
            
            NIS
                82.22
            
            
            NIS
                58.21Third
                Quarter
            
            $
            14.40
            
            $
            11.44
            
            
            NIS
                63.00
            
            
            NIS
                50.43Fourth
                Quarter
            
            $
            16.14
            
            $
            13.60
            
            
            NIS
                67.13
            
            
            NIS
                59.13ANNUAL
            
            $
            21.49
            
            $
            11.44
            
            
            NIS
                101.10
            
            
            NIS
                50.43





56





**Most
                recent six months****2007**June*
            
            $
            13.35
            
            $
            13.29
            
            
            NIS
                54.81
            
            
            NIS
                53.97May
            
            $
            13.30
            
            $
            12.31
            
            
            NIS
                54.05
            
            
            NIS
                49.73April
            
            $
            13.11
            
            $
            12.87
            
            
            NIS
                56.64
            
            
            NIS
                51.71March
            
            $
            14.45
            
            $
            13.46
            
            
            NIS
                61.76
            
            
            NIS
                56.63February
            
            $
            14.63
            
            $
            13.00
            
            
            NIS
                61.53
            
            
            NIS
                55.24January
            
            $
            15.62
            
            $
            12.84
            
            
            NIS
                67.97
            
            
            NIS
                55.30**2006**December
            
            $
            16.14
            
            $
            15.35
            
            
            NIS
                67.13
            
            
            NIS
                63.64


*Through
      June 4, 2007




**B.**
            **Plan
                of Distribution**





Not
      applicable.





**C.**
            **Markets**





Our
      ordinary shares are listed for quotation on the Nasdaq Global Market under
      the
      symbol “RDWR” and on the Tel Aviv Stock Exchange.





**D.**
            **SellingShareholders**





Not
      applicable.





**E.**
            **Dilution**





Not
      applicable.





**F.**
            **Expensesof
                the Issue**





Not
      applicable.




**ITEM
                10.**
            **Additional
                information******





**A.**
            **Share
                Capital******





Not
      applicable.





**B.**
            **Memorandum**and Articles of Association





*Set
      out below is a description of certain provisions of our Memorandum of
      Association and Articles of Association, and of the Israeli Companies Law
      related to such provisions. This description is only a summary and does not
      purport to be complete and is qualified by reference to the full text of the
      Memorandum and Articles which are incorporated by reference to exhibits to
      this
      Annual Report and by Israeli law.*





57


We
      were
      first registered under Israeli law on May 16, 1996 as a private company, and
      on
      November 18, 1999 became a public company. Our registration number with the
      Israeli registrar of companies is 52-004437-1.





**Objects
      and Purposes**





Pursuant
      to our articles of association, our object is to engage, directly or indirectly,
      in any lawful undertaking or business whatsoever, including, without limitation,
      as stipulated in our Memorandum of Association, which was filed with the Israeli
      registrar of companies.





**Shares;** **Transfer** **of Shares**





Our
      registered capital is divided into 30,000,000 ordinary shares of nominal (par)
      value NIS 0.10 each. There are no other classes of shares. All of our
      outstanding shares are fully paid and non-assessable. The shares do not entitle
      their holders to preemptive rights and fully paid ordinary shares may be freely
      transferred pursuant to our articles of association unless such transfer is
      restricted or prohibited by another instrument.





**Dividend
      and** **Liquidation** **Rights**





Dividends
      on our ordinary shares may be paid only out of profits and other surplus, as
      defined in the Companies Law, as of the end of the most recent financial
      statements or as accrued over a period of two years, whichever is higher. Our
      Board of Directors is authorized to declare dividends, provided that there
      is no
      reasonable concern that payment of the dividend will prevent us from satisfying
      our existing and foreseeable obligations as they become due, and provided
      further that our shareholders approved the final dividend declared by the Board
      of Directors, in an amount not to exceed the Board of Directors’ recommendation.
      In the event of our liquidation, after satisfaction of liabilities to creditors,
      our assets will be distributed to the holders of ordinary shares in proportion
      to their respective holdings. This liquidation right may be affected by the
      grant of preferential dividends or distribution rights to the holders of a
      class
      of shares with preferential rights that may be authorized in the
      future.





**Voting,** **Shareholders'** **Meetings and Resolutions**





We
      have
      two types of general shareholder meetings: the annual general meeting and the
      extraordinary general meeting. An annual general meeting must be held once
      in
      every calendar year, but not more than 15 months after the last annual general
      meeting. The Board of Directors may convene an extraordinary general meeting
      whenever it thinks fit, and is obliged to do so upon the request of any of:
      two
      directors or one fourth of the serving directors; one or more shareholders
      who
      have at least 5% of the issued share capital and at least 1% of the voting
      rights; or one or more shareholders who have at least 5% of the voting rights.





Under
      the
      Companies Law, shareholder meetings generally require prior notice of not less
      than 21 days. The Companies Law also provides that the record date for the
      participation of shareholders of a company whose shares are traded or registered
      outside of Israel such as us may generally be no more than 40 but no less than
      28 days prior to the meeting, provided that notice for said meeting is given
      prior to the record date. A shareholder may vote in person or by proxy, or,
      if
      the shareholder is a corporate body, by its representative.





Holders
      of ordinary shares have one vote for each ordinary share held on all matters
      submitted to a vote of shareholders. A shareholder may only vote the shares
      for
      which all calls have been paid, except in separate general meetings of a
      particular class.





These
      voting rights may be affected by the grant of any special voting rights to
      the
      holders of a class of shares with preferential rights that may be authorized
      in
      the future. The quorum required for an ordinary meeting of shareholders consists
      of at least two shareholders present in person or by proxy who hold or represent
      between them at least 35% of the outstanding voting shares unless otherwise
      required by applicable rules. A meeting adjourned for lack of a quorum generally
      is adjourned to the same day in the following week at the same time and place
      or
      any time and place as the Chairman may designate with the consent of a majority
      of the voting power represented at the meeting and voting on the matter
      adjourned. At such reconvened meeting the required quorum consists of any two
      members present in person or by proxy.





58


Under
      the
      Companies Law, unless otherwise provided in the articles of association or
      applicable law, all resolutions of the shareholders require a simple majority
      of
      the shares present, in person or by proxy, and voting on the matter. However,
      our articles of association require approval of at least 75% of the shares
      present and voting to increase our share capital or to change its structure,
      grant any special rights to the holders of a class of shares with preferential
      rights or change such rights previously granted or remove directors from office.





Subject
      to the Companies Law, a resolution in writing signed by the holders of all
      of
      our ordinary shares entitled to vote at a meeting of shareholders or to which
      all such shareholders have given their written consent will be sufficient to
      adopt the resolution in lieu of a meeting.





**General** **Duties** **of Shareholders**





Under
      the
      Companies Law, each and every shareholder has a duty to act in good faith in
      exercising his rights and fulfilling his obligations towards the company and
      other shareholders and refrain from abusing his power in the company, such
      as in
      voting in the general meeting of shareholders on the following
      matters:





·
            Any
                amendment to the articles of
                association;





·
            An
                increase of the company's authorized share
                capital;





·
            A
                merger; or





·
            Approval
                of certainrelated
                partytransactionsand
                actions which require shareholder approval pursuant to the Companies
                Law.





In
      addition, each and every shareholder has the general duty to refrain from
      depriving rights of other shareholders.





Furthermore,
      any controlling shareholder, any shareholder who knows that it possesses the
      power to determine the outcome of a shareholder vote and any shareholder that,
      pursuant to the provisions of the articles of association, has the power to
      appoint or to prevent the appointment of an office holder in the company or
      any
      other power toward the company is under a duty to act in fairness towards the
      company. The Companies Law does not describe the substance of this duty of
      fairness. These various shareholder duties may restrict the ability of a
      shareholder to act in what the shareholder perceives to be its own best
      interests.





**Restrictions
      on Non-Israeli Residents**





The
      ownership or voting of our ordinary shares by non-residents of Israel, except
      with respect to citizens of countries which are in a state of war with Israel,
      is not restricted in any way by our Memorandum of Association or Articles of
      Association or by the laws of the State of Israel.





**Mergers
      and** **Acquisitions** **under Israeli Law**





There
      are
      no specific provisions of our memorandum or articles of association that would
      have an effect of delaying, deferring or preventing a change in control of
      us or
      that would operate only with respect to a merger, acquisition or corporate
      restructuring involving us (or any of our subsidiaries). However, certain
      provisions of the Companies Law may have such effect.





The
      Israeli Companies Law includes provisions that allow a merger transaction and
      requires that each company that is party to a merger approve the transaction
      by
      its board of directors and a vote of the majority of its shares, voting on
      the
      proposed merger at a shareholders’ meeting. For purposes of the shareholder
      vote, unless a court rules otherwise, the merger will not be deemed approved
      if
      shares, representing a majority of the voting power present at the shareholders
      meeting and which are not held by the other party to the merger (or by any
      person who holds 25% or more of the voting power of the right to appoint 25%
      or
      more of the directors of the other party), vote against the merger. Upon the
      request of a creditor of either party of the proposed merger, the court may
      delay or prevent the merger if it concludes that there exists a reasonable
      concern that as a result of the merger, the surviving company will be unable
      to
      satisfy the obligations of any of the parties to the merger. In addition, a
      merger may not be completed unless at least (i) 50 days have passed from the
      time that a proposal of the merger has been filed with the Israeli Registrar
      of
      Companies by each merging company and (ii) 30 days have passed since the merger
      was approved by the shareholders of each merging company.





59


In
      addition, provisions of the Companies Law that deal with “arrangements” between
      a company and its shareholders may be used to effect squeeze-out transactions
      in
      which the target company becomes a wholly-owned subsidiary of the acquiror.
      These provisions generally require that the merger be approved by a majority
      of
      the participating shareholders holding at least 75% of the shares voted on
      the
      matter. In addition to shareholder approval, court approval of the transaction
      is required, which entails further delay. The Companies Law also provides for
      a
      merger between Israeli companies, after completion of the above procedure for
      an
“arrangement” transaction and court approval of the merger.





The
      Companies Law also provides that an acquisition of shares of a public company
      must be made by means of tender offer if as a result of the acquisition the
      purchaser would become a 25% or greater shareholder of the company and there
      is
      no 25% or greater shareholder in the company. Similarly,
      the Companies Law provides that an acquisition of shares in a public company
      must be made by means of a tender offer if as a result of the acquisition the
      purchaser would become a 45% or greater shareholder of the company, unless
      there
      is already a 45% or greater shareholder of the company. These requirements
      do
      not apply if, in general, the acquisition (1) was made in a private placement
      that received shareholder approval, (2) was from a 25% or greater shareholder
      of
      the company which resulted in the acquirer becoming a 25% or greater shareholder
      of the company, or (3) was from a 45% or greater shareholder of the company
      which resulted in the acquirer becoming a 45% or greater shareholder of the
      company. The tender offer must be extended to all shareholders, but the offeror
      is not required to purchase more than 5% of the company's outstanding shares,
      regardless of how many shares are tendered by shareholders. The tender offer
      may
      be consummated only if (i) at least 5% of the company’s outstanding shares will
      be acquired by the offeror and (ii) the number of shares tendered in the offer
      exceeds the number of shares whose holders objected to the offer.





If,
      as a
      result of an acquisition of shares, the acquirer will hold more than 90% of
      a
      company’s outstanding shares, the acquisition must be made by means of a tender
      offer for all of the outstanding shares. If less than 5% of the outstanding
      shares are not tendered in the tender offer, all the shares that the acquirer
      offered to purchase will be transferred to it. The Companies Law provides for
      appraisal rights if any shareholder files a request in court within three months
      following the consummation of a full tender offer. If more than 5% of the
      outstanding shares are not tendered in the tender offer, then the acquiror
      may
      not acquire shares in the tender offer that will cause his shareholding to
      exceed 90% of the outstanding shares.





Finally,
      Israeli tax law treats stock-for-stock acquisitions between an Israeli company
      and a foreign company less favorably than does U.S. tax law. For example,
      Israeli tax law subjects a shareholder who exchanges his ordinary shares for
      shares in another corporation to taxation on half the shareholder’s shares two
      years following the exchange and on the balance four years thereafter even
      if
      the shareholder has not yet sold the new shares.





**Modification
      of Class Rights**





Our
      articles of association provide that the rights attached to any class (unless
      otherwise provided by the terms of such class), such as voting, rights to
      dividends and the like, may be varied by written consent of holders of
      seventy-five percent of the issued shares of that class, or by adoption by
      the
      holders of seventy-five percent of the shares of that class at a separate class
      meeting. Subject thereto, the conditions imposed by our articles of association
      governing changes in the rights of any class of shares, are no more stringent
      than is required by Israeli law.





**Board
      of Directors**





According
      to the Companies Law and our articles of association, the management of our
      business is vested in our Board of Directors. Our articles of association
      provide that the Board of Directors shall consist of not less than five and
      not
      more than nine directors as shall be determined by our shareholders. (in October
      2006 our shareholders fixed the maximum size of our Board of Directors at nine
      members.) In accordance with our articles of association, our Board of Directors
      (other than our external directors) is divided into three classes with each
      class serving until the third annual meeting following their election, as more
      fully described in “Item 6- Directors, Senior Management and Employees - Board
      Practices - Staggered Board.”There is no requirement under our articles or
      Israeli law for directors to retire on attaining a specific age. Our articles
      do
      not require directors to hold our ordinary shares to qualify for
      election.





60


The
      Board
      of Directors may exercise all such powers and may take all such actions that
      are
      not specifically granted to our shareholders. As part of its powers, our Board
      of Directors may cause the Company to borrow or secure payment of any sum or
      sums of money for the purposes of the Company, at such times and upon such
      terms
      and conditions as it thinks fit, including the grants of security interests
      on
      all or any part of the property of the Company. In addition, the Companies
      Law
      requires that transactions between a company and its office holders (which
      term
      includes directors) or that benefit its office holders, including arrangements
      as to the compensation of office holders, be approved as provided for in the
      Companies Law and the Company's articles of association, as more fully described
      in Item 6C under “Approval of Specified Related Party Transactions Under Israeli
      Law”.





A
      resolution proposed at any meeting of the Board of Directors shall be deemed
      adopted if approved by a majority of the directors present and voting on the
      matter.





**Exculpation,
      Insurance and Indemnification**





*Exculpation
      of Office Holders*





Under
      the
      Companies Law, an Israeli company may not exempt an office holder from liability
      for a breach of his or her duty of loyalty, but may exempt in advance an office
      holder from his or her liability to the company, in whole or in part, for a
      breach of his duty of care (except
      in connection with distributions), provided
      that the articles of association of the company allow it to do so. Our articles
      of association allow us to exempt our office holders to the maximum extent
      permitted by law.


*Insurance
      of Office Holders*





Our
      articles of association provide that, subject to the provisions of the Companies
      Law, we may enter into a contract for the insurance of the liability of any
      of
      our office holders, with respect to an act performed in the capacity of an
      office holder for:





·
            A
                breach of his or her duty of care to us or to another
                person;





·
            A
                breach of his or her duty of loyalty to us, provided that the office
                holder acted in good faith and had reasonable cause to assume that
                his or
                her act would not prejudice our interests; or





·
            A
                financial liability imposed upon him or her in favor of another
                person.





*Exculpation
      and Indemnification of Office Holders*





Under
      the
      Companies Law, we may indemnify any of our office holders against the following
      obligations and expenses imposed on the office holder with respect to an act
      performed in the capacity of an office holder:





·
            A
                financial liability incurred by, or imposed on him or her in favor
                of
                another person by a court judgment, including a settlement or an
                arbitration award approved by the court. Such indemnification may
                be
                approved (i) after the liability has been incurred or (ii) in advance,
                provided that our undertaking to indemnify is limited to events that
                our
                Board of Directors believes are foreseeable in light of our actual
                operations at the time of providing the undertaking and to a sum
                or
                criterion that our Board of Directors determines to be reasonable
                under
                the circumstances;





·
            Reasonable
                litigation expenses, including attorney’s fees, expended by the office
                holder as a result of an investigation or proceeding instituted against
                him or her by a competent authority, provided that such investigation
                or
                proceeding concluded without the filing of an indictment against
                him or
                her or the imposition of any financial liability in lieu of criminal
                proceedings other than with respect to a criminal offense that does
                not
                require proof of criminal intent;
                and





61


·
            Reasonable
                litigation expenses, including attorneys' fees, expended by the office
                holder or charged to him or her by a court in connection with proceedings
                we institute against him or her or instituted on our behalf or by
                another
                person, a criminal indictment from which he or she was acquitted,
                or a
                criminal indictment in which he or she was convicted for a criminal
                offense that does not require proof of criminal
                intent.





*Limitations
      on Insurance and Indemnification*





The
      Companies Law provides that a company may not indemnify an office holder, or
      enter into an insurance contract which would provide coverage for any monetary
      liability incurred as a result of any of the following:





·
            A
                breach by the office holder of his or her duty of loyalty unless,
                with
                respect to indemnification or insurance coverage, the office holder
                acted
                in good faith and had a reasonable basis to believe that the act
                would not
                prejudice the company;





·
            A
                breach by the office holder of his or her duty of care if the breach
                was
                done intentionally or recklessly unless the breach was done
                negligently;





·
            Any
                act or omission done with the intent to derive an illegal personal
                benefit; or





·
            Any
                fine levied against the office
                holder.





In
      addition, under the Companies Law, indemnification of, and procurement of
      insurance coverage for, our office holders must be approved by our Audit
      Committee and our Board of Directors and, if the beneficiary is a director,
      by
      our shareholders.





We
      currently hold directors and officers liability insurance for the benefit of
      our
      office holders. In addition, we provide our directors and officers
      indemnification pursuant to the terms of a Letter of Indemnification
      substantially in the form approved by our shareholders (See Exhibit 4.4 of
      our
      amended annual report on Form 20-F/A for the year ending December 31, 2005
      filed
      with the Securities and Exchange Commission on July 6, 2006, for the form of
      such letter.)





