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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, 2008


OR

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

For the transition period from __________ to __________


OR

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

Date
of event requiring this shell company report _________


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)              

|                                                                                        
|----------------------------------------------------------------------------------------
|Efrat Baruh-Noy                                                                         
|Tel. +972-3-7668666, Fax:
 +972-3-7668982                                               
|22 Raoul Wallenberg St., Tel Aviv 69710, Israel                                         
|                                                                                        
|(Name, Telephone, E-mail and/or
 Facsimile number and Address of Company Contact Person)

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,            |  | NASDAQ Global Select Market                | 
| | NIS 0.1 par value per share |  |                                            | 

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:

18,918,438 Ordinary Shares,
NIS 0.1 par value per share



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

oYes  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.

oYes  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.

xYes  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 basis of accounting the registrant has used to prepare the
financial statements included in this filing:

|  |                                                                                                        
|- | -------------------------------------------------------------------------------------------------------
|x | U.S.
 GAAP                                                                                             
|  |                                                                                                        
|o | International
 Financial Reporting Standards as issued by the International Accounting
 Standards Board
|  |                                                                                                        
|o | Other                                                                                                  

If
Other has been checked in response to the previous question indicate by check
mark which financial statement item the registrant has elected to follow:

o  Item
17  o  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

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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).

We
have registered trademarks for Radware®, APSolute®, Web Server Director®,
Cache Server Director®, FireProof®, LinkProof®, Triangulation®, Smart
Nat®, Get Certain®, CertainT®, Peer Director®,, Synapps Architecture®,
DefensePro®, StringMatch Engine®, CID  Content Inspection Director®,
SIPDirector®, AppDirector®, AppXcel®, AppXML® and SecureFlow® and we
have trademark applications pending for OnDemand Switch, Uplink, Virtual
Director, APSolute Vision, Apsolute Insite and AppWall. All other
trademarks and trade names appearing in this annual report are owned by their
respective holders.

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.

1

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TABLE OF CONTENTS

|                                                               |  |     
|-------------------------------------------------------------- |  | ----
|                                                               |  | Page
|                                                               |  |     
|                                                               |  |     
|PART I                                                         |  | 5   
|ITEM
 1. Identity of Directors, Senior Management and Advisors |  | 5   
|ITEM
 2. Offer Statistics and Expected Timetable               |  | 5   
|ITEM
 3. Key Information                                       |  | 6   
|A.
 Selected Financial Data                                    |  | 6   
|B.
 Capitalization and Indebtedness                            |  | 7   
|C.
 Reasons for the Offer and Use of Proceeds                  |  | 7   
|D.
 Risk Factors                                               |  | 7   
|ITEM
 4. Information on the Company                            |  | 20  
|A.
 History and Development of the Company                     |  | 20  
|B.
 Business Overview                                          |  | 20  
|C.
 Organizational Structure                                   |  | 31  
|D.
 Property, Plants and Equipment                             |  | 32  
|ITEM
 5. Operating and Financial Review and Prospects          |  | 33  
|A.
 General                                                    |  | 33  
|B.
 Operating Results                                          |  | 41  
|C.
 Liquidity and Capital Resources                            |  | 45  
|D.
 Research and Development, Patents and License              |  | 48  
|E.
 Trend Information                                          |  | 48  
|F.
 Off-Balance Sheet Arrangements                             |  | 48  
|G.
 Tabular Disclosure of Contractual Obligations              |  | 49  
|ITEM
 6. Directors, Senior Management and Employees            |  | 50  
|A.
 Directors and Senior Management                            |  | 50  
|B. Compensation                                                |  | 52  
|C. Board Practices                                             |  | 53  
|D. Employees                                                   |  | 58  
|E. Share Ownership                                             |  | 59  
|ITEM
 7. Major Shareholders and Related Party Transactions     |  | 62  
|A.
 Major Shareholders                                         |  | 62  
|B.
 Related Party Transactions                                 |  | 63  