**C.**
            **Material
                Contracts**





On
      April
      25, 2007 we entered into an agreement and plan of merger with Covelight,
      pursuant to which we purchased Covelight for a consideration of up to $16
      million, consisting of $7.5 million paid at closing and up to $8.5 million
      to be
      paid in 12 months from closing based on achieving certain sales revenues from
      the sales of Covelight products, with the maximum amount of $8.5 million being
      paid if the sales of Covelight’s products during the 12 months ending on March
      31, 2008 are no less than $8 million. The agreement included representations,
      warranties and indemnification obligations of Covelight’s shareholders with
      respect to Covelight’s financial statements, employees, material agreements,
      intellectual property and additional business parameters.





For
      a
      summary of additional material contracts, see “Item 5 - Operating and Financial
      Review and Prospects - General - Business Combinations” and “Item 7 - Major
      Shareholders and Related Party Transactions - Related Party Transactions -
      Lease
      of Property”.





**D.**
            **Exchange
                Controls**





There
      are
      currently no Israeli currency control restrictions on payments of dividends
      or
      other distributions with respect to our ordinary shares or the proceeds from
      the
      sale of the shares, except for the obligation of Israeli residents to file
      reports with the Bank of Israel regarding certain transactions. However,
      legislation remains in effect pursuant to which currency controls can be imposed
      by administrative action at any time.





**E.**
            **Taxation******





**Holders
      of our ordinary shares should consult their own tax advisors as to the United
      States, Israeli or other tax consequences of the purchase, ownership and
      disposition of ordinary shares, including, in particular, the effect of any
      foreign, state or local taxes.**





62


**Israeli
      Tax Considerations**





The
      following is a summary of the current tax structure applicable to companies
      incorporated in Israel, with special reference to its effect on us. The
      following also contains a discussion of the material Israeli tax consequences
      to
      purchasers of our ordinary shares and Israeli government programs benefiting
      us.
      To the extent that the discussion is based on new tax legislation which has
      not
      been subject to judicial or administrative interpretation, we cannot assure
      you
      that the views expressed in the discussion will be accepted by the Israel tax
      authorities or courts. The discussion is not intended, and should not be
      construed, as legal or professional tax advice and is not exhaustive of all
      possible tax considerations.





*General
      Corporate Tax Structure*





Generally,
      Israeli companies are subject to “Corporate Tax” on their taxable income at the
      rate of 31% for the 2006 tax year. **.** Following
      an amendment to the Tax Ordinance), which came into effect on January 1, 2006,
      the Corporate Tax rate is scheduled to decrease as follows: in
      2007 -
      29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%. Israeli
      companies are generally subject to Capital Gains Tax at a rate of 25% for
      capital gains (other than gains deriving from the sale of listed securities)
      derived after January 1, 2003. However, the effective tax rate payable by a
      company which derives income from an approved enterprise (as further discussed
      below) may be considerably less.





*Tax
      Benefits Under the Law for the Encouragement of Capital Investments,
      1959* ****





***The
      law before the amendment of 2005***





The
      Law
      for the Encouragement of Capital Investments, 1959, as in effect prior to April
      1, 2005 (the “Investments Law”), provided that a proposed capital investment in
      eligible facilities may, upon application to the Investment Center of the
      Ministry of Industry and Commerce of the State of Israel, be designated as
      an
      approved enterprise. The Investment Center based its decision as to whether
      or
      not to approve an application, among other things, on the criteria set forth
      in
      the Investments Law and regulations, the then prevailing policy of the
      Investment Center, and the specific objectives and financial criteria of the
      applicant. Each certificate of approval for an approved enterprise relates
      to a
      specific investment program delineated both by its financial scope, including
      its capital sources, and by its physical characteristics, e.g *.* ,
      the
      equipment to be purchased and utilized pursuant to the program.





The
      Investments Law provides that an approved enterprise is eligible for tax
      benefits on taxable income derived from its approved enterprise programs. The
      tax benefits under the Investments Law also apply to income generated by a
      company from the grant of a usage right with respect to know-how developed
      by
      the approved enterprise, income generated from royalties, and income derived
      from a service which is auxiliary to such usage right or royalties, provided
      that such income is generated within the approved enterprise’s ordinary course
      of business. If a company has more than one approval or only a portion of its
      capital investments are approved, its effective tax rate is the result of a
      weighted average of the applicable rates. The tax benefits under the Investments
      Law are not, generally, available with respect to income derived from products
      manufactured outside of Israel. In addition, the tax benefits available to
      an
      approved enterprise are contingent upon the fulfillment of conditions stipulated
      in the Investments Law and regulations and the criteria set forth in the
      specific certificate of approval, as described above. In the event that a
      company does not meet these conditions, it would be required to refund the
      amount of tax benefits, plus a consumer price index linkage adjustment and
      interest.





The
      Investments Law also provides that an approved enterprise is entitled to
      accelerated depreciation on its property and equipment that are included in
      an
      approved enterprise program.





Taxable
      income of a company derived from an approved enterprise is subject to corporate
      tax at the maximum rate of 25%, rather than the regular corporate tax rate,
      for
      the benefit period. This period is ordinarily seven years commencing with the
      year in which the approved enterprise first generates taxable income (after
      the
      commencement of production), and is limited to twelve years from commencement
      of
      production or 14 years from the date of approval, whichever is earlier (the
      “Years Limitation”).





63


A
      company
      may elect to receive an alternative package of benefits. Under the alternative
      package of benefits, a company’s undistributed income derived from the approved
      enterprise will be exempt from corporate tax for a period of between two and
      ten
      years from the first year the company derives taxable income under the program,
      depending on the geographic location of the approved enterprise within Israel,
      and such company will be eligible for a reduced tax rate for the remainder
      of
      the benefits period **.** The
      Years
      Limitation does not apply to the exemption period. A company that has elected
      the alternative package of benefits, such as us, that subsequently pays a
      dividend out of income derived from the approved enterprise during the tax
      exemption period will be subject to corporate tax in respect of the gross amount
      distributed, including any taxes thereon, at the rate which would have been
      applicable had it not elected the alternative package of benefits, generally
      10%-25%, depending on the percentage of the company’s ordinary shares held by
      foreign shareholders. The dividend recipient is subject to withholding tax
      at
      the rate of 15% applicable to dividends from approved enterprises, if the
      dividend is distributed during the tax exemption period or within twelve years
      thereafter. The company must withhold this tax at source.





A
      company
      that has an approved enterprise program is eligible for further tax benefits
      if
      it qualifies as a foreign investors’ company. A foreign investors’ company is a
      company which more than 25% of its share capital and combined share and loan
      capital is owned by non-Israeli residents. A company that qualifies as a foreign
      investors’ company and has an approved enterprise program is eligible for tax
      benefits for a ten-year benefit period. As specified above, depending on the
      geographic location of the approved enterprise within Israel, income derived
      from the approved enterprise program may be exempt from tax on its undistributed
      income for a period of between two to ten years, and will be subject to a
      reduced tax rate for the remainder of the benefits period. The tax rate for
      the
      remainder of the benefits period will be 25%, unless the level of foreign
      investment exceeds 49%, in which case the tax rate will be 20% if the foreign
      investment is more than 49% and less than 74%; 15% if more than 74% and less
      than 90%; and 10% if 90% or more.





Subject
      to applicable provisions concerning income under the alternative package of
      benefits, dividends paid by a company are considered to be attributable to
      income received from the entire company and the company’s effective tax rate is
      the result of a weighted average of the various applicable tax rates, excluding
      any tax-exempt income. Under the Investments Law, a company that has elected
      the
      alternative package of benefits is not obliged to distribute retained profits,
      and may generally decide from which year’s profits to declare dividends. We
      currently intend to reinvest any income derived from our approved enterprise
      program and not to distribute such income as a dividend.





The
      Investment Center has granted us an approval to establish an approved enterprise
      program under the Investments Law, at our facilities in Tel Aviv and Jerusalem.





The
      current benefits for an approved enterprise program in Jerusalem provide that
      income derived from the approved enterprise program allocated to the approved
      enterprise in Jerusalem is tax exempt for ten years commencing with the year
      in
      which the approved enterprise first generates taxable income and will be taxed
      at a reduced company tax rate of up to 25% (rather than the regular corporate
      tax rate) in the following years.





The
      current benefits for an approved enterprise program in Tel Aviv provide that
      income derived from the approved enterprise program and allocated to our Tel
      Aviv facility will be tax exempt for a period of two years and will be subject
      to a reduced tax rate, depending on the level of foreign investment, for an
      additional period of five to eight years.





As
      mentioned above, the Investment Center’s approval is for establishing an
      approved enterprise program in both Tel Aviv and Jerusalem. The approval
      provides for the allocation of tax benefits between our facilities in Tel Aviv
      and Jerusalem such that the income derived from the approved enterprise program
      shall be allocated pro-rata between the aforementioned facilities based on
      the
      expenses borne by each facility. However, since all our manufacturing and part
      of our research and development facilities are located in Jerusalem, the
      Investment Center determined the method of allocation of tax benefits between
      our facilities in Jerusalem and Tel Aviv as follows: The method of allocation
      of
      the tax benefits between our facilities in Tel Aviv and Jerusalem will be based
      on the number of research and development employees in each of the facilities,
      provided, however that the average salary for such employees in our Jerusalem
      facility will not be less than 85% of the average salary of such employees
      in
      our Tel Aviv facility. In the years that such condition is not fulfilled, the
      method of allocation will be as follows: (i) 50% of our income will be allocated
      between our Jerusalem facility and our Tel Aviv facility, pro-rata according
      to
      the number of employees engaged in research and development or manufacturing
      activities in each facility; and (ii) 50% of our income will be allocated
      between our Jerusalem facility and our Tel Aviv facility, pro-rata according
      to
      the salaries paid to the employees engaged in research and development or
      manufacturing activities in each facility. The Israeli government may reduce
      or
      eliminate tax benefits available to approved enterprise programs in the future.
      We cannot assure you that our approved program and the benefits thereunder
      shall
      continue in the future at its current level or at any level.See “Item 3 - Key
      Information - Risks Related to Operations In Israel.” ****





64


In
      2004,
      the Company began to utilize the above mentioned tax benefits, and they are
      scheduled to gradually expire through 2013. As of December 31, 2006, retained
      earnings included approximately $25,000,000 in tax-exempt income earned by
      the
      Company’s ”Approved Enterprise”. The Company has decided not to declare
      dividends out of such tax-exempt income. Accordingly, no deferred income taxes
      have been provided on income attributable to the Company’s ”Approved
      Enterprise”.





If
      the
      retained tax-exempt income is distributed, it would be taxed at the corporate
      tax rate applicable to such profits as if the Company had not elected the
      alternative tax benefits (currently between 10% - 25%) and an income tax
      liability of up to $6,250,000 would be incurred.





Income
      from sources other than the “Approved Enterprise” will be subject to the tax at
      the regular rate.





During
      2004, the Company's production facilities in Israel (Tel Aviv and Jerusalem)
      were granted an expansion program to its Approved Enterprise status by the
      Investment Center. The
      Company applied for an amendment to this expansion program, according to which
      it requested an enlargement to this expansion program, neutralization of certain
      assets and an approval that the benefits period from such expansion program
      will
      commence in 2006. The Investment Center granted temporary approval for the
      year
      2006.





**The
      2005 Amendment to the Investments Law**





An
      amendment to the Investments Law, which was published on April 1, 2005 (the
      “Amendment”), has changed certain provisions of the Law. As a result of the
      Amendment, a company is no longer obliged to acquire Approved Enterprise status
      in order to receive the tax benefits previously available under the Alternative
      Benefits provisions, and therefore generally there is no need to apply to the
      Investment Center for this purpose. (Approved Enterprise status remains
      mandatory for companies seeking grants.) Rather, the Company may claim the
      tax
      benefits offered by the Investments Law directly in its tax returns, provided
      that its facilities meet the criteria for tax benefits set out by the Amendment.
      A company is also granted a right to approach the Israeli Tax Authority for
      a
      pre-ruling regarding their eligibility for benefits under the
      Amendment.





Tax
      benefits are available under the Amendment to production facilities (or other
      eligible facilities), which are generally required to derive more than 25%
      of
      their business income from export (referred to as a “Benefited Enterprise”). In
      order to receive the tax benefits, the Amendment states that the company must
      make an investment in the Benefited Enterprise exceeding a certain percentage
      or
      a minimum amount specified in the Investments Law. Such investment may be made
      over a period of no more than three years ending at the end of the year in
      which
      the company requested to have the tax benefits apply to the Benefited Enterprise
      (the ”Year of Election”). Where the company requests to have the tax benefits
      apply to an expansion of existing facilities, then only the expansion will
      be
      considered a Benefited Enterprise and the company’s effective tax rate will be
      the result of a weighted combination of the applicable rates. In this case,
      the
      minimum investment required in order to qualify as a Benefited Enterprise is
      required to exceed a certain percentage or a minimum amount of the company’s
      production assets before the expansion.





The
      duration of tax benefits is subject to a limitation of the earlier of 7 to
      10
      years from the commencement year, or 12 years from the first day of the Year
      of
      Election. The tax benefits granted to a Benefited Enterprise are determined,
      as
      applicable to its geographic location within Israel, according to one of the
      following new tax routes, which may be applicable to us:





·
            Similar
                to the currently available alternative route, exemption from corporate
                tax
                on undistributed income for a period of two to ten years, depending
                on the
                geographic location of the Benefited Enterprise within Israel, and
                a
                reduced corporate tax rate of 10% to 25% for the remainder of the
                benefits
                period, depending on the level of foreign investment in each year.
                Benefits may be granted for a term of seven to ten years, depending
                on the
                level of foreign investment in the company. If the company pays a
                dividend
                out of income derived from the Benefited Enterprise during the tax
                exemption period, such income will be subject to corporate tax at
                the
                applicable rate (10%-25%). The company is required to withhold tax
                at the
                source at a rate of 15% from any dividends distributed from income
                derived
                from the Benefited Enterprise; and





65


·
            A
                special tax route, which enables companies owning facilities in certain
                geographical locations in Israel to pay corporate tax at the rate
                of 11.5%
                on income of the Benefited Enterprise. The benefits period is ten
                years.
                Upon payment of dividends, the company is required to withhold tax
                at
                source at a rate of 15% for Israeli residents and at a rate of 4%
                for
                foreign residents.





Generally,
      a company that is Abundant in Foreign Investment (as defined in the Investments
      Law) is entitled to an extension of the benefits period by an additional five
      years, depending on the rate of its income that is derived in foreign
      currency.





The
      Amendment changes the definition of “foreign investment” in the Investments Law
      so that the definition now requires a minimal investment of NIS 5 million by
      foreign investors. Furthermore, such definition now also includes the purchase
      of shares of a company from another shareholder, provided that the company’s
      outstanding and paid-up share capital exceeds NIS 5 million. Such changes to
      the
      aforementioned definition are retroactive from 2003.





The
      Amendment will apply to approved enterprise programs in which the year of
      election under the Investments Law is 2004 or later, unless such programs
      received approval from the Investment Center on or prior to December 31, 2004,
      in which case the Amendment provides that terms and benefits included in any
      certificate of approval already granted will remain subject to the provisions
      of
      the Investments Law as they were on the date of such approval.





Should
      we
      elect to utilize tax benefits under the Amendment to the law, any such tax
      exempt profits might be subject to future taxation on the corporate level upon
      distribution to shareholders by a way of dividend or liquidation. Accordingly,
      we may be required to recognize deferred tax liability with respect to such
      tax
      exempt profits.





A
      substantial portion of our taxable operating income is derived from our approved
      enterprise program and we expect that a substantial portion of any taxable
      operating income that we may realize in the future will be also derived from
      such program. There is no assurance that our Jerusalem facility and Tel Aviv
      facility will continue to enjoy such status in the future.





*Tax
      Benefits for Research and Development*





Israeli
      tax law allows, under specified conditions, a tax deduction for expenditures,
      including capital expenditures, in the year incurred relating to scientific
      research and development projects, if the expenditures are approved by the
      relevant Israeli Government ministry, determined by the field of research,
      and
      the research and development is for the promotion of the company and is carried
      out by or on behalf of the company seeking such deduction. However, the amount
      of such deductible expenses shall be reduced by the sum of any funds received
      through government grants for the finance of such scientific research and
      development projects. Expenditures not so approved are deductible over a
      three-year period.





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





Under
      the
      Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement
      Law”), Industrial Companies are entitled to the following preferred corporate
      tax benefits, among others:





·
            Deduction
                of purchases of know-how and patents over an eight-year period for
                tax
                purposes;





·
            Right
                to elect, under specified conditions, to file a consolidated tax
                return
                with additional related Israeli Industrial Companies;





66


·
            Accelerated
                depreciation rates on equipment and buildings; and





·
            Deductions
                over a three-year period of expenses involved with the issuance and
                listing of shares on a stock
                market.





Eligibility
      for benefits under the Industry Encouragement Law is not subject to receipt
      of
      prior approval from any governmental authority. Under the Industry Encouragement
      Law, an “Industrial Company” is defined as a company resident in Israel, at
      least 90% of the income of which, in any tax year, determined in Israeli
      currency, exclusive of income from government loans, capital gains, interest
      and
      dividends, is derived from an “Industrial Enterprise” owned by it. An
“Industrial Enterprise” is defined as an enterprise owned by an Industrial
      Company, whose major activity in a given tax year is industrial production
      activity.





We
      believe that we currently qualify as an Industrial Company within the definition
      of the Industry Encouragement Law. No assurance can be given that we 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*





Under
      the
      Income Tax (Inflationary Adjustments) Law,
      of
      1985, or the
      Adjustments Law, results for tax purposes are measured in real terms, in
      accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”).
      Accordingly, until 2002, results for tax purposes were measured in terms of
      earnings in NIS after certain adjustments for increases in the Israeli CPI.
      Commencing in taxable year 2003, the Company has elected to measure its taxable
      income and file its tax return under the Israeli Income Tax Regulations
      (Principles Regarding the Management of Books of Account of Foreign Invested
      Companies and Certain Partnerships and the Determination of Their Taxable
      Income), 1986. Such an election obligates the Company for three years.
      Accordingly, commencing taxable year 2003, results for tax purposes are measured
      in terms of earnings in dollar. We have submitted a request to the Israeli
      tax
      authorities to extend the effect of the above regulations on our company for
      2006.





*Capital
      Gains Tax on Sales of Our Ordinary Shares*





Israeli
      law generally imposes a capital gains tax on the sale of any capital assets
      by
      residents of Israel, as defined for Israeli tax purposes, and on the sale of
      assets located in Israel, including shares in Israeli companies, by
      non-residents of Israel, unless a specific exemption is available or unless
      a
      tax treaty between Israel and the shareholder’s country of residence provides
      otherwise. The law distinguishes between real gain and inflationary surplus.
      The
      inflationary surplus is a portion of the total capital gain which is equivalent
      to the increase of the relevant asset’s purchase price which is attributable to
      the increase in the Israeli consumer price index or, in certain circumstances,
      a
      foreign currency exchange rate, between the date of purchase and the date of
      sale. The real gain is the excess of the total capital gain over the
      inflationary surplus.





Generally,
      the tax rate applicable to capital gains derived from the sale of shares,
      whether listed on a stock market or not, is 20% for Israeli individuals, unless
      such shareholder claims a deduction for financing expenses in connection with
      such shares, in which case the gain will generally be taxed at a rate of 25%.
      Additionally, if such shareholder is considered a “significant shareholder” at
      any time during the 12-month period preceding such sale, i.e., such shareholder
      holds directly or indirectly, including with others, at least 10% of any means
      of control in the company, the tax rate shall be 25%. Israeli companies are
      subject to the Corporate Tax rate on capital gains derived from the sale of
      shares, unless such companies were not subject to the Adjustments Law (or
      certain regulations) as of August 10, 2005, in which case the applicable tax
      rate is 25%. However, the foregoing tax rates do not apply to: (i) dealers
      in
      securities; and (ii) shareholders who acquired their shares prior to an initial
      public offering (that may be subject to a different tax
      arrangement).





The
      tax
      basis of shares acquired prior to January 1, 2003 will be determined in
      accordance with the average closing share price in the three trading days
      preceding January 1, 2003. However, a request may be made to the tax authorities
      to consider the actual adjusted cost of the shares as the tax basis if it is
      higher than such average price.





67


Non-Israeli
      residents are exempt from Israeli capital gains tax on any gains derived from
      the sale of shares of Israeli companies publicly traded on a recognized stock
      exchange or regulated market outside of Israel, provided however that such
      capital gains are not derived from a permanent establishment in Israel, such
      shareholders are not subject to the Adjustments Law, and such shareholders
      did
      not acquire their shares prior to an initial public offering. However,
      non-Israeli corporations will not be entitled to such exemption if an Israeli
      resident (i) has a controlling interest of 25% or more in such non-Israeli
      corporation, or (ii) is the beneficiary or is entitled to 25% or more of the
      revenues or profits of such non-Israeli corporation, whether directly or
      indirectly.





In
      some
      instances where our shareholders may be liable to Israeli tax on the sale of
      their ordinary shares, the payment of the consideration may be subject to the
      withholding of Israeli tax at the source.





Pursuant
      to the Convention Between the government of the United States of America and
      the
      government of Israel with Respect to Taxes on Income, as amended (the
“U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares
      by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies
      as a resident of the United States within the meaning of the U.S.-Israel Tax
      Treaty and (iii) is entitled to claim the benefits afforded to such person
      by
      the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli
      capital gains tax. Such exemption will not apply if (i) such Treaty U.S.
      Resident holds, directly or indirectly, shares representing 10% or more of
      our
      voting power during any part of the 12-month period preceding such sale,
      exchange or disposition, subject to certain conditions, or (ii) the capital
      gains from such sale, exchange or disposition can be allocated to a permanent
      establishment in Israel. In such case, the sale, exchange or disposition of
      ordinary shares would be subject to Israeli tax, to the extent applicable;
      however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would
      be
      permitted to claim a credit for such taxes against the U.S. federal income
      tax
      imposed with respect to such sale, exchange or disposition, subject to the
      limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel
      Tax
      Treaty does not relate to U.S. state or local taxes.





*Taxation
      of Dividends paid to Non-Resident Holders of Shares*





Non-residents
      of Israel are subject to income tax on income accrued or derived from sources
      in
      Israel. Such sources of income include passive income such as dividends. On
      distributions of dividends other than bonus shares, or stock dividends, income
      tax is withheld at the source at the rate of 20%, or 25% for a shareholder
      that
      is considered a “significant shareholder” at any time during the 12-month period
      preceding such distribution, unless a different rate is provided in a treaty
      between Israel and the shareholder’s country of residence. However, under the
      Investments Law, dividends generated by an Approved Enterprise (or Benefited
      Enterprise) are taxed at the rate of 15%.





Under
      the
      U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of
      ordinary shares who is a Treaty U.S. Resident is 25%. However, dividends not
      generated by an Approved Enterprise (or Benefited Enterprise) paid to a U.S.
      corporation holding at least 10% of our issued voting power during
      the part of the tax year which precedes the date of payment of the dividend
      and
      during the whole of its prior tax year ,
      are
      generally taxed at a rate of 12.5%. Dividends generated by an Approved
      Enterprise (or Benefited Enterprise) are taxed at the rate of 15% under the
      U.S.-Israel Tax Treaty.





For
      information with respect to the applicability of Israeli capital gains taxes
      on
      the sale of ordinary shares by United States residents, see above “The 2005
      Amendment to the Investments Law — Capital Gains Tax on Sales of Our Ordinary
      Shares.”





**United
      States Federal Income Tax Considerations**





Subject
      to the limitations described herein, the following discussion summarizes the
      material United States federal income tax consequences to a U.S. Holder of
      our
      ordinary shares. A “U.S. Holder” means a holder of our ordinary shares who
      is:





·
            A
                citizen or resident of the United States for U.S. tax purposes;





·
            A
                corporation or partnership (or other entity taxable as a corporation
                or
                partnership for U.S. federal income tax purposes) created or organized
                in
                the United States or under the laws of the United States or any political
                subdivision thereof;





68


·
            An
                estate, the income of which is subject to United States federal income
                tax
                regardless of its source; or





·
            A
                trust (i) if, in general a court within the United States is able
                to
                exercise primary supervision over its administration and one or more
                U.S.
                persons have the authority to control all of its substantial decisions,
                or
                (ii) that has in effect a valid election under applicable U.S. Treasury
                regulations to be treated as a U.S.
                person.





This
      discussion considers only U.S. Holders that will own their ordinary shares
      as
      capital assets and does not purport to be a comprehensive description of all
      of
      the tax considerations that may be relevant to each person’s decision to
      purchase our ordinary shares. Material aspects of U.S. federal income taxation
      relevant to a holder of our ordinary shares that is not a U.S. Holder (a
“Non-U.S. Holder”) are also discussed below.





This
      discussion is based on current provisions of the Internal Revenue Code of 1986,
      as amended (the “Code”), current and proposed Treasury regulations promulgated
      thereunder, and administrative and judicial decisions as of the date hereof,
      all
      of which are subject to change, possibly on a retroactive basis. This discussion
      does not address all aspects of United States federal income taxation that
      may
      be relevant to any particular U.S. Holder in light of such holder’s individual
      circumstances. In particular, this discussion does not address the potential
      application of the alternative minimum tax or United States federal income
      tax
      consequences to shareholders that are subject to special treatment, including
      holders that:





·
            Are
                broker-dealers or insurance companies;





·
            Have
                elected mark-to-market accounting;





·
            Are
                tax-exempt organizations or retirement plans;





·  Are
      financial institutions or “financial services entities”;





· Hold
      their shares as part of a straddle, “hedge” or “conversion transaction” with
      other investments;





· Acquired
      their shares upon the exercise of employee stock options or otherwise as
      compensation;





· Are,
      or
      hold their shares through, partnerships or other pass-through entities;





· Own
      directly, indirectly or by attribution at least 10% of our voting power;
      or





·  Have
      a
      functional currency that is not the U.S. dollar.





In
      addition, this discussion does not address any aspect of state, local or
      non-United States tax laws or the possible application of United States federal
      gift or estate tax.





**Each
      holder of our ordinary shares is advised to consult such person’s own tax
      advisor with respect to the specific tax consequences to such person of
      purchasing, holding or disposing of our ordinary shares, including the
      applicability and effect of federal, state, local and foreign income tax and
      other tax laws in such person’s particular circumstances.**





*Taxation
      of Ordinary Shares*





*Taxation
      of Dividends Paid On Ordinary Shares.* Subject
      to the discussion below under “Passive Foreign Investment Company Status”, a
      U.S. Holder will be required to include in gross income as dividend income
      the
      amount of any distribution paid on our ordinary shares, including any Israeli
      taxes withheld from the amount paid, on the date the distribution is received
      to
      the extent the distribution is paid out of our current or accumulated earnings
      and profits as determined for United States federal income tax purposes.
      Distributions in excess of such earnings and profits will be applied against
      and
      will reduce the U.S. Holder’s basis in our ordinary shares and, to the extent in
      excess of such basis, will be treated as gain from the sale or exchange of
      our
      ordinary shares. The dividend portion of such distributions generally will
      not
      qualify for the dividends received deduction available to
      corporations.





69


Dividends
      that are received by non-corporate U.S. Holders will be taxed at the rate
      applicable to long-term capital gains (a maximum rate of 15%), provided that
      such dividends meet the requirements of “qualified dividend income.” Dividends
      that fail to meet such requirements, and dividends received by corporate U.S.
      Holders, are taxed at ordinary income rates. No dividend received by a U.S.
      Holder will be a qualified dividend (1) if the U.S. Holder held the
      ordinary share with respect to which the dividend was paid for less than 61
      days
      during the 121-day period beginning on the date that is 60 days before the
      ex-dividend date with respect to such dividend, excluding for this purpose,
      under the rules of Code section 246(c), any period during which the U.S. Holder
      has an option to sell, is under a contractual obligation to sell, has made
      and
      not closed a short sale of, is the grantor of a deep-in-the-money or otherwise
      nonqualified option to buy, or has otherwise diminished its risk of loss by
      holding other positions with respect to, such ordinary share (or substantially
      identical securities); or (2) to the extent that the U.S. Holder is under
      an obligation (pursuant to a short sale or otherwise) to make related payments
      with respect to positions in property substantially similar or related to the
      ordinary share with respect to which the dividend is paid. If we were to be
      a
“passive foreign investment company” (as such term is defined in the Code) for
      any year, dividends paid on our ordinary shares in such year or in the following
      year would not be qualified dividends. The reduced tax rate for qualified
      dividends is scheduled to expire on December 31, 2010, unless further extended
      by Congress. In addition, a non-corporate U.S. Holder will be able to take
      a
      qualified dividend into account in determining its deductible investment
      interest (which is generally limited to its net investment income) only if
      it
      elects to do so; in such case the dividend will be taxed at ordinary income
      rates.





Distributions
      of current or accumulated earnings and profits paid in foreign currency to
      a
      U.S. Holder (including any Israeli taxes withheld therefrom) will be includible
      in the income of a U.S. Holder in a U.S. dollar amount calculated by reference
      to the exchange rate on the day the distribution is received regardless of
      whether the foreign currency is converted into U.S. dollars. A U.S. Holder
      that
      receives a foreign currency distribution and converts the foreign currency
      into
      U.S. dollars after the date of receipt will have foreign exchange gain or loss
      based on any appreciation or depreciation in the value of the foreign currency
      against the U.S. dollar, which will generally be U.S. source ordinary income
      or
      loss.





U.S.
      Holders will have the option of claiming the amount of any Israeli income taxes
      withheld at source either as a deduction from gross income or as a
      dollar-for-dollar credit against their United States federal income tax
      liability. Individuals who do not claim itemized deductions, but instead utilize
      the standard deduction, may not claim a deduction for the amount of the Israeli
      income taxes withheld, but such amount may be claimed as a credit against the
      individual’s United States federal income tax liability. The amount of foreign
      income taxes which may be claimed as a credit in any year is subject to complex
      limitations and restrictions, which must be determined on an individual basis
      by
      each U.S. holder. These limitations include, among others, rules which limit
      foreign tax credits allowable with respect to specific classes of income to
      the
      United States federal income taxes otherwise payable with respect to each such
      class of income. The total amount of allowable foreign tax credits in any year
      cannot exceed regular U.S. tax liability for the year attributable to foreign
      source taxable income. A U.S. Holder will be denied a foreign tax credit with
      respect to Israeli income tax withheld from a dividend received on the ordinary
      shares if such U.S. Holder has not held the ordinary shares for at least 16
      days
      of the 30-day period beginning on the date which is 15 days before the
      ex-dividend date with respect to such dividend, or to the extent such U.S.
      Holder is under an obligation to make related payments with respect to
      substantially similar or related property. Any days during which a U.S. Holder
      has substantially diminished its risk of loss on the ordinary shares are not
      counted toward meeting the required 16 day holding period. Distributions of
      current or accumulated earnings and profits will be foreign source passive
      income for United States foreign tax credit purposes.





*Taxation
      of the Disposition of Ordinary Shares.* Subject
      to the discussion below under “Passive Foreign Investment Company Status,” upon
      the sale, exchange or other disposition of our ordinary shares, a U.S. Holder
      will recognize capital gain or loss in an amount equal to the difference between
      such U.S. Holder’s basis in such ordinary shares, which is usually the cost of
      such shares, and the amount realized on the disposition. A U.S. Holder that
      uses
      the cash method of accounting calculates the U.S. dollar value of the proceeds
      received on the sale as of the date that the sale settles, while a U.S. Holder
      that uses the accrual method of accounting is required to calculate the value
      of
      the proceeds of the sale as of the “trade date,” unless such U.S. Holder has
      elected to use the settlement date to determine its proceeds of sale. Capital
      gain from the sale, exchange or other disposition of our ordinary shares held
      more than one year is long-term capital gain, and is eligible for a reduced
      rate
      of taxation for individuals. Gains recognized by a U.S. Holder on a sale,
      exchange or other disposition of our ordinary shares will be treated as United
      States source income for United States foreign tax credit purposes. A loss
      recognized by a U.S. Holder on the sale, exchange or other disposition of our
      ordinary shares is allocated to U.S. source income. The deductibility of a
      capital loss recognized on the sale, exchange or other disposition of our
      ordinary shares is subject to limitations. A U.S. Holder that receives foreign
      currency upon disposition of our ordinary shares and subsequently converts
      the
      foreign currency into U.S. dollars or disposes of such foreign currency, will
      have foreign exchange gain or loss based on any appreciation or depreciation
      in
      the value of the foreign currency against the U.S. dollar, which will generally
      be U.S. source ordinary income or loss.





70


*Passive
      Foreign Investment Company Status* .
      We will
      be a passive foreign investment company (a “PFIC”) if (taking into account
      certain “look-through” rules with respect to the income and assets of our
      subsidiaries) either 75 percent or more of our gross income in a taxable year
      is
      passive income or the average percentage (by value) of our passive assets during
      the taxable year is at least 50 percent. If we were a PFIC, each U.S. Holder
      would (unless it made one of the elections discussed below on a timely basis)
      be
      taxable on gain recognized from the disposition of our ordinary shares
      (including gain deemed recognized if the ordinary shares are used as security
      for a loan) and upon receipt of certain distributions with respect to our
      ordinary shares as if such income had been recognized ratably over the U.S.
      Holder’s holding period for the ordinary shares. The U.S. Holder’s income for
      the current taxable year would include (as ordinary income) amounts allocated
      to
      the current year and to any period prior to the first day of the first taxable
      year for which we were a PFIC. Tax would also be computed at the highest
      ordinary income tax rate in effect for each other period to which income is
      allocated, and an interest charge on the tax as so computed would also apply.
      Additionally, if we were a PFIC, U.S. Holders who acquire our ordinary shares
      from decedents (other than nonresident aliens) dying before 2010 would be denied
      the normally-available step-up in basis for such shares to fair market value
      at
      the date of death and, instead, would have a tax basis in such shares equal
      to
      the decedent’s basis, if lower. As an alternative to the tax treatment described
      above, a U.S. Holder could elect to treat us as a “qualified electing fund” (a
“QEF”), in which case the U.S. Holder would be taxed currently on its pro rata
      share of our ordinary earnings and net capital gain (subject to a separate
      election to defer payment of taxes, which deferral is subject to an interest
      charge). Special rules apply if a U.S. Holder makes a QEF election after the
      first year in its holding period in which we are a PFIC. We have agreed to
      supply U.S. Holders with the information needed to report income and gain under
      a QEF election if we were a PFIC. As another alternative to the tax treatment
      described above, a U.S. Holder could elect to mark our ordinary shares to market
      annually, recognizing as ordinary income or loss each year an amount equal
      to
      the difference as of the close of the taxable year between the fair market
      value
      of our shares and the shareholder’s adjusted basis in the shares. Losses would
      be allowed only to the extent of net mark-to-market gain previously included
      in
      income by the U.S. Holder.





As
      indicated above, we will be a PFIC for any tax year if the average percentage
      (by value) of our assets held for the production of, or that produce, passive
      income is at least 50 percent.  The Code does not specify how a corporation
      must determine the fair market value of its assets for this purpose and the
      issue has not been definitively determined by the courts.  The market
      capitalization approach has generally been used to determine the fair market
      value of the assets of a publicly traded corporation.  The Internal Revenue
      Service and the courts, however, have accepted other valuation methods in
      certain valuation contexts.  For our 2006 tax year, we have received advice
      from our tax and valuation consultants to the effect that, based on certain
      valuation methodologies, the average percentage in 2006 of our passive assets
      to
      the fair market value of our total assets was less than 50%.  Based on this
      advice, we reasonably believe that we should not be a PFIC for our tax year
      ended December 31, 2006.  However, there can be no assurance that the
      Internal Revenue Service will not challenge this treatment.





It
      is
      possible that the Internal Revenue Service will attempt to treat us as a PFIC
      for 2006 or prior years. The tests for determining PFIC status are applied
      annually and it is difficult to make accurate predictions of future income
      and
      assets, which are relevant to this determination. Accordingly, there can be
      no
      assurance that we will not become a PFIC in 2007 or in subsequent years.