2

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|                                                                                        |  |   
|--------------------------------------------------------------------------------------- |  | --
|C. Interests of Experts and Counsel                                                     |  | 64
|ITEM
 8. Financial Information                                                          |  | 64
|A.
 Consolidated Statements and other Financial Information                             |  | 64
|B.
 Legal Proceedings                                                                   |  | 64
|C.
 Significant Changes                                                                 |  | 65
|ITEM
 9. The Listing                                                                    |  | 66
|A.
 Listing Details                                                                     |  | 66
|B.
 Plan of Distribution                                                                |  | 67
|C.
 Markets                                                                             |  | 67
|D.
 Selling Shareholders                                                                |  | 67
|E.
 Dilution                                                                            |  | 67
|F.
 Expenses of the Issue                                                               |  | 67
|ITEM
 10. Additional information                                                        |  | 68
|A.
 Share Capital                                                                       |  | 68
|B.
 Memorandum and Articles of Association                                              |  | 68
|C.
 Material Contracts                                                                  |  | 72
|D.
 Exchange Controls                                                                   |  | 73
|E.
 Taxation                                                                            |  | 73
|F. Dividends and Paying Agents                                                          |  | 84
|G. Statement by Experts                                                                 |  | 84
|H. Documents on Display                                                                 |  | 84
|I. Subsidiary Information                                                               |  | 85
|ITEM
 11. Quantitative and Qualitative Disclosures about Market Risk                    |  | 86
|ITEM
 12. Description of Securities other than Equity Securities                        |  | 86
|PART II                                                                                 |  | 87
|ITEM
 13. Defaults, Dividend Averages and Delinquencies                                 |  | 87
|ITEM
 14. Material Modifications to the Rights of Security Holders and Use of
 Proceeds |  | 87
|ITEM
 15. Controls and Procedures                                                       |  | 87
|ITEM
 16. [Reserved]                                                                    |  | 88
|ITEM
 16A. Audit Committee Financial Expert                                             |  | 88
|ITEM
 16B. Code of ethics                                                               |  | 89

3

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|                                                                                  |  |   
|--------------------------------------------------------------------------------- |  | --
|ITEM
 16C. Principal Accountant Fees and Services                                 |  | 89
|ITEM
 16D. Exemptions From the Listing Standards for Audit Committees             |  | 90
|ITEM
 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers |  | 90
|ITEM
 16F. Change in Registrants Certifying Accountant                           |  | 90
|ITEM
 16G. Corporate Governance                                                   |  | 91
|PART III                                                                          |  | 92
|ITEM
 17. Financial Statements                                                    |  | 92
|ITEM
 18. Financial Statements                                                    |  | 92
|ITEM
 19. Exhibits                                                                |  | 93

4

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PART I

|        |                                                       
|------- | ------------------------------------------------------
|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
 ADVISORS

Not
applicable.

|        |                                        
|------- | ---------------------------------------
|ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