U.S.
      Holders who hold our ordinary shares during a period when we are a PFIC will
      be
      subject to the foregoing rules, even if we cease to be a PFIC, subject to
      certain exceptions for U.S. Holders who made a QEF election or the
      mark-to-market election.





71


Although
      a U.S. Holder normally is not permitted to make a retroactive QEF election
      for a
      foreign corporation, a retroactive election may be made for a taxable year
      of
      the U.S. Holder (the “retroactive election year”) if the U.S. Holder (i)
      reasonably believed that, as of the date the QEF election was due, the foreign
      corporation was not a PFIC for its taxable year that ended during the
      retroactive election year and (ii) filed a protective statement with respect
      to
      the foreign corporation, applicable to the retroactive election year, in which
      the U.S. Holder described the basis for its reasonable belief and extended
      the
      period of limitation on the assessment of taxes determined under Sections 1291
      through 1298 of the Code with respect to the foreign corporation (PFIC related
      taxes) for all taxable years of the shareholder to which the protective
      statement applies.





**U.S.
      Holders are urged to consult their tax advisors about the PFIC rules, including
      eligibility for and the manner and advisability of making, the QEF election
      (or
      a “protective” QEF election) or the mark-to market
      election.**





*Tax
      Consequences for Non-U.S. Holders of Ordinary Shares*





Except
      as
      described in “Information Reporting and Back-up Withholding” below, a Non-U.S.
      Holder of ordinary shares will not be subject to U.S. federal income or
      withholding tax on the payment of dividends on, and the proceeds from the
      disposition of, ordinary shares, unless:





·
            Such
                item is effectively connected with the conduct by the Non-U.S. Holder
                of a
                trade or business in the United States and, in the case of a resident
                of a
                country which has a treaty with the United States, such item is
                attributable to a permanent establishment or, in the case of an
                individual, a fixed place of business, in the United
                States;





·
            The
                Non-U.S. Holder is an individual who holds the ordinary shares as
                a
                capital asset and is present in the United States for 183 days or
                more in
                the taxable year of the disposition and certain other requirements
                are
                met; or





·
            The
                Non-U.S. Holder is subject to tax pursuant to the provisions of United
                States tax law applicable to U.S.
                expatriates.





*Information
      Reporting and Back-up Withholding*





U.S.
      Holders generally are subject to information reporting requirements with respect
      to dividends paid in the United States on ordinary shares and proceeds paid
      from
      the sale, exchange, redemption or other disposition of ordinary shares. Under
      the Code, a U.S. Holder may be subject, under certain circumstances, to backup
      withholding currently at a rate of up to 28% with respect to dividends paid
      on
      our ordinary shares and proceeds paid from the sale, exchange, redemption or
      other disposition of ordinary shares unless the holder provides proof of an
      applicable exemption or correct taxpayer identification number and otherwise
      complies with applicable requirements of the backup withholding
      rules.





A
      holder
      of ordinary shares who does not provide a correct taxpayer identification number
      may be subject to penalties imposed by the IRS. Amounts withheld under the
      backup withholding rules are not an additional tax and may be refunded or
      credited against the holder’s federal income tax liability, provided the
      required information is furnished to the IRS.





Non-U.S.
      Holders generally are not subject to information reporting or back-up
      withholding with respect to dividends paid on, or the proceeds from the
      disposition of, ordinary shares, provided that such Non-U.S. Holder provides
      a
      taxpayer identification number, certifies to its foreign status, or otherwise
      establishes an exemption.





**F.**
            **Dividends
                and Paying Agents**





Not
      applicable.





**G.**
            **Statementby
                Experts**





Not
      applicable.





72


**H.**
            **Documentson
                Display**





We
      are
      subject to the informational requirements of the Securities Exchange Act of
      1934, as amended, applicable to foreign private issuers and fulfill the
      obligations with respect to such requirements by filing reports with the
      Securities and Exchange Commission. You may read and copy any document we file
      with the Securities and Exchange Commission without charge at the Securities
      and
      Exchange Commission’s public reference room at 100
      F
      Street, N.E., Washington,
      D.C. 20549. Copies of such material may be obtained by mail from the Public
      Reference Branch of the Securities and Exchange Commission at such address,
      at
      prescribed rates. Please call the Securities and Exchange Commission at
      1-800-SEC-0330 for further information on the public reference room. Such
      materials are also available free of charge at the website of the Securities
      and
      Exchange Commission at www.sec.gov.





As
      a
      foreign private issuer, we are exempt from the rules under the Exchange Act
      prescribing the furnishing and content of proxy statements, and our officers,
      directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
      Act. In addition, we are not required under the Exchange Act to file periodic
      reports and financial statements with the Securities and Exchange Commission
      as
      frequently or as promptly as U.S. companies whose securities are registered
      under the Exchange Act.





In
      accordance with Rule 4350(a)(1) of the Rules of Corporate Governance of The
      Nasdaq Stock Market, Inc., we have received an exemption from the requirement
      to
      distribute an annual report to our shareholders prior to our annual meeting
      of
      shareholders. The basis for the exemption is that the generally accepted
      business practice in Israel, where we are incorporated, is not to distribute
      an
      annual report to shareholders. We post our Annual Report on Form 20-F on our
      web
      site (www.radware.com) as soon as practicable following the filing of the Annual
      Report on Form 20-F with the Securities and Exchange Commission.





**I.**
            **SubsidiaryInformation**





Not
      applicable.




**ITEM
                11.**
            **Quantitative
                and Qualitative Disclosures about Market
                Risk**





We
      are
      exposed to market risk, including movements in interest rates and foreign
      currency exchange rates. Our primary market risk exposure occurs because we
      generate most of our revenues in U.S. dollars and incur a portion of our
      expenses in NIS and in Euro. In 2004 we began selling to some European countries
      in Euro.





We
      do not
      presently engage in any hedging or other transactions intended to manage risks
      relating to foreign currency exchange rate or interest rate fluctuations. As
      of
      December 31, 2006, we did not own any market risk sensitive instruments, except
      for the following: Approximately 6% of our investment portfolio is invested
      in a
      structured note with guaranteed principal and changing interest. An increase
      in
      short-term interest rates will negatively affect the income received from this
      note. We may in the future undertake hedging or other similar transactions
      or
      invest in market risk sensitive instruments if our management determines that
      it
      is necessary to offset these risks.





Approximately
      70% of our investment portfolio is invested in high-rated marketable securities,
      mainly U.S. government and agency bonds and corporate bonds. Since these
      investments carry fixed interest rates, interest income over the holding period
      is not sensitive to changes in interest rates.




**ITEM
                12.**
            **Description
                of Securities other than Equity
                Securities**





Not
      applicable.


73


**PART** **II**





**ITEM
                13.**
            **Defaults,
                Dividend Averages and
                Delinquencies**





Not
      applicable.





**ITEM
                14.**
            **Material
                Modifications to the Rights of Security Holders and Use
                of********Proceeds**





The
      effective date of the registration statement (Commission File Number 333-10752)
      for our initial public offering of our ordinary shares, NIS 0.1 par value,
      was
      September 29, 1999. The offering commenced on October 5, 1999, and terminated
      after the sale of all the securities registered. The managing underwriter of
      the
      offering was Salomon Smith Barney. We registered 4,025,000 ordinary shares
      in
      the offering, including shares issued pursuant to the exercise of the
      underwriters' over-allotment option. Of such shares, we sold 3,500,000 ordinary
      shares at an aggregate offering price of $63.0 million ($18.00 per share) and
      certain selling shareholders sold an aggregate of 525,000 ordinary shares at
      an
      aggregate offering price of $9.45 million ($18.00 per share). Under the terms
      of
      the offering, we incurred underwriting discounts of $4.41 million. We also
      incurred estimated expenses of $1.82 million in connection with the offering.
      None of the expenses consisted of amounts paid directly or indirectly to any
      of
      our directors, officers, general partners or their associates, any persons
      owing
      ten percent or more of any class of our equity securities, or any of our
      affiliates. The net proceeds that we received as a result of the offering were
      approximately $56.8 million. None of the use of proceeds consisted of amounts
      paid directly or indirectly to any of our directors, officers, general partners
      or their associates, any persons owning ten percent or more of any class of
      our
      equity securities, or any of our affiliates.





In
      January 2000, we raised net proceeds of approximately $60.0 million in a public
      offering of our ordinary shares.





The
      net
      proceeds of the two offerings are kept in short-term and long-term bank deposits
      and in marketable securities.




**ITEM
                15.**
            **Controls
                and Procedures******





**a.**
            **Disclosure
                Controls and Procedures**





The
      Company’s management, with the participation of its chief executive officer and
      chief financial officer, evaluated the effectiveness of the Company’s disclosure
      controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) under the Exchange Act), as of December 31, 2006. Based on this
      evaluation, the Company’s chief executive officer and chief financial officer
      concluded that, as of December 31, 2006, the Company’s disclosure controls and
      procedures were: (1) designed to ensure that material information relating
      to the Company, including its consolidated subsidiaries, is made known to the
      Company’s management, including the Company’s chief executive officer and chief
      financial officer, by others within those entities, as appropriate to allow
      timely decisions regarding required disclosure, particularly during the period
      in which this report was being prepared; and (2) effective, in that they
      provide reasonable assurance that information required to be disclosed by the
      Company in the reports that it files or submits 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.





74


**b.**
            **Management’s
                Annual Report on Internal Control Over Financial
                Reporting**





The
      Company’s management, under the supervision of our chief executive officer and
      our chief financial officer, is responsible for establishing and maintaining
      adequate internal controls over financial reporting for the Company. Based
      on
      the criteria for effective internal control over financial reporting established
      in *Internal
      Control—Integrated Framework* ,
      which
      was issued by the Committee of Sponsoring Organizations of the Treadway
      Commission, management has assessed the Company’s internal control over
      financial reporting as effective as of December 31, 2006.




**c.**
            **Attestation
                Report of the Registered Public Accounting
                Firm**




This
      annual report does not include an attestation report of the Company’s registered
      public accounting assessing our internal control over financial reporting.
      The
      Company’s management’s report was not subject to attestation by our registered
      public accounting firm pursuant to temporary rules of the SEC that permit us
      to
      provide only the management’s report in this annual report.





**d.**
            **Changes
                In Internal Control Over Financial
                Reporting**





No
      changes in the Company’s internal control over financial reporting (as defined
      in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
      during the year ended December 31, 2006, that has materially affected, or
      is reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




**ITEM
                16.**
            **[Reserved****]******





**ITEM
              16A.**
            **AUDIT
                COMMITTEE FINANCIAL EXPERT**





Our
      Board
      of Directors has determined that Mr. Zohar Gilon, and Dr. Orna Berry, members
      of
      our Audit Committee, are Audit Committee financial expert as defined in the
      applicable regulations, and has determined that such members are “independent”
as such term is defined in the Nasdaq listing standards. The education and
      experience of both Audit Committee financial experts is presented in “Item 6 -
      Directors, Senior Management and Employees - Directors and Senior Management”
and is incorporated herein by reference.





**ITEM
              16B.**
            **CODE
                OF ETHICS**





On
      February 2, 2004 our Board of Directors adopted our Code of Ethics, a code
      that
      applies to all directors, officers and employees of the Company, including
      our
      Chief Executive Officer and President, Chief Financial Officer, Director of
      Finance and Corporate Controller. On January 30, 2005, our Board of Directors
      modified the Code of Conduct and Ethics. Our Code of Conduct and Ethics (as
      amended) has been posted on our Internet website,
      http://www.radware.com/content/company/investorrelations.


75


**ITEM
              16C.**
            **PRINCIPAL
                ACCOUNTANT FEES AND SERVICES**





In
      the
      annual meeting held on December 11, 2005 our shareholders re-appointed Kost,
      Forer, Gabbay & Kasierer, a member of Ernst & Young Global (“Ernst &
Young”), to serve as our independent auditors until
      the
      next annual meeting .





Ernst
      & Young billed the following fees to us for professional services in each of
      the last two fiscal years:


Year
                Ended December 31,2006
            
            2005(US$
                in thousands)Audit
                Fees
            
            
            108
            
            
            108Audit-Related
                Fees
            
            
            20
            
            
            23Tax
                Fees
            
            
            7
            
            
            23All
                Other Fees
            
            
            -
            
            
            -**Total**
            
            
            **135**
            
            
            **154**





“Audit
      Fees” are the aggregate fees billed for the audit of our annual financial
      statements, statutory audits and services that are normally provided in
      connection with statutory and regulatory filings or engagements.





“Audit-Related
      Fees” are the aggregate fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of our financial
      statements and are not reported under Audit Fees.





“Tax
      Fees” are the aggregate fees billed for professional services rendered for tax
      compliance, tax advice on actual or contemplated transactions and tax planning
      such as assistance with tax audits and tax advice.





“All
      Other Fees” are the aggregate fees billed for products and services provided by
      Ernst & Young other than as described above.





*Audit
      Committee's pre-approval policies and procedures*





Our
      Audit
      Committee oversees our independent auditors. See also the description in “Item
      6- Directors, Senior Management and Employee - Board Practices.” In 2003 our
      Audit Committee also adopted a policy requiring management to obtain the
      Committee's approval before engaging our independent auditors to provide any
      other audit or permitted non-audit services to us or our subsidiaries. Pursuant
      to this policy, which is designed to assure that such engagements do not impair
      the independence of our auditors, and which is discussed and approved at the
      end
      of each calendar year, the Audit Committee pre-approves annually a catalog
      of
      specific audit and non-audit services in the categories Audit Service,
      Audit-Related Service and Tax Consulting Services that may be performed by
      our
      auditors. In addition, the Audit Committee limited the aggregate amount in
      fees
      our auditors may receive during the 2006 fiscal year for non-audit services
      in
      certain categories, unless pre- approved. Our
      Director of Legal Affairs and Director of Finance review all individual
      management requests to engage our independent auditors as a service provider
      in
      accordance with this catalog and, if the requested services are permitted
      pursuant to the catalog, approve the request accordingly. We inform the Audit
      Committee about these approvals on a quarterly basis. Services that are not
      included in the catalog require pre-approval by the Audit Committee on a
      case-by-case basis. Our Audit Committee is not permitted to approve any
      engagement of our auditors if the services to be performed either fall into
      a
      category of services that are not permitted by applicable law or the services
      would be inconsistent with maintaining the auditors' independence.




76




**ITEM
              16D.**
            **EXEMPTIONS
                FROM THE LISTING STANDARDS FOR AUDIT
                COMMITTEES**





None.





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





During
      2006 we repurchased our ordinary shares under a share repurchase plan, in an
      aggregate amount of $11.1 million, as follows:





Period
            (a)
                Total Number of Shares (or Units) Purchased
            (b)
                Average Price Paid per Share (or Units) (in US$)
            (c)
                Total Number of Shares (or Units) Purchased as Part of Publicly Announced
                Plans or Programs
            (d)
                Maximum Number (or Approximate Dollar Value) of Shares (or Units)
                that May
                Yet Be Purchased Under the Plans or ProgramsMay
                22-31
            121,900
            14.16
            121,900
            $23,274,249June
                1-16
            237,112
            13.44
            237,112
            $20,088,266July
                26-31
            106,821
            11.71
            106,821
            $18,837,199August
                1-31
            324,445
            12.72
            324,445
            $14,711,865September
                5-15
            56,577
            13.80
            56,577
            $13,931,269




77


**PART** **III**





**ITEM
                17.**
            **Financial
                Statements**





We
      have
      responded to Item 18 in lieu of this item.




**ITEM
              18.**
            **Financial
                Statements**





The
      Financial Statements required by this item are found at the end of this Annual
      Report, beginning on page F-1.




78




**ITEM
              19.**
            **Exhibits******





The
      exhibits filed with or incorporated into this annual report are listed on the
      index of exhibits below.




Exhibit
                No.
            Exhibit1.1
            Memorandum
                of Association(A)1.2
            Articles
                of Association(B)1.3
            Amendment
                to the Articles of Association (C)4.1
            Lease
                Agreement for the Company’s Headquarters (B)4.2
            Lease
                Agreement for the Company’s Mahwah office (D)4.3
            Distributor
                Agreement with Bynet Data Communications Ltd. (D)4.4
            Form
                of Directors and Officers Indemnity Deed (D)4.5
            Asset
                Purchase Agreement with V-Secure Technologies (U.S.) Inc.
                (E)4.6
            Agreement
                and Plan of Merger by and Between the Company, its subsidiary, Covelight
                and its stockholders and note-holders8.1
            List
                of Subsidiaries10.1
            Consent
                of Independent Auditors12.1
            Certification
                of the Chief Executive Officer pursuant to Section § 302 of the
                Sarbanes-Oxley Act of 200212.2
            Certification
                of the Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200213.1
            Certification
                of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.13.2
            Certification
                of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.




(A)
      Incorporated by reference to the Company’s Registration
      Statement on Form F-1 (File No. 333-10752) ,
      filed
      with the SEC on September 1, 1999.


(B)
      Incorporated by reference to the Company’s Annual Report on Form 20-F for the
      year ended December 31, 2000, filed with the SEC on May 18, 2001.


(C)
      Incorporated by reference to the Company’s Annual Report on Form 20-F for the
      year ended December 31, 2005, filed with the SEC on April 5, 2002.


(D)
      Incorporated by reference to the Annual Report on Form 20-F for the year ended
      December 31, 2001, filed with the SEC on April 5, 2002.


(E)
      Incorporated by reference to the Annual Report on Form 20-F/A for the year
      ended
      December 31, 2005, filed with the SEC on July 6, 2006.





79





SIGNATURE





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.





RADWARE
                LTD.By:
            /s/  Roy
              ZisapelRoy
              ZisapelChief
                Executive Officer




Date:
      June 5, 2007




80











**RADWARE
      LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**AS
      OF DECEMBER 31, 2006**





**U.S.
      DOLLARS IN THOUSANDS**








**INDEX**





**Page****Report
                of Independent Registered Public Accounting Firm**
            **F2****Consolidated
                Balance Sheets**
            **F3
                - F4****Consolidated
                Statements of Operations**
            **F5****Statements
                of Changes in Shareholders' Equity**
            **F6****Consolidated
                Statements of Cash Flows**
            **F7****Notes
                to Consolidated Financial Statements**
            **F8
                - F33**





















**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To
      the Shareholders of**





**RADWARE
      LTD.**





We
      have
      audited the accompanying consolidated balance sheets of Radware Ltd. ("the
      Company") and its subsidiaries as of December 31, 2005 and 2006, and the related
      consolidated statements of operations, statements of changes in shareholders'
      equity and the consolidated statements of cash flows for each of the three
      years
      in the period ended December 31, 2006. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these 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 financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of the Company and its
      subsidiaries at December 31, 2005 and 2006, and the consolidated results of
      their operations and their cash flows for each of the three years in the period
      ended December 31, 2006, in conformity with U.S. generally accepted accounting
      principles.





As
      discussed in Note 2n to the consolidated financial statements, in 2006, the
      Company adopted Statement of Financial Accounting Standard Board No. 123
      (revised 2004) "Share-Based Payments".








Tel-Aviv,
                Israel
            KOST
                FORER GABBAY & KASIERERJanuary
                28, 2007
            A
                Member of Ernst & Young Global





-
          F-2 -


**RADWARE
        LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**U.S.
      dollars in thousands**





**December
                31,****2005**
            
            **2006**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            56,263
            
            $
            25,324Bank
                deposit
            
            
            10,195
            
            
            -Available-for-sale
                marketable securities
            
            
            14,717
            
            
            92,133Held-to-maturity
                marketable securities
            
            
            45,726
            
            
            22,918Trade
                receivables (net of allowance for doubtful accounts of $ 1,006
                and
              $ 1,106
                in 2005 and 2006, respectively) *)
            
            
            14,661
            
            
            17,453Other
                receivables and prepaid expenses
            
            
            1,451
            
            
            1,996Inventories
            
            
            5,254
            
            
            6,892Totalcurrent assets
            
            
            148,267
            
            
            166,716LONG-TERM
                INVESTMENTS:Structured
                note
            
            
            9,458
            
            
            9,602Available-for-sale
                marketable securities
            
            
            11,399
            
            
            14,154Held-to-maturity
                marketable securities
            
            
            16,735
            
            
            -Severance
                pay fund
            
            
            2,178
            
            
            2,907Totallong-term investments
            
            
            39,770
            
            
            26,663PROPERTY
                AND EQUIPMENT, NET
            
            
            5,968
            
            
            9,253LONG-TERM
                DEFERRED TAXES AND OTHER LONG-TERM ASSETS
            
            
            1,075
            
            
            1,219INTANGIBLE
                ASSETS, NET
            
            
            2,813
            
            
            2,363GOODWILL
            
            
            6,454
            
            
            9,454Totalassets
            
            $
            204,347
            
            $
            215,668





*)
            Includes
                balances in the amount of $ 1,447 and $ 1,452 with related parties as
                of December 31, 2005 and 2006, respectively (see also Note
                13a).





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




-
          F-3 -


**RADWARE
        LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**





**U.S.
      dollars in thousands, except share and per share data**





**December
                31,****2005**
            
            **2006**LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                payables *)
            
            $
            5,329
            
            $
            6,956Deferred
                revenues
            
            
            12,424
            
            
            15,712Other
                payables and accrued expenses
            
            
            6,509
            
            
            6,642Totalcurrent liabilities
            
            
            24,262
            
            
            29,310ACCRUED
                SEVERANCE PAY
            
            
            2,659
            
            
            3,944COMMITMENTS
                AND CONTINGENT LIABILITIESSHAREHOLDERS'
                EQUITY:Share
                capital:Ordinary
                shares of NIS 0.1 par value:
              Authorized
                - 30,000,000 as of December 31, 2005 and 2006; Issued - 19,061,760
                shares
                and 20,258,758 shares as of December 31, 2005 and 2006, respectively;
                outstanding 19,061,760 shares and 19,411,903 shares as of December
                31,
                2005 and 2006, respectively
            
            
            470
            
            
            478Additional
                paid-in capital
            
            
            153,010
            
            
            170,090Deferred
                stock based compensation
            
            
            (67
            )
            
            -Treasury
                stock, at cost
            
            
            -
            
            
            (11,049
            )Accumulated
                other comprehensive loss
            
            
            (404
            )
            
            (242
            )Retained
                earnings
            
            
            24,417
            
            
            23,137Totalshareholders' equity
            
            
            177,426
            
            
            182,414Totalliabilities and shareholders' equity
            
            $
            204,347
            
            $
            215,668





*)
            See
                Note 13a for balances with related
                parties.





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





-
          F-4 -


**RADWARE
        LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF** **OPERATIONS**





**U.S.
      dollars in thousands, except share per share data**





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Revenues:
                *)Products
            
            $
            52,206
            
            $
            55,902
            
            $
            57,335Services
            
            
            16,233
            
            
            21,682
            
            
            24,075Totalrevenues
            
            
            68,439
            
            
            77,584
            
            
            81,410Cost
                of revenues: *)Products
            
            
            8,080
            
            
            9,325
            
            
            10,267Services
            
            
            4,104
            
            
            5,571
            
            
            5,524Totalcost of revenues
            
            
            12,184
            
            
            14,896
            
            
            15,791Gross
                profit
            
            
            56,255
            
            
            62,688
            
            
            65,619Operating
                expenses: *)Research
                and development, net
            
            
            10,342
            
            
            13,017
            
            
            17,659Sales
                and marketing
            
            
            31,898
            
            
            40,002
            
            
            50,128General
                and administrative
            
            
            4,493
            
            
            5,244
            
            
            6,178Totaloperating expenses
            
            
            46,733
            
            
            58,263
            
            
            73,965Operating
                income (loss)
            
            
            9,522
            
            
            4,425
            
            
            (8,346
            )Financial
                income, net
            
            
            4,565
            
            
            5,159
            
            
            7,422Income
                (loss) before income taxes
            
            
            14,087
            
            
            9,584
            
            
            (924
            )Income
                taxes
            
            
            (341
            )
            
            (240
            )
            
            (356
            )Net
                income (loss) before minority interest in losses of a
                subsidiary
            
            
            13,746
            
            
            9,344
            
            
            (1,280
            )Minority
                interest in losses of a subsidiary
            
            
            34
            
            
            -
            
            
            -Net
                income (loss)
            
            $
            13,780
            
            $
            9,344
            
            $
            (1,280
            )Basic
                net earnings (loss) per share
            
            $
            0.77
            
            $
            0.50
            
            $
            (0.07
            )Diluted
                net earnings (loss) per share
            
            $
            0.70
            
            $
            0.47
            
            $
            (0.07
            )





*)
            See
                Note 13b for transactions with related
                parties.





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





-
          F-5 -


**RADWARE
        LTD. AND ITS SUBSIDIARIES**





**STATEMENTS
      OF CHANGES IN SHAREHOLDERS' EQUITY**





**U.S.
      dollars in thousands, except share data**





**Number
                of**
              **outstanding
                Ordinary**
              **shares**
            
            **Share**
              **capital**
            
            **Additional
                paid-in**
              **capital**
            
            **Deferred**
              **stock
                based compensation**
            
            **Treasury**
              **shares,
                at cost**
            
            **Accumulated**
              **other
                comprehensive**
              **loss**
            
            **Retained
                earnings**
            
            **Total**
              **comprehensive
                income (loss)**
            
            **Total**Balance
                as of January 1, 2004
            
            
            17,704,183
            
            $
            439
            
            $
            138,552
            
            $
            -
            
            $
            -
            
            $
            (38
            )
            $
            1,293
            
            
            
            
            $
            140,246Issuance
                of shares upon exercise of stock options and upon purchase of shares
                under
                ESPP
            
            
            784,347
            
            
            18
            
            
            6,887
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            6,905Comprehensive
                income:Unrealized
                losses from available-for-sale securities, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (14
            )
            
            -
            
            $
            (14
            )
            
            (14
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            13,780
            
            
            13,780
            
            
            13,780Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            13,766Balance
                as of December 31, 2004
            
            
            18,488,530
            
            
            457
            
            
            145,439
            
            
            -
            
            
            -
            
            
            (52
            )
            
            15,073
            
            
            
            
            
            160,917Issuance
                of shares upon exercise of stock options and upon purchase of shares
                under
                ESPP
            
            
            573,230
            
            
            13
            
            
            7,298
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            7,311Deferred
                stock based compensation
            
            
            -
            
            
            -
            
            
            125
            
            
            (125
            )
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -Amortization
                of deferred stock based compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            58
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            58Warrants
                issued in respect of business combination
            
            
            -
            
            
            -
            
            
            148
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            148Comprehensive
                income:Unrealized
                losses from available-for-sale securities, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (352
            )
            
            -
            
            $
            (352
            )
            
            (352
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            9,344
            
            
            9,344
            
            
            9,344Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            8,992Balance
                as of December 31, 2005
            
            
            19,061,760
            
            
            470
            
            
            153,010
            
            
            (67
            )
            
            -
            
            
            (404
            )
            
            24,417
            
            
            
            
            
            177,426Repurchase
                of shares
            
            
            (846,855
            )
            
            (20
            )
            
            -
            
            
            -
            
            
            (11,049
            )
            
            -
            
            
            -
            
            
            
            
            
            (11,069
            )Issuance
                of shares upon exercise of stock options
            
            
            1,196,998
            
            
            28
            
            
            12,607
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            12,635Stock
                based compensation
            
            
            -
            
            
            -
            
            
            4,540
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            4,540Reclassification
                of deferred stock compensation into additional paid-in capital upon
                adoption of SFAS 123(R)
            
            
            -
            
            
            -
            
            
            (67
            )
            
            67
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -Comprehensive
                income:Unrealized
                income from available-for-sale securities, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            162
            
            
            -
            
            $
            162
            
            
            162Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,280
            )
            
            (1,280
            )
            
            (1,280
            )Total
                comprehensive income (loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (1,118
            )Balance
                as of December 31, 2006
            
            
            19,411,903
            
            $
            478
            
            $
            170,090
            
            $
            -
            
            $
            (11,049
            )
            $
            (242
            )
            $
            23,137
            
            
            
            
            $
            182,414





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





-
          F-6 -


**RADWARE
        LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**U.S.
      dollars in thousands**





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            13,780
            
            $
            9,344
            
            $
            (1,280
            )Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization (including amortization of deferred compensation
                costs
                relating to employees of V-Secure)
            
            
            1,429
            
            
            1,921
            
            
            2,976Stock
                based compensation
            
            
            -
            
            
            58
            
            
            4,540Minority
                interest in losses of a subsidiary
            
            
            (34
            )
            
            -
            
            
            -Amortization
                of premiums, accretion of discounts and accrued interest on
                available-for-sale and held-to-maturity marketable debt securities,
                net
            
            
            318
            
            
            (475
            )
            
            458Accrued
                interest on bank deposits and structured note
            
            
            791
            
            
            1,468
            
            
            51Accrued
                severance pay, net
            
            
            288
            
            
            3
            
            
            556Decrease
                (increase) in long-term deferred taxes
            
            
            (350
            )
            
            20
            
            
            (241
            )Increase
                in trade receivables, net
            
            
            (3,476
            )
            
            (1,495
            )
            
            (2,792
            )Increase
                in other receivables and prepaid expenses
            
            
            (243
            )
            
            (119
            )
            
            (545
            )Increase
                in inventories
            
            
            (1,096
            )
            
            (1,160
            )
            
            (1,520
            )Increase
                in trade payables
            
            
            790
            
            
            245
            
            
            1,627Increase
                in deferred revenues
            
            
            2,830
            
            
            2,536
            
            
            3,288Increase
                in other payables and accrued expenses
            
            
            123
            
            
            1,547
            
            
            133Other
            
            
            1
            
            
            (43
            )
            
            -Net
                cash provided by operating activities
            
            
            15,151
            
            
            13,850
            
            
            7,251Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (2,369
            )
            
            (3,626
            )
            
            (5,843
            )Proceeds
                from sale of property and equipment
            
            
            16
            
            
            297
            
            
            -Investment
                in other long-term assets
            
            
            (225
            )
            
            (24
            )
            
            11Purchase
                of available-for-sale marketable debt securities
            
            
            (21,281
            )
            
            (86
            )
            
            (109,336
            )Purchase
                of held-to-maturity marketable debt securities
            
            
            (31,320
            )
            
            (31,962
            )
            
            (6,000
            )Proceeds
                from sale and redemption of available-for-sale marketable debt
                securities
            
            
            13,369
            
            
            16,265
            
            
            29,327Proceeds
                from redemption of held-to-maturity marketable debt
                securities
            
            
            -
            
            
            1,462
            
            
            45,085Investment
                in long-term bank deposits
            
            
            (2,890
            )
            
            -
            
            
            -Proceeds
                from maturity of long-term bank deposit
            
            
            -
            
            
            62,995
            
            
            -Investment
                in bank deposit
            
            
            -
            
            
            (10,000
            )
            
            -Proceeds
                from bank deposits
            
            
            -
            
            
            -
            
            
            10,000Increase
                in holdings in a subsidiary
            
            
            (335
            )
            
            -
            
            
            -Payment
                for the acquisition of V-Secure (1)
            
            
            -
            
            
            (9,011
            )
            
            (3,000
            )Net
                cash provided by (used in) investing activities
            
            
            (45,035
            )
            
            26,310
            
            
            (39,756
            )Cash
                flows from financing activities:Proceeds
                from exercise of stock options
            
            
            6,905
            
            
            7,311
            
            
            12,635Repurchase
                of shares
            
            
            -
            
            
            -
            
            
            (11,069
            )Net
                cash provided by financing activities
            
            
            6,905
            
            
            7,311
            
            
            1,566Increase
                (decrease) in cash and cash equivalents
            
            
            (22,979
            )
            
            47,471
            
            
            (30,939
            )Cash
                and cash equivalents at the beginning of the year
            
            
            31,771
            
            
            8,792
            
            
            56,263Cash
                and cash equivalents at the end of the year
            
            $
            8,792
            
            $
            56,263
            
            $
            25,324(1)Payment
                for the acquisition of V-Secure:Estimated
                fair value of assets acquired at the date of acquisition:Acquired
                technology
            
            $
            -
            
            $
            1,772
            
            $
            -Customers
                relationships
            
            
            -
            
            
            542
            
            
            -Deferred
                compensation cost
            
            
            -
            
            
            400
            
            
            -Goodwill
            
            
            -
            
            
            6,297
            
            
            3,000$
            -
            
            $
            9,011
            
            $
            3,000Supplemental
                disclosure of cash flow activities:Cash
                paid during the year for:Taxes
            
            $
            1,494
            
            $
            -
            
            $
            -





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





-
          F-7 -


**RADWARE
        LTD. AND ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
        dollars in thousands, except share and per share
        data**




**NOTE
                1:-**
            **GENERAL**





a.
            Radware
                Ltd. ("the Company"), an Israeli corporation, and its subsidiaries
                ("the
                Group"), commenced operations in April 1997. The Company is engaged
                in the
                development, manufacture and sale of Application Delivery and Network
                Security ("business smart networking") solutions that provide end-to-end
                availability, performance and security of mission critical networked
                applications. The Company's products are marketed
                worldwide.





b.
            The
                Company established wholly-owned subsidiaries in the United States,
                France, Germany, Singapore, the United Kingdom, Japan, Korea, Canada,
                Switzerland and Italy. In addition, the Company established branches
                and
                representative offices in China, India, Russia and Taiwan. In Australia,
                the Company held approximately 83% of its Australian subsidiary as
                of
                January 1, 2004; the additional 17% was purchased by the Company
                during
                2004 for a total amount of $ 335. The Company's subsidiaries are
                engaged primarily in sales, marketing and support
                activities.





c.
            The
                Company depends on a single supplier to supply certain components
                for the
                production of its products. If this supplier fails to deliver or
                delays
                the delivery of the necessary components, the Company will be required
                to
                seek alternative sources of supply. A change in suppliers could result
                in
                manufacturing delays, which could cause a possible loss of sales
                and,
                consequently, could adversely affect the Company's results of operations
                and financial position.





d.
            The
                Company relies upon independent distributors (which are considered
                to be
                end-users) to market and sell its products to customers. A loss of
                a major
                distributor, or any event negatively affecting such distributor's
                financial condition, could cause a material adverse effect on the
                Company's results of operations and financial
                position.


As
                of December 31, 2004, 2005 and 2006 one single customer (a distributor)
                represented 11%, 16% and 12%, respectively, of the Company's total
                revenues.





e.
            Business
                combination - acquisition of V-Secure Technologies (US) Inc.
                ("V-Secure"):





In
                December 2005, the Company acquired the business of V-Secure which
                included the acquisition of its technology, customer relationships
                and
                goodwill. The total consideration for the acquisition was $ 9,168,
                out of
                which an amount of $ 9,011 was paid in cash; amount valuated as $ 148
                was paid by issuance of fully vested warrants to V-Secure to purchase
                45,454 Ordinary shares of the Company, at an exercise price of $
                22 per
                share. The remaining balance was related to acquisition
                costs.





According
                to the agreement between the parties, additional cash consideration
                of $
                6,000 (earn-out) was payable contingent upon meeting a certain
                technological milestone in regards to the integrated product of the
                Company and V-Secure. During 2006, a partial amount of $ 3,000 out of
                total consideration of $ 6,000 was paid according to an amended agreement
                between the Company and V-Secure's shareholders. According to the
                agreement V-Secure's shareholders waived any claim or demand for
                additional payment.


The
                amount paid resulted in recording additional goodwill.