5

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

|   |                        
|-- | -----------------------
|A. | 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, 2006, 2007 and 2008 and the balance sheet data as at
December 31, 2007 and 2008 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, 2004 and 2005 and the balance sheet data for the years ended
December 31, 2004, 2005 and 2006 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 2w and 11 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
 December 31,                  |        | Year ended
 December 31, |   | Year ended
 December  31, |   | Year ended
 December  31, |        | Year ended
 December  31, |  
|                                             |  | 2004                                      |        | 2005                     |   | 2006*                     |   | 2007*                     |        | 2008*                     |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |  
|                                             |  | (US $ in thousands except per share data) |       
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Statement
 of Operations Data:               |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Revenues:                                    |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Products                                     |  | $                                         | 52,206 |                          | $ | 55,902                    |   | $                         | 57,335 |                           | $ | 59,422  |   | $ | 59,678  |  
|Services                                     |  |                                           | 16,233 |                          |   | 21,682                    |   |                           | 24,075 |                           |   | 29,209  |   |   | 34,903  |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|                                             |  |                                           | 68,439 |                          |   | 77,584                    |   |                           | 81,410 |                           |   | 88,631  |   |   | 94,581  |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Cost of
 revenues:                           |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Products                                     |  |                                           | 8,080  |                          |   | 9,325                     |   |                           | 10,267 |                           |   | 13,133  |   |   | 15,143  |  
|Services                                     |  |                                           | 4,104  |                          |   | 5,571                     |   |                           | 5,524  |                           |   | 5,895   |   |   | 6,431   |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|                                             |  |                                           | 12,184 |                          |   | 14,896                    |   |                           | 15,791 |                           |   | 19,028  |   |   | 21,574  |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Gross profit                                 |  |                                           | 56,255 |                          |   | 62,688                    |   |                           | 65,619 |                           |   | 69,603  |   |   | 73,007  |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Operating
 expenses:                         |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Research and
 development, net               |  |                                           | 10,342 |                          |   | 13,017                    |   |                           | 17,659 |                           |   | 23,515  |   |   | 28,357  |  
|Sales and
 marketing                         |  |                                           | 31,898 |                          |   | 40,002                    |   |                           | 50,128 |                           |   | 57,977  |   |   | 63,591  |  
|General and
 administrative                  |  |                                           | 4,493  |                          |   | 5,244                     |   |                           | 6,178  |                           |   | 7,114   |   |   | 12,066  |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Total operating
 expenses                    |  |                                           | 46,733 |                          |   | 58,263                    |   |                           | 73,965 |                           |   | 88,606  |   |   | 104,014 |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Operating profit
 (loss)                     |  |                                           | 9,522  |                          |   | 4,425                     |   |                           | (8,346 | )                         |   | (19,003 | ) |   | (31,077 | )
|Financial
 income, net                       |  |                                           | 4,565  |                          |   | 5,159                     |   |                           | 7,422  |                           |   | 7,420   |   |   | 3,612   |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Income (loss)
 before income taxes           |  |                                           | 14,087 |                          |   | 9,584                     |   |                           | (924   | )                         |   | (11,583 | ) |   | (27,395 | )
|Income taxes                                 |  |                                           | (341   | )                        |   | (240                      | ) |                           | (356   | )                         |   | (428    | ) |   | (3,627  | )
|Minority
 interest in losses of a subsidiary |  |                                           | 34     |                          |   |                          |   |                           |       |                           |   |        |   |   |        |  
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Net income
 (loss)                           |  | $                                         | 13,780 |                          | $ | 9,344                     |   | $                         | (1,280 | )                         | $ | (12,011 | ) | $ | (31,022 | )
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Basic net
 earnings (loss) per share         |  | $                                         | 0.77   |                          | $ | 0.50                      |   | $                         | (0.07  | )                         | $ | (0.62   | ) | $ | (1.60   | )
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  
|Diluted net
 earnings (loss) per share       |  | $                                         | 0.70   |                          | $ | 0.47                      |   | $                         | (0.07  | )                         | $ | (0.62   | ) | $ | (1.60   | )
|                                             |  |                                           |        |                          |   |                           |   |                           |        |                           |   |         |   |   |         |  

*
The Company adopted Statement of Financial Accounting Standards Board No.
123(revised 2004) Share-Based Payment effective January 1, 2006.

6

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|                                                                                                    |  |                                |  |                                |        |                                |  |                                |  |                                |        |  |  |        |  |  | 
|--------------------------------------------------------------------------------------------------- |  | ------------------------------ |  | ------------------------------ | ------ | ------------------------------ |  | ------------------------------ |  | ------------------------------ | ------ |  |  | ------ |  |  | 
|                                                                                                    |  | Year ended
 December 31,
 2004 |  | Year ended
 December 31,
 2005 |        | Year ended
 December 31,
 2006 |  | Year ended
 December 31,
 2007 |  | Year ended
 December 31,
 2008 |       
|                                                                                                    |  |                                |  |                                |        |                                |  |                                |  |                                |       
|                                                                                                    |  | (In thousands)                 | 
|                                                                                                    |  |                                |  |                                |        |                                |  |                                |  |                                |        |  |  |        |  | 
|Weighted average number of ordinary shares used
 in computing basic net earnings (loss) per share   |  | 17,995                         |  |                                | 18,800 |                                |  | 19,325                         |  |                                | 19,477 |  |  | 19,440 |  | 
|                                                                                                    |  |                                |  |                                |        |                                |  |                                |  |                                |        |  |  |        |  | 
|Weighted average number of ordinary shares used
 in computing diluted net earnings (loss) per share |  | 19,805                         |  |                                | 20,072 |                                |  | 19,325                         |  |                                | 19,477 |  |  | 19,440 |  | 