-
          F-8 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**





**NOTE
                1:-**
            **GENERAL
                (Cont.)**





The
      purchase price was allocated to the identifiable intangible assets acquired
      (which have been valuated by management using a third party valuation
      specialist) based upon their estimated fair values as follows:





Acquired
                technology
            
            $
            1,772Customers
                relationships
            
            
            542Goodwill
                (including additional $ 3,000 paid and recorded during
                2006)
            
            
            9,454Total
                intangible assets
            
            
            11,768Deferred
                compensation cost
            
            
            400Total
                consideration
            
            $
            12,168





The
      deferred compensation cost was carved-out of the goodwill and represents
      incentive to former employees of V-Secure that will remain with the Company
      for
      periods of no less than 12 to 24 months. Such deferred compensation cost is
      amortized over the employment period, and is recorded as compensation costs.
      Any
      amount not used for bonuses is returned to V-Secure, and will increase the
      goodwill. During 2006, an amount of $84 was recorded as compensation costs,
      included in research and development expenses.





The
      acquisition of V-Secure was accounted for under the purchase method of
      accounting.





In
      accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
      and Other Intangible Assets" ("SFAS No. 142"), goodwill arising from the
      acquisition will not be amortized. In lieu of amortization, the Company is
      required to perform an annual impairment review. If the Company determines,
      through the impairment review process, that goodwill has been impaired, it
      will
      record the impairment charge in its statement of income. During the year ended
      December 31, 2006, no such impairment loss was recorded.





Unaudited
      pro-forma results:





The
      following represents the unaudited pro-forma results of operations of V-Secure
      and the Company's consolidated statements of income for the years ended December
      31, 2004 and 2005, assuming that V-Secure's acquisition occurred on January
      1,
      of each year:





**Year
                ended December 31,****2004**
            
            **2005****Unaudited****Total
                consolidated**Revenues
            
            $
            69,069
            
            $
            78,145Net
                income
            
            $
            9,747
            
            $
            5,033Diluted
                net earning per share
            
            $
            0.49
            
            $
            0.25





-
          F-9 -
 
 **RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**


**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES**





The
      consolidated financial statements have been prepared in accordance with
      generally accepted accounting principles in the United States ("U.S.
      GAAP").





a.
            Use
                of estimates:





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Actual results could differ from those estimates.





b.
            Financial
                statements in U.S. dollars:





A
      majority of the revenues of the Company and its subsidiaries are generated
      in
      U.S. dollars ("dollar" or "dollars"). In addition, a substantial portion of
      the
      Company's and certain of its subsidiaries' costs is incurred in dollars. The
      Company's management believes that the dollar is the primary currency of the
      economic environment in which the Company and its subsidiaries operate. Thus,
      the functional and reporting currency of the Company and its subsidiaries is
      the
      dollar.





Accordingly,
      monetary accounts maintained in currencies other than the dollar are remeasured
      into U.S. dollars in accordance with Statement of the Financial Accounting
      Standard Board No. 52 "Foreign Currency Translation" ("SFAS No. 52"). All
      transactions gains and losses from the remeasurement of monetary balance sheet
      items are reflected in the consolidated statements of operations as financial
      income or expenses, as appropriate.





c.
            Principles
                of consolidation:





The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. Intercompany balances and transactions including profits from
      intercompany sales not yet realized outside the Group, have been eliminated
      upon
      consolidation.


d.
            Cash
                equivalents:





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





e.
            Marketable
                securities:





The
      Company accounts for investments in marketable debt securities in accordance
      with Statement of Financial Accounting Standard No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities" ("SFAS No. 115"). Management
      determines the appropriate classification of its investments in debt and equity
      securities at the time of purchase and reevaluates such determinations at each
      balance sheet date.





-
          F-10 -
 
 **RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





Debt
      securities are classified as held-to-maturity when the Company has the positive
      intent and ability to hold the securities to maturity and are stated at
      amortized cost. The amortized cost of held-to-maturity securities is adjusted
      for amortization of premiums and accretion of discounts to maturity. Such
      amortization and decline in value judged to be other than temporary and interest
      are included in financial income, net. As of December 31, 2006, no impairment
      has been identified.





Debt
      securities that are designated as available-for-sale are stated at fair value,
      with unrealized gains and losses reported in accumulated other comprehensive
      income (loss), a separate component of shareholders' equity. Realized gains
      and
      losses on sales of investments, as determined on a specific identification
      basis, are included in financial income, net. The Company has the positive
      ability to hold the securities to maturity. As of December 31, 2006, no
      impairment has been identified.





f.
            Inventories:





Inventories
      are stated at the lower of cost or market value. Inventory write-offs are
      provided to cover risks arising from slow-moving items, technological
      obsolescence, excess inventories and discontinued products. As of December
      31,
      2005 and 2006, the provision for inventory write-offs amounted to $ 846 and
      $ 783, respectively. Any write-off is recognized in the consolidated
      statements of operations as cost of revenues.





Cost
      is
      determined as follows:





Raw
      materials and components - using the "first-in, first-out" method.


Work-in-progress
      and finished products:


Raw
      materials and components - using the "first-in, first-out" method.


Subcontracting
      costs - on the basis of direct subcontractors costs with the addition of
      allocable costs.


g.
            Structured
                note:





Structured
                note as of December 31, 2006, consists of a callable structured note
                ("Structured Note") with a maturity of seven years. The Structured
                Note
                bears interest that varies inversely with changes of the three-month
                USD
                LIBOR-rate.





As
      of
      December 31, 2006, the Structured Note amounted to $ 9,602. Interest income
      resulting from investment in the Structured Note is accounted for based on
      the
      guidelines provided in the Emerging Issues Task Force ("EITF") No. 96-12,
      "Recognition of Interest
      Income and Balance Sheet Classification of Structured Notes". Under EITF No.
      96-12, the retrospective interest method is used for recognizing interest
      income.





-
          F-11 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





h.
            Property
                and equipment, net:





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





**%**Computer,
                software and peripheral equipment
            
            15-33Office
                furniture and equipment
            
            7-15Motor
                vehicles
            
            15Leasehold
                improvements
            
            Over
                the shorter of the term of
              the
                lease or the life of the asset





i.
            Impairment
                of long-lived assets:





The
      Company's and its subsidiaries' long-lived assets and certain identifiable
      intangibles 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 assets to be held and used is measured
      by
      a comparison of the carrying amount of an asset to the future undiscounted
      cash
      flows expected to be generated by the assets. If such assets are considered
      to
      be impaired, the impairment to be recognized is measured by the amount by which
      the carrying amount of the assets exceeds the fair value of the assets. As
      of
      December 31, 2006, no impairment losses have been identified.





j.
            Goodwill:





Goodwill
      represents excess of the costs over the fair value of net assets of businesses
      acquired. Under SFAS No. 142, goodwill is not amortized. SFAS No. 142 requires
      goodwill to be tested for impairment on adoption and at least annually
      thereafter or between annual tests in certain circumstances, and written down
      when impaired, rather than being amortized as previous accounting standards
      required. Goodwill is tested for impairment by comparing the fair value with
      its
      carrying value. Fair value is determined using discounted cash flows and market
      multiples. During the year ended December 31, 2006 no such impairment losses
      were recorded.





k.
            Intangible
                assets:





Intangible
      assets are amortized over their useful life using a method of amortization
      that
      reflects the pattern in which the economic benefits of the intangible assets
      are
      consumed or otherwise used up, in accordance with SFAS No. 142. Acquired
      technology and customer relationships are amortized using the straight-line
      method over an estimated period between six to ten years during which benefits
      are expected to be received. During 2006, an amount of $ 450 was recorded as
      amortization expenses, included in cost of revenues and sales and marketing
      expenses. As of December 31, 2006, no impairment losses have been
      identified.





-
          F-12 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





l.
            Revenue
                recognition:





The
      Company and its subsidiaries generate revenues mainly from selling their
      products and from post-contract customer support primarily through distributors
      and resellers, all of which are considered end-users.





Revenues
      from product sales are recognized when delivery has occurred, persuasive
      evidence of an agreement exists, the fee is fixed or determinable, no further
      obligation exists and collectability is probable.





Revenues
      in arrangements with multiple deliverables are recognized under the "residual
      method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists
      for all undelivered elements, no VSOE exists for the delivered elements, and
      all
      other revenue recognition criteria are satisfied. VSOE for post-contract
      customer support is determined based on the price when it is sold separately
      in
      similar arrangements. The price may vary in the territories and vertical markets
      in which the Company conducts business. Price is determined by using a
      consistent percentage of the Company's product price lists.





Service
      revenue derived from post-contract customer support, which represents mainly
      help desk support, unit replacement and security update service, is recognized
      ratably over the contract period, which is typically one year.





Service
      revenues from training and installation, which are considered as not essential
      to the functionality of the product, included in multiple elements arrangements
      are recognized at the time they are rendered.





The
      Company and its subsidiaries provide a provision for product returns and stock
      rotation based on their experience with historical sales returns, analysis
      of
      credit memo data and other known factors, in accordance with Statement of
      Financial Accounting Standard No. 48, "Revenue Recognition When Right of Return
      Exists" ("SFAS No. 48").





Deferred
      revenue includes unearned amounts received under post-contract customer
      support.





m.
            Warranty
                costs:





The
      Company generally offers a one year warranty for all of its products. A
      provision for warranty costs is provided at the time revenues are recognized
      and
      for estimated material costs during the warranty period based on the Company's
      experience. Warranty expenses for the years ended December 31, 2004, 2005 and
      2006 were immaterial.





-
          F-13 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**




**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





n.
            Accounting
                for stock-based compensation:





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)") which requires
      the measurement and recognition of compensation expense based on estimated
      fair
      values for all share-based payment awards made to employees and directors.
      SFAS
      123(R) supersedes Accounting Principles Board Opinion No. 25, "Accounting for
      Stock Issued to Employees" ("APB 25"), for periods beginning in fiscal 2006.
      In
      March 2005, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 107 ("SAB No. 107") relating to SFAS No. 123(R). The Company has
      applied the provisions of SAB No. 107 in its adoption of SFAS No.
      123(R).





SFAS
      No.
      123(R) requires companies to estimate the fair value of equity-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as an
      expense over the requisite service periods in the Company's consolidated income
      statement. Prior to the adoption of SFAS 123(R), the Company accounted for
      equity-based awards to employees and directors using the intrinsic value method
      in accordance with APB 25 as allowed under Statement of Financial Accounting
      Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").





The
      Company adopted SFAS No. 123(R) using the modified prospective transition
      method, which requires the application of the accounting standard starting
      from
      January 1, 2006, the first day of the Company's fiscal year 2006. Under that
      transition method, compensation cost recognized in the year ended December
      31,
      2006, includes: (a) compensation cost for all share-based payments granted
      prior
      to, but not yet vested as of January 1, 2006, based on the grant date fair
      value
      estimated in accordance with the original provisions of SFAS No. 123, and (b)
      compensation cost for all share-based payments granted subsequent to January
      1,
      2006, based on the grant-date fair value estimated in accordance with the
      provisions of SFAS No. 123(R). Results for prior periods have not been restated.





The
      Company has two stock option plans, the Company's Key Employee Share Incentive
      Plan (1997) and the Directors and Consultants Option Plan ("the Stock Option
      Plans"). Under the Stock Option Plans, options may be granted to officers,
      directors, employees and consultants of the Company or its subsidiaries. The
      options expire six years from the grant date. The options vest primarily over
      four years. Each option is exercisable for one Ordinary share. Any options,
      which are forfeited or not exercised before expiration, become available for
      future grants.





Pursuant
      to the Stock Option Plans, the Company reserved for issuance 8,087,071 Ordinary
      shares. The Company approved in July 2006  an
      increase of 3% of issued and outstanding Ordinary shares reserved for option
      grants under the Stock Option Plans. As of December 31, 2006, an aggregate
      of
      695,269 Ordinary shares of the Company were still available for future
      grants.





-
          F-14 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**




**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





The
                Company recognizes compensation expenses for the value of its awards,
                based on the accelerated attribution method, net of estimated forfeitures.
                Estimated forfeitures are based on actual historical pre-vesting
                forfeitures.





As
      a
      result of adopting SFAS No. 123(R) on January 1, 2006, the Company's income
      before income taxes and net income for the year ended December 31, 2006, is
      approximately $ 4,500 lower than if it had continued to account for
      stock-based compensation under APB No. 25. Basic and diluted net earnings per
      share for the year ended December 31, 2006, are $ 0.24 and $ 0.23
      respectively, lower than if the Company had continued to account for share-based
      compensation under APB No. 25.





Prior
      to
      January 1, 2006, the Company applied the intrinsic value method of accounting
      for stock options as prescribed by APB No. 25, whereby compensation expense
      is
      equal to the excess, if any, of the quoted market price of the stock over the
      exercise price at the grant date of the award. During the years ended December
      31, 2004 and 2005, the Company recognized stock-based compensation expense
      related to employee stock options under the plans in the amounts of $ 0 and
      $
      58, respectively.





The
                Company estimates the fair value of stock options granted using the
                Black-Scholes-Merton option-pricing model. The option-pricing model
                requires a number of assumptions, of which the most significant are
                expected stock price volatility and the expected option term. Expected
                volatility was calculated based upon actual historical stock price
                movements.





The
                expected option term represents the period that the Company's stock
                options are expected to be outstanding and was determined based on
                the
                simplified method permitted by SAB No. 107 as the average of the
                vesting
                period and the contractual term. The risk-free interest rate is based
                on
                the yield from U.S. Treasury zero-coupon bonds with an equivalent
                term.
                The Company has historically not paid dividends and has no foreseeable
                plans to pay dividends.




The
      fair
      value of the Company's stock options granted to employees and directors for
      the
      years ended December 31, 2004, 2005 and 2006 was estimated using the following
      weighted average assumptions:





**Year
                ended**
              **December
                31,****2004**
            
            **2005**
            
            **2006**Risk
                free interest
            
            
            2.5
            %
            
            4.5
            %
            
            4.9
            %Dividend
                yields
            
            
            0
            %
            
            0
            %
            
            0
            %Volatility
            
            
            75
            %
            
            41
            %
            
            50
            %Expected
                term (in years)
            
            
            2.5
            
            
            3.5
            
            
            3.9





-
          F-15 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**


**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





A
      summary
      of employee option activity under the Company's Stock Option Plans as of
      December 31, 2006 and changes during the year ended December 31, 2006 are as
      follows:





**Number
                of options**
            
            **Weighted-average
                exercise price**
            
            **Weighted-
                average remaining contractual term**
              **(in
                years)**
            
            **Aggregate
                intrinsic value**Outstanding
                at January 1, 2006
            
            
            4,054,380
            
            $
            14.31Granted
            
            
            1,122,400
            
            $
            14.69Exercised
            
            
            (1,196,998
            )
            $
            10.55Forfeited
                and cancelled
            
            
            (694,783
            )
            $
            17.48Outstanding
                at December 31, 2006
            
            
            3,284,999
            
            $
            15.13
            
            
            3.13
            
            $
            5,749Exercisable
                at December 31, 2006
            
            
            1,034,230
            
            $
            13.18
            
            
            1.61
            
            $
            3,779Vested
                and expected to vest at December 31, 2006
            
            
            2,799,618
            
            $
            15.69
            
            
            3.04
            
            $
            4,445





A
      summary
      of the employee option activity under the Company’s Stock Option Plans as of
      December 31, 2005 and 2004, and changes in activity during the years ended
      on
      those dates, are as follow:




**December
                31, 2004**
            
            **December
                31, 2005****Number**
              **of
                options**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Number**
              **of
                options**
            
            **Weighted**
              **average**
              **exercise**
              **price**Options
                outstanding at the beginning of the year
            
            
            3,951,840
            
            $
            11.12
            
            
            3,902,433
            
            $
            13.21Changes
                during the year:Granted
            
            
            1,112,933
            
            $
            19.10
            
            
            1,007,250
            
            $
            18.80Exercised
            
            
            (669,865
            )
            $
            8.93
            
            
            (503,591
            )
            $
            12.15Expired
            
            
            (1,625
            )
            $
            10.69
            
            
            (45,174
            )
            $
            45.88Forfeited
                and cancelled
            
            
            (490,850
            )
            $
            15.64
            
            
            (306,538
            )
            $
            13.96Options
                outstanding at the end of the year
            
            
            3,902,433
            
            $
            13.21
            
            
            4,054,380
            
            $
            14.31Options
                exercisable at the end of the year
            
            
            1,251,679
            
            $
            10.24
            
            
            1,428,575
            
            $
            9.52





-
          F-16 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





The
      weighted-average grant-date fair value of options granted during the years
      ended
      December 31, 2004, 2005 and 2006 was $ 8.6 and $ 7.1 and $ 5.04,
      respectively. The aggregate intrinsic value in the table above represents the
      total intrinsic value (the difference between the Company's closing stock price
      on the last trading day of fiscal 2006 and the exercise price, multiplied by
      the
      number of in-the-money options) that would have been received by the option
      holders had all option holders exercised their options on December 31,
      2006. This amount changes, based on the fair market value of the Company's
      stock. Total intrinsic value of options exercised for the year ended December
      31, 2006 was approximately $ 6,394. As of December 31, 2006, there was
      approximately $ 6,451 of total unrecognized compensation costs related to
      non-vested share-based compensation arrangements granted under the Company's
      stock option plans. That cost is expected to be recognized over a
      weighted-average period of 1.03 years. Total grant-date fair value of vested
      options for the year ended December 31, 2006 was approximately
      $ 5,668.





The
      options outstanding under the Company's Stock Option Plans as of December 31,
      2006, have been separated into ranges of exercise price as follows:





**Options**
            
            **Weighted**
            
            
            
            **Options**
            
            **Weighted****outstanding**
            
            **average**
            
            **Weighted**
            
            **Exercisable**
            
            **average
                exercise****Ranges
                of**
            
            **as
                of**
            
            **remaining**
            
            **average**
            
            **as
                of**
            
            **price
                of****exercise**
            
            **December
                31,**
            
            **contractual**
            
            **exercise**
            
            **December
                31,**
            
            **exercisable****price**
            
            **2006**
            
            **life
                (years)**
            
            **price**
            
            **2006**
            
            **options**$8-11
            
            
            542,483
            
            
            1.18
            
            $
            8.97
            
            
            493,205
            
            $
            8.77$12.5-15
            
            
            1,291,350
            
            
            3.67
            
            $
            14.34
            
            
            300,000
            
            $
            15.00$16-17
            
            
            631,350
            
            
            2.57
            
            $
            16.94
            
            
            72,900
            
            $
            16.99$18-20.08
            
            
            540,233
            
            
            3.46
            
            $
            18.78
            
            
            96,459
            
            $
            19.48$23.13-25.30
            
            
            279,583
            
            
            2.99
            
            $
            23.88
            
            
            71,666
            
            $
            23.493,284,999
            
            
            
            
            
            
            
            
            1,034,230





The
      following table illustrates the effect on the net income and net 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,****2004**
            
            **2005**Net
                income as reported
            
            $
            13,780
            
            $
            9,344Add:
                stock-based employee compensation expenses included in reported net
                loss -
                intrinsic value
            
            
            -
            
            
            58Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method
            
            
            (7,520
            )
            
            (6,082
            )Pro
                forma net income
            
            $
            6,260
            
            $
            3,320Basic
                net income per share as reported
            
            $
            0.77
            
            $
            0.50Diluted
                net income per share as reported
            
            $
            0.70
            
            $
            0.47Pro
                forma basic net earnings per share
            
            $
            0.35
            
            $
            0.18Pro
                forma diluted net earnings per share
            
            $
            0.32
            
            $
            0.17





-
          F-17 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**




**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





o.
            Research
                and development expenses:





Research
      and development expenses, net of grants received are charged to the statement
      of
      operations, as incurred. Development grants deducted from research and
      development expenses amounted to $ 0, $ 200 and $ 200 for the years ended
      December 31, 2004, 2005 and 2006 respectively.





p.
            Advertising
                expenses:





Advertising
      expenses are charged to the statements of operations as incurred.





q.
            Basic
                and diluted net earnings (loss) per
                share:





Basic
      net
      earnings (loss) per share are computed based on the weighted average number
      of
      Ordinary shares outstanding during each year. Diluted net earnings (loss) per
      share are computed based on the weighted average number of Ordinary shares
      outstanding during each year, plus dilutive potential Ordinary shares considered
      outstanding during the year, in accordance with Statement of Financial Standard
      No. 128, "Earnings per Share" ("SFAS No. 128").





The
      weighted average number of shares related to outstanding anti dilutive options
      excluded from the calculation of diluted earnings (loss) per share was 709,972
      and 1,763,760 for the years ended December 31, 2005 and 2006,
      respectively.





r.
            Income
                taxes:





The
      Company and its subsidiaries account for income taxes in accordance with
      Statement of Financial Accounting Standards No. 109, "Accounting for Income
      Taxes" ("SFAS No. 109"). This statement prescribes the use of the liability
      method whereby deferred tax assets 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 and its
      subsidiaries provide a valuation allowance, if necessary, to reduce deferred
      tax
      assets to their estimated realizable value if it is more likely than not that
      a
      portion or all of the deferred tax assets will not be realized.





s.
            Concentrations
                of credit risks:





Financial
      instruments that potentially subject the Company and its subsidiaries to
      concentrations of credit risk consist principally of cash and cash equivalents,
      bank deposits, marketable securities, trade receivables and structured
      note.





The
      majority of the Company's and its subsidiaries' cash and cash equivalents,
      and
      bank deposits are invested in major banks in the United States and in the United
      Kingdom in U.S. dollars. Management believes that the financial institutions
      that hold the Company's investments are financially sound and accordingly,
      minimal credit risk exists with respect to these investments. Such deposits
      in
      the United States may be in excess of insured limits and are not insured in
      other jurisdictions.





-
          F-18 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





The
      Company's marketable securities include investments in U.S. government
      debentures; foreign banks and government debentures and corporate debentures.
      Management believes that those corporations and governments are financially
      sound and that the portfolios are well-diversified, and accordingly, minimal
      credit risk exists with respect to these marketable securities. Moreover, the
      Company’s investment policy, limits the amount the Company may invest in any one
      type of investment, thereby reducing credit risk concentration.


The
      trade
      receivables of the Company and its subsidiaries are mainly derived from sales
      to
      customers located primarily in the United States, Europe, the Middle East,
      Africa and Asia Pacific. The Company performs ongoing credit evaluations of
      its
      customers. An allowance for doubtful accounts is determined with respect to
      those amounts that the Company has determined to be doubtful of collection.
      In
      certain circumstances **,** the
      Company may require from its customers letters of credit, other collateral
      or
      additional guarantees.





As
      of
      December 31, 2005 and 2006, the Company and its subsidiaries had no
      off-balance-sheet concentration of credit risk such as foreign exchange
      contracts, option contracts or other foreign hedging arrangements.





t.
            Severance
                pay:





The
      Company's liability for severance pay for its Israeli employees is calculated
      pursuant to the 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. Employees are entitled to one month's salary for each year of
      employment or a portion thereof. The Company's liability for all of its Israeli
      employees is fully provided by monthly deposits with insurance policies and
      by
      an accrual.





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 the Israeli Severance Pay Law or labor agreements. The value of
      the
      deposited funds is based on the cash surrendered value of these policies, and
      includes immaterial profits.





Severance
      expenses for the years ended December 31, 2004, 2005, and 2006, amounted to
      approximately $ 774, $ 405 and $ 1,015,
      respectively.





u.
            Fair
                value of financial instruments:





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





The
      carrying amount reported in the balance sheet of cash and cash equivalents,
      bank
      deposits, trade receivables, other receivables and prepaid expenses, trade
      payables and other payables and accrued expenses approximates their fair values
      due to the short-term maturities of such instruments.





The
      fair
      values for marketable securities are based on quoted market prices and do not
      significantly differ from carrying amounts (see also Note 3).





-
          F-19 -
 
 **RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





The
      carrying amount of the Company's structured note is estimated by discounting
      the
      future cash flows using the future prospected interest rates for deposits of
      similar terms and maturities. The carrying amount of the structured note does
      not significantly differ from its fair value.





v.
            Impact
                of recently issued Accounting
                Standards:





In
      June
      2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes" ("FIN 48"). FIN 48 creates a single model to address uncertainty
      in tax positions. FIN 48 clarifies the accounting for income taxes by
      prescribing the minimum recognition threshold a tax position is required to
      meet
      before being recognized in the financial statements. FIN 48 also provides
      guidance on derecognition, measurement, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. In addition, FIN
      48
      clearly scopes out income taxes from Financial Accounting Standards Board
      Statement No. 5, "Accounting for Contingencies." FIN 48 utilizes a two-step
      approach for evaluating tax positions. Recognition (step one) occurs when an
      enterprise concludes that a tax position, based solely on its technical merits,
      is more-likely-than-not to be sustained upon examination. Measurement (step
      two)
      is only addressed if step one has been satisfied (i.e., the position is
      more-likely-than-not to be sustained). FIN 48 applies to all tax positions
      related to income taxes subject to Financial Accounting Standards Board
      Statement No. 109, "Accounting for Income Taxes." This includes tax positions
      considered to be "routine" as well as those with a high degree of uncertainty.
      Derecognition of a tax position that was previously recognized would occur
      when
      a company subsequently determines that a tax position no longer meets the
      more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits
      the use of a valuation allowance as a substitute for derecognition of tax
      positions. FIN 48 is effective for fiscal years beginning after December 15,
      2006. Management is in a process of evaluating the possible impact of the
      adoption of FIN 48 on its consolidated financial statements.





In
                September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
                ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
                framework
                for measuring fair value in generally accepted accounting principles
                and
                expands disclosures about fair value measurements. SFAS No. 157 is
                effective for financial statements issued for fiscal years beginning
                after
                November 15, 2007 and interim periods within those fiscal years.
                Management believes that SFAS No. 157 will not have a material effect
                on
                its consolidated financial
                statements.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" ("SFAS No. 159"), which permits
      companies to choose to measure certain financial instruments and other items
      at
      fair value that are not currently required to be measured at fair value. SFAS
      No. 159 is effective for fiscal years beginning after November 15, 2007. The
      Company will adopt SFAS No. 159 no later than January 1, 2008. The Company
      has
      not yet determined the effect that the adoption of SFAS No. 159 will have on
      its
      consolidated financial statements.





-
          F-20 -
 
 **RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
              3:-**
            **MARKETABLE
                SECURITIES**





The
      Company invests in marketable debt securities, which are classified as
      available-for-sale and held-to-maturity investments. The following is a summary
      of marketable debt securities:




**December
                31,****2005**
            
            **2006****Amortized**
            
            **Unrealized**
            
            **Market**
            
            **Amortized**
            
            **Unrealized**
            
            **Market****cost**
            
            **losses**
            
            **value**
            
            **cost**
            
            **losses**
            
            **value**Available-for-sale:U.S.
                Government debentures
            
            $
            6,035
            
            $
            (114
            )
            $
            5,921
            
            $
            97,151
            
            $
            (177
            )
            $
            96,974Foreign
                banks andgovernment
                debentures
            
            
            8,376
            
            
            (196
            )
            
            8,180
            
            
            2,774
            
            
            (35
            )
            
            2,739Corporate
                debentures
            
            
            3,859
            
            
            (94
            )
            
            3,765
            
            
            6,604
            
            
            (30
            )
            
            6,574Auction
                rate securities
            
            
            8,250
            
            
            -
            
            
            8,250
            
            
            -
            
            
            -
            
            
            -Totalavailable-for-sale
              marketable
                securities
            
            $
            26,520
            
            $
            (404
            )
            $
            26,116
            
            $
            106,529
            
            $
            (242
            )
            $
            106,287Held-to-maturity:U.S.
                Government debentures
            
            $
            62,461
            
            $
            (1,304
            )
            $
            61,157
            
            $
            22,918
            
            $
            (183
            )
            $
            22,735





The
      unrealized losses on available-for-sale debt securities included in other
      comprehensive income, as a separate component of shareholders' equity, totaled
      to $ 404 and $ 242 as of December 31, 2005 and 2006, respectively.





The
      unrealized losses on the Company's investments in held-to-maturity securities
      and in available-for-sale securities are a result of interest rate changes.
      Since the Company has the ability and intent to hold these investments until
      a
      recovery of fair value, which may be until maturity, the Company does not
      consider these investments to be other-than-temporarily impaired as of December
      31, 2006.





The
      amortized cost and estimated fair value of available-for-sale and
      held-to-maturity investments as of December 31, 2005 and 2006, by contractual
      maturity, are as follows:





**December
                31,****2005**
            
            **2006****Amortized
                cost**
            
            **Market
                value**
            
            **Amortized
                cost**
            
            **Market
                value**Available-for-sale:Matures
                in one year
            
            $
            14,832
            
            $
            14,717
            
            $
            92,291
            
            $
            92,133Matures
                in one to three years
            
            
            8,966
            
            
            8,692
            
            
            14,238
            
            
            14,15423,798
            
            
            23,409
            
            
            106,529
            
            
            106,287Matures
                in three to five years
            
            
            2,722
            
            
            2,707
            
            
            -
            
            
            -$
            26,520
            
            $
            26,116
            
            $
            106,529
            
            $
            106,287Held-to-maturity:Matures
                in one year
            
            $
            45,726
            
            $
            44,784
            
            $
            22,918
            
            $
            22,735Matures
                in one to three years
            
            
            16,735
            
            
            16,373
            
            
            -
            
            
            -$
            62,461
            
            $
            61,157
            
            $
            22,918
            
            $
            22,735





-
          F-21 -


**RADWARE
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands, except share and per share
          data**





**NOTE
              4:-**
            **INVENTORIES**





Inventories
      are comprised of the following:





**December
                31,****2005**
            
            **2006**Raw
                materials and components
            
            $
            515
            
            $
            562Work-in-progress
            
            
            2,457
            
            
            2,702Finished
                products
            
            
            2,282
            
            
            3,628$
            5,254
            
            $
            6,892





**NOTE
              5:-**
            **PROPERTY
                AND EQUIPMENT, NET**




**December
                31,****2005**
            
            **2006**Cost:Computer,
                software and peripheral equipment
            
            $
            12,001
            
            $
            17,249Office
                furniture and equipment
            
            
            1,152
            
            
            1,358Motor
                vehicles
            
            
            166
            
            
            97Leasehold
                improvements
            
            
            689
            
            
            77114,008
            
            
            19,475Accumulated
                depreciation:Computer,
                software and peripheral equipment
            
            
            7,020
            
            
            9,046Office
                furniture and equipment
            
            
            514
            
            
            644Motor
                vehicles
            
            
            144
            
            
            81Leasehold
                improvements
            
            
            362
            
            
            4518,040
            
            
            10,222Depreciated
                cost
            
            $
            5,968
            
            $
            9,253





Depreciation
      expenses for the years ended December 31, 2004, 2005 and 2006 were $ 1,381,
      $ 1,856 and $ 2,440, respectively.





-
          F-22 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
                6:-**
            **INTANGIBLE
                ASSETS**





a.
            Intangible
                assets:




**Weighted****average**
            
            **December
                31,****amortization**
            
            **2005**
            
            **2006****Years**Cost:Acquired
                technology
            
            
            6
            
            $
            1,772
            
            $
            1,772Customers
                relationships
            
            
            6-10
            
            
            1,189
            
            
            1,1892,961
            
            
            2,961Accumulated
                amortization:Acquired
                technology
            
            
            
            
            
            -
            
            
            296Customers
                relationships
            
            
            
            
            
            148
            
            
            302148
            
            
            598Amortized
                cost
            
            
            
            
            $
            2,813
            
            $
            2,363





Amortization
      expenses for the years ended December 31, 2004, 2005 and 2006, were $ 49,
      $ 65 and $ 450, respectively.





b.
            Estimated
                amortization expenses for the years
                ended:





**December
                31,**2007
            
            $
            4502008
            
            
            4502009
            
            
            4502010
            
            
            4502011
            
            
            4502012
                and after
            
            
            113Total
            
            $
            2,363





**NOTE
                7:-**
            **OTHER
                PAYABLES AND ACCRUED
                EXPENSES**




**December
                31,****2005**
            
            **2006**Employees
                and payroll accruals
            
            $
            3,257
            
            $
            4,057Accrued
                expenses
            
            
            2,941
            
            
            2,305Provision
                for warranty costs
            
            
            190
            
            
            200Other
            
            
            121
            
            
            80$
            6,509
            
            $
            6,642





-
          F-23 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
                8:-**
            **COMMITMENTS
                AND CONTINGENT LIABILITIES**





a.
            Operating
                leases:





The
      Company and its subsidiaries rent their facilities under various operating
      lease
      agreements, which expire on various dates, the latest of which is in 2010
      Aggregate minimum rental payments under non-cancelable operating leases as
      of
      December 31, 2006, are as follows:





2007
            
            $
            1,6062008
            
            
            6952009
            
            
            3742010
            
            
            60$
            2,735





Total
      rent expenses for the years ended December 31, 2004, 2005 and 2006, were
      approximately $ 1,554, $ 1,768 $ 1,948, respectively (see also Note
      13b).





b.
            Litigation:





(1)
            In
                December 2001, the Company, its Chairman, its President and Chief
                Executive Officer and its Chief Financial Officer (the “Individual
                Defendants”) and several underwriters in the syndicates for the Company’s
                September 30, 1999 Initial Public Offering (“IPO”) and January 24, 2000
                secondary offering, were named as defendants in a class action complaint
                alleging violations of the federal securities laws in the United
                States
                District Court, Southern District of New York.





The
      complaint seeks unspecified damages as a result of alleged violations of Section
      11 of the Securities Act of 1933 against all the defendants and Section 15
      of
      the Securities Act of 1933 against the Individual Defendants arising from
      activities purportedly engaged in by the underwriters in connection with the
      Company’s IPO and secondary offering. Plaintiffs allege that the underwriter
      defendants agreed to allocate stock in the Company's IPO and secondary offering
      to certain investors in exchange for excessive and undisclosed commissions
      and
      agreements by those investors to make additional purchases of stock in the
      aftermarket at pre-determined prices.





An
      amended complaint filed on April 19, 2002, which is now the operative complaint,
      added a claim under Section 10(b) of the Securities Exchange Act of 1934 against
      the Company and a claim under Section 20(a) of the Securities Exchange Act
      of
      1934 against the Individual Defendants. Plaintiffs allege that the Prospectuses
      for the Company's IPO and secondary offering were false and misleading because
      they did not disclose these arrangements. The action is being coordinated with
      approximately three hundred other nearly identical actions filed against other
      companies before one judge in the U.S. District Court for the Southern District
      of New York.





A
      motion
      to dismiss addressing issues common to the companies and individuals who have
      been sued in these actions was filed on July 15, 2002. On October 9, 2002,
      the
      Court dismissed the Individual Defendants from the case without prejudice based
      upon Stipulations of Dismissal filed by the plaintiffs and the Individual
      Defendants.





-
          F-24 -
 
 **RADWARE
              LTD. AND ITS SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands, except share and per share
              data**





**NOTE
                8:-**
            **COMMITMENTS
                AND CONTINGENT LIABILITIES
                (Cont.)**





This
      dismissal disposed of the Section 15 and 20(a) control person claims without
      prejudice, since these claims were asserted only against the Individual
      Defendants.





On
      February 19, 2003, the Court denied the motion to dismiss with respect to the
      Company.


On
      October 13, 2004, the Court certified a class in six of the approximately 300
      other nearly identical actions and noted that the decision is intended to
      provide strong guidance to all parties regarding class certification in the
      remaining cases. The underwriter defendants appealed the decision and the Second
      Circuit vacated the district court’s decision granting class certification in
      those six cases on December 5, 2006. Plaintiffs filed a petition for rehearing
      (see also Note 14b).





Prior
      to
      the Second Circuit’s December 5, 2006 ruling, the Company approved a settlement
      agreement and related agreements which set forth the terms of a settlement
      between the Company, the Individual Defendants, the plaintiff class and the
      vast
      majority of the other approximately 300 issuer defendants. These agreements
      were
      submitted to the Court for approval. The settlement would have provided, among
      other things, a release of the Company and the Individual Defendants for the
      conduct alleged to be wrongful in the complaint in exchange for a guarantee
      from
      the company’s insurers regarding recovery from the underwriter defendants and
      other consideration from the Company regarding its underwriters. In light of
      the
      Second Circuit opinion, liaison counsel for the issuers informed the district
      court that the settlement cannot be approved because the defined settlement
      class, like the litigation class, cannot be certified. The Company’s management
      cannot predict whether the Company will be able to negotiate a settlement that
      complies with the Second Circuit’s mandate.