|                                                                                                                                  |  |                      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                                                                                                  |  | December
 31,        |        
|                                                                                                                                  |  | 2004                 |         | 2005 |   | 2006    |  | 2007 |         | 2008 |  
|                                                                                                                                  |  |                      |         |      |   |         |  |      |         |      |  
|                                                                                                                                  |  | (US $ in
 thousands) |        
|                                                                                                                                  |  |                      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Balance Sheet Data:                                                                                                               |  |                      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Cash and cash equivalents, short-term bank
 deposits and marketable securities and current maturities of long-term bank
 deposits |  | $                    | 109,020 |      | $ | 126,901 |  | $    | 140,375 |      | $ | 152,110 |  | $ | 88,796  | 
|Long-term bank deposits, structured deposit and
 marketable securities                                                            |  |                      | 48,021  |      |   | 37,592  |  |      | 23,756  |      |   | 2,735   |  |   | 45,112  | 
|Working capital                                                                                                                   |  |                      | 107,687 |      |   | 124,005 |  |      | 137,406 |      |   | 149,954 |  |   | 82,292  | 
|Total assets                                                                                                                      |  |                      | 183,241 |      |   | 204,347 |  |      | 215,668 |      |   | 216,067 |  |   | 185,464 | 
|Shareholders equity                                                                                                              |  |                      | 160,917 |      |   | 177,426 |  |      | 182,414 |      |   | 176,713 |  |   | 148,062 | 

|   |                                
|-- | -------------------------------
|B. | Capitalization and Indebtedness

Not
applicable.

|   |                                           
|-- | ------------------------------------------
|C. | Reasons for the Offer and Use of
 Proceeds

Not
applicable.

|   |             
|-- | ------------
|D. | Risk Factors

You should carefully consider
the following risks before deciding to purchase, hold or sell our ordinary
shares. 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. You should also refer to the other information
contained or incorporated by reference in this annual report, before making any
investment decision regarding our Company.

7

---

---



Risks
Related to Our Business and Our Industry

We have incurred losses, and may
continue to incur losses in the future.

We
incurred losses in 2006 through 2008. We had a net loss of approximately $31.0
million in 2008 and a net loss of approximately $12.0 million in 2007. We will
need to generate increased revenues as well as reduce our costs to return to
and maintain profitability.

Our
revenues may not grow or continue at their current level. For example, the
growth rate in 2007 compared to 2006 was approximately 9% and the growth rate
in 2008 compared to 2007 was approximately 7%. Our gross margin is currently approximately 77% and, as a result, any
decrease in sales may have a significant effect on our profitability.

In
addition, our operating expenses may 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 2008 we continued to
invest in the expansion of our new line of hardware platforms, the OnDemand Switch.
We also invested in new product development, including solutions for the
carrier sector along with the introduction of the Virtual Director and
AppWall appliances for the enterprise sector, and we continued to enhance our
DefensePro® (network security) and Insite (management) offerings. Our efforts
as well as our expenditures in these products and any related go-to-market
strategies may not result in increased revenues. If our revenues continue not
to increase as anticipated, or if our expenses are not reduced, we will
continue to incur losses.

Our results for 2008 were benefited by
financial income in an amount of approximately $3.6 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.

The global economic recession and volatility of the
market for our products, including