Due
      to
      the inherent uncertainties of litigation, the Company’s management cannot
      accurately predict the ultimate outcome of the matter. If the Company is found
      liable, it is unable to estimate or predict the potential damages that might
      be
      awarded, whether such damages would be greater than the Company’s insurance
      coverage, and whether such damages would have a material impact on its results
      of operations, cash flows or financial condition in any future period.





(2)
            The
                Company’s French subsidiary, Radware France, is a party to two separate
                litigation proceedings before the Boulogne-Billancourt Employment
                Tribunal, brought against the subsidiary by two of its former employees
                claiming damages in connection with their dismissal. The hearings
                with
                respect to these matters are scheduled for January 10, 2008 and April
                3,
                2008, respectively. At this stage without receiving all file submissions
                from the Tribunal. The Company’s management cannot asses the outcome or
                the risks associated with these two matters but in any event the
                Company’s
                management does not expect them to have a material affect on the
                Company.





(3)
            From
                time to time, the Company is involved in routine trade litigation.
                The
                Company is not subject to any additional material legal proceedings
                other
                than those described above.





-
          F-25 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
              9:-**
            **SHAREHOLDERS'
                EQUITY**





The
      Company's shares are listed for trade on the NASDAQ National Market and since
      April 2004 on the Tel-Aviv Stock Exchange, both under the symbol
      "RDWR".





a.
            Treasury
                stock:





In
      July
      2006, the Company's Board of Directors authorized the repurchase of up to
      $ 50,000 of treasury stock in the open market, subject to normal trading
      restrictions. During 2006, the Company purchased 846,855 of its ordinary shares
      for total consideration of $ 11,069, which was recorded as treasury stock,
      at cost in shareholders' equity.





b.
            Stock
                Option Plans:





See
      detailed information in Note 2n.





c.
            Dividends:





Dividends,
      if any, will be paid in NIS. Dividends paid to shareholders outside Israel
      may
      be converted to U.S. dollars on the basis of the exchange rate prevailing at
      the
      date of the conversion. The Company does not intend to pay cash dividends in
      the
      foreseeable future.





**NOTE
                10:-**
            **TAXES
                ON INCOME**





a.
            Israeli
                income taxes:





1.
            Measurement
                of taxable income:





Commencing
      in taxable year 2003, the Company has elected to measure its taxable income
      and
      file its tax return under the Israeli Income Tax Regulations (Principles
      Regarding the Management of Books of Account of Foreign Invested Companies
      and
      Certain Partnerships and the Determination of Their Taxable Income), 1986.





2.
            Tax
                rates:





On
      July
      25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment
      of
      the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a
      gradual decrease in the corporate tax rate in Israel to the following tax rates:
      in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and
      thereafter - 25%.





-
          F-26 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**


**NOTE
                10:-**
            **TAXES
                ON INCOME****(Cont.)**





3.
            Tax
                benefits under the Law for the Encouragement of Capital Investments,
                1959:





The
      Company's production facilities in Israel (Tel-Aviv and Jerusalem) have been
      granted an "Approved Enterprise" status under the above state law. According
      to
      the provisions of such Israeli law, the Company has been granted the
      "Alternative Benefit Plan", under which the main benefits are tax exemption
      and
      reduced tax rate. Therefore, the Company's income derived from Approved
      Enterprise and allocated to the Tel Aviv facility will be entitled to a tax
      exemption for a period of two years and to an additional period of five to
      eight
      years with reduced tax rates of 10%-25% (based on percentage of foreign
      ownership). Income allocated to the Jerusalem facility will be exempt from
      tax
      for a period of up to 10 years, provided that the Company meets certain
      criteria. The duration of tax benefits is subject to a limitation of the earlier
      of 12 years from commencement of production, or 14 years from the approval
      date.
      The Company began to utilize such tax benefits in 2004 and these tax benefits
      we
      scheduled to gradually expire through 2013.





As
      mentioned above, the approval, which the Investment Center granted the Company,
      is for establishing an Approved Enterprise program in Tel-Aviv and Jerusalem,
      Israel. The income derived from the "Approved Enterprise" program shall be
      allocated between the facilities in Tel-Aviv and Jerusalem based on a mechanism
      as determined by the Investment Center.





The
      entitlement to the above benefits is conditional upon the Company's fulfilling
      the conditions stipulated by the above law, regulations published hereunder
      and
      the letters of approval for the specific investments in "Approved Enterprises".
      In the event of failure to comply with these conditions, the benefits may be
      partially or fully canceled and the Company may be required to refund the amount
      of the benefits, in whole or in part, including interest.





As
      of
      December 31, 2006, retained earnings included approximately $ 25,000 in
      tax-exempt income earned by the Company's "Approved Enterprise". The Company
      has
      decided not to declare dividends out of such tax-exempt income. Accordingly,
      no
      deferred income taxes have been provided on income attributable to the Company's
      "Approved Enterprise".





If
      the
      retained tax-exempt income is distributed, it would be taxed at the corporate
      tax rate applicable to such profits as if the Company had not elected the
      alternative tax benefits (currently between 10% - 25%) and an income tax
      liability of approximately up to $ 6,250 would be incurred by the
      Company.




Income
      from sources other than the "Approved Enterprise" will be subject to the tax
      at
      the regular rate.





During
      2004, the Company's production facilities in Israel (Tel-Aviv and Jerusalem)
      have been granted an expansion program to its Approved Enterprise status by
      the
      Investment Center. The Company applied for an amendment to this expansion
      program, according to which it requested an enlargement to this expansion
      program, neutralization of certain assets and an approval that the benefits
      period from such expansion program will commence in 2006. The Investment Center
      has granted a temporary approval for the year 2006.




-
          F-27 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**




**NOTE
                10:-**
            **TAXES
                ON INCOME (Cont.)**





On
      April
      2005, an amendment to the law ("the Amendment") has changed certain provisions
      of the law. As a result of the Amendment, a company is no longer obliged to
      implement an Approved Enterprise status in order to receive the tax benefits
      previously available under the Alternative Benefits provisions, and therefore
      there is no need to apply to the Investment Center for this purpose (Approved
      Enterprise status remains mandatory for companies seeking grants). Rather,
      a
      company may claim the tax benefits offered by the Investment Law directly in
      its
      tax returns, provided that its facilities meet the criteria for tax benefits
      set
      out by the Amendment. A company is also granted a right to approach the Israeli
      Tax Authorities for a pre-ruling regarding their eligibility for benefits under
      the Amendment.





Tax
      benefits are available under the Amendment to production facilities (or other
      eligible facilities), which are generally required to derive more than 25%
      of
      the company's business income from export. In order to receive the tax benefits,
      the Amendment states that a company must make an investment in the Benefited
      Enterprise exceeding a minimum amount specified in the law. Such investment
      may
      be made over a period of no more than three years ending at the end of the
      year
      in which the company requested to have the tax benefits apply to the Benefited
      Enterprise ("the Year of Election"). Where a company requests to have the tax
      benefits apply to an expansion of existing facilities, then only the expansion
      will be considered a Benefited Enterprise and the company's effective tax rate
      will be the result of a weighted combination of the applicable rates. In this
      case, the minimum investment required in order to qualify as a Benefited
      Enterprise is required to exceed a certain percentage of the company's
      production assets before the expansion. The duration of tax benefits is subject
      to a limitation of the earlier of 7 years from the commencement year, or 12
      years from the first day of the Year of Election. As of December 31, 2006,
      the
      Company did not generate income under the provisions of the new
      law.





4.
            Tax
                assessments:





In
      2004,
      the Company received final tax assessments from the Israeli Tax Authorities
      (the
      "ITA") for the tax years 1999 through 2002. The company is in a process of
      tax
      assessment with regard to the years 2003-2004.





b.
            Taxes
                on income are comprised as follows:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Current
                taxes
            
            $
            (428
            )
            $
            (304
            )
            $
            (1,313
            )Taxes
                in respect of prior years
            
            
            (803
            )
            
            -
            
            
            -Increase
                in deferred tax assets
            
            
            890
            
            
            64
            
            
            957$
            (341
            )
            $
            (240
            )
            $
            (356
            )Domestic
            
            $
            (1,576
            )
            $
            (203
            )
            $
            170Foreign
            
            
            1,235
            
            
            (37
            )
            
            (526
            )$
            (341
            )
            $
            (240
            )
            $
            (356
            )





-
          F-28 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
                10:-**
            **TAXES
                ON INCOME (Cont.)**





c.
            Deferred
                income taxes:





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company's and its subsidiaries' deferred tax liabilities and assets are as
      follows:




**December
                31,****2005**
            
            **2006**Deferred
                tax assets:Carryforward
                tax losses
            
            $
            2,624
            
            $
            2,378Tax
                benefit related to employee stock options grants
            
            
            -
            
            
            900Gross
                deferred tax assets
            
            
            2,624
            
            
            3,278Valuation
                allowance
            
            
            (1,670
            )
            
            (1,303
            )Net
                deferred tax asset *)
            
            
            954
            
            
            1,975Gross
                deferred tax liabilitiesTemporary
                differences relating to property and equipment
            
            
            -
            
            
            (64
            )Net
                deferred tax assets
            
            $
            954
            
            $
            1,911





*)
      Including $ 625 and $ 1,405 as short-term deferred taxes as of December 31,
      2005
      and 2006 respectively.





During
      2006 decrease in valuation allowance mainly was derived due to changes on
      Company’s strategy in respect of utilization of capital tax losses. As of
      December 31, 2006 the Company has a remaining deferred tax asset of $1,145
      relating to the available carryforward capital tax losses and changes in the
      tax
      regulatory environment.





d.
            Foreign:





The
      Company's U.S. subsidiary has estimated total available carryforward tax losses
      of approximately $ 2,400 to offset against future taxable profit between
      2011 and 2025. As of December 31, 2006, the Company recorded a deferred tax
      asset of $ 644 relating to the available net carryforward tax losses.





Utilization
      of U.S. net operating losses may be subject to substantial annual limitation
      due
      to the "change in ownership" provisions of the Internal Revenue Code of 1986
      and
      similar state provisions. The annual limitation may result in the expiration
      of
      net operating losses before utilization.





The
      Company has provided valuation allowances in respect of deferred tax assets
      resulting from tax benefits for which future offset is doubtful. Management
      currently believes that it is more likely than not that those deferred tax
      deductions will not be realized in the foreseeable future.





In
      addition, two other subsidiaries have estimated total available carryforward
      tax
      losses of approximately $ 1,400 to offset against future taxable profit. As
      of
      December 31, 2006, the Company recorded a deferred tax asset of $ 186 relating
      to these available net carryforward losses.





-
          F-29 -
 
 **RADWARE
              LTD. AND ITS SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands, except share and per share
              data**


**NOTE
                10:-**
            **TAXES
                ON INCOME (Cont.)**





e.
            A
                reconciliation between the theoretical tax expense, assuming all
                income is
                taxed at the statutory tax rate applicable to income (loss) of the
                Company
                and the actual tax expense as reported in the statement of operations
                is
                as follows:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Income
                before taxes, as reported in the consolidated statements of
                income
            
            $
            14,087
            
            $
            9,584
            
            $
            (924
            )Statutory
                tax rate
            
            
            35
            %
            
            34
            %
            
            31
            %Theoretical
                tax expenses (benefit) on the above amount at the Israeli statutory
                tax
                rate
            
            $
            (4,930
            )
            $
            (3,259
            )
            $
            286Decrease
                in taxes resulting from "Approved Enterprise" benefits (1)
            
            
            4,762
            
            
            2,746
            
            
            -Tax
                adjustment in respect of different tax rate of foreign subsidiary
            
            
            (52
            )
            
            22
            
            
            (55
            )Non-deductible
                expenses
            
            
            (893
            )
            
            (528
            )
            
            (329
            )Changes
                in valuation allowance in respect of deferred taxes
            
            
            1,470
            
            
            632
            
            
            1,267Stock
                compensation relating to options per SFAS 123(R)- Non-deductible
                options
            
            
            -
            
            
            -
            
            
            (500
            )Stock
                compensation relating to options per SFAS 123(R)-Deductible options
                for
                which a full valuation allowance was provided
            
            
            -
            
            
            -
            
            
            (900
            )Income
                taxes in respect of prior years
            
            
            (803
            )
            
            -
            
            
            -Other
            
            
            105
            
            
            147
            
            
            (125
            )Actual
                tax expense
            
            $
            (341
            )
            $
            (240
            )
            $
            (356
            )(1)Per
                share amounts (basic) of the tax benefit resulting from the
                exemption
            
            $
            0.26
            
            $
            0.15
            
            $
            -Per
                share amounts (diluted) of the tax benefit resulting from the
                exemption
            
            $
            0.24
            
            $
            0.14
            
            $
            -





f.
            Income
                before income taxes is comprised as
                follows:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Domestic
            
            $
            12,461
            
            $
            7,601
            
            $
            (2,129
            )Foreign
            
            
            1,626
            
            
            1,983
            
            
            1,205Income
                (loss) before income taxes
            
            $
            14,087
            
            $
            9,584
            
            $
            (924
            )





-
          F-30 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
              11:-**
            **GEOGRAPHIC
                INFOROMATION AND SELECTED STATEMENTS OF INCOME
                DATA**





Summary
      information about geographic 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 end-users.





The
      following presents total revenues for the years ended December 31, 2004, 2005
      and 2006 and long-lived assets as of December 31, 2005 and 2006:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Revenues
                from sales to customers located at:America
                (principally the United States)
            
            $
            28,984
            
            $
            31,900
            
            $
            27,646EMEA
                *)
            
            
            20,450
            
            
            24,074
            
            
            27,529Asia
                Pacific
            
            
            19,005
            
            
            21,610
            
            
            26,235$
            68,439
            
            $
            77,584
            
            $
            81,410





*)  Europe,
      the Middle East and Africa.





**December
                31,****2005**
            
            **2006**Long-lived
                assets, by geographic region:America
            
            $
            1,609
            
            $
            1,669EMEA
            
            
            6,755
            
            
            8,957Asia
                Pacific
            
            
            417
            
            
            990$
            8,781
            
            $
            11,616





-
          F-31 -
 
 **RADWARE
              LTD. AND ITS SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands, except share and per share
              data**


**NOTE
                12:-**
            **SELECTED
                STATEMENTS OF INCOME DATA**





a.
            Financial
                income (expenses):





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Financial
                income:Interest
                on bank deposits
            
            $
            3,045
            
            $
            3,426
            
            $
            1,048Foreign
                currency translation differences, net
            
            
            784
            
            
            -
            
            
            892Amortization
                of premiums, accretion of discounts and interest on marketable debt
                securities, net
            
            
            852
            
            
            2,856
            
            
            5,6204,681
            
            
            6,282
            
            
            7,560Financial
                expenses:Interest
                and other bank charges
            
            
            (116
            )
            
            (70
            )
            
            (138
            )Foreign
                currency translation differences, net
            
            
            -
            
            
            (1,053
            )
            
            -$
            4,565
            
            $
            5,159
            
            $
            7,422




b.
            Net
                earnings per share:





The
      following table sets forth the calculation of basic and diluted net earnings
      (loss) per share:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Numerator:Net
                income (loss) available to shareholders of Ordinary shares
            
            $
            13,780
            
            $
            9,344
            
            $
            (1,280
            )Denominator:Denominator
                for basic earnings (loss) per share - weighted average number of
                shares,
                net of treasury stock
            
            
            17,995,207
            
            
            18,800,474
            
            
            19,325,055Effect
                of dilutive securities:Employee
                stock options and ESPP
            
            
            1,809,689
            
            
            1,271,718
            
            
            -Denominator
                for diluted net earnings (loss) per share - adjusted weighted average
                number of Ordinary shares
            
            
            19,804,896
            
            
            20,072,192
            
            
            19,325,055





-
          F-32 -


**RADWARE
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands, except share and per share
            data**





**NOTE
              13:-**
            **BALANCES
                AND TRANSACTIONS WITH RELATED
                PARTIES**





Represents
      transactions and balances with other entities in which certain of the Company's
      shareholders have interest:





a.
            The
                following related party balances are included in the balance
                sheets:





**December
                31,****2005**
            
            **2006**Trade
                receivables
            
            $
            1,447
            
            $
            1,452Trade
                payables
            
            $
            -
            
            $
            68





b.
            The
                following related party transactions are included in the statements
                of
                operations:





**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006**Revenues
            
            $
            2,400
            
            $
            3,111
            
            $
            3,656Operating
                expenses, net and cost of revenues- primarily rental, sub-contractors
                and
                communications (1)
            
            $
            1,151
            
            $
            1,309
            
            $
            917Purchase
                of property and equipment
            
            $
            466
            
            $
            377
            
            $
            939





(1)
            The
                Company leases office space and purchases other miscellaneous services
                from certain companies, which are considered to be related parties.
                In
                addition, the Company subleases part of the office space to related
                parties and provides certain services to related
                parties.





**NOTE
                14:-**
            **SUBSEQUENT
                EVENTS****- unAudited**




a.
            in
                April 2007, the Company acquired Covelight Systems, Inc. ("Covelight").
                The acquisition will be accounted under the provisions of SFAS No.
                141,
                "Business Combinations" ("SFAS No. 141"). The total consideration
                for the
                acquisition will be up to $ 16,000 out of which an amount of $ 7,500
                was
                paid in cash and an additional amount of up to $ 8,500 is payable
                in cash
                contingent upon meeting sales performance targets by April
                2008.




The
      Company is in the process of completing a Purchase Price Allocation ("PPA").
      The
      Company expects that intangible assets will be derived from the
      acquisition.





b.
            In
                respect of the petition for rehearing filed by the plaintiffs as
                discussed
                in Note 8b(1), onApril
                6, 2007, the Second Circuit denied the petition, but noted that the
                plaintiffs could ask the district court to certify a more narrow
                class
                than the one that was rejected. Plaintiffs have not yet moved to
                certify a
                class in the Company’s case.






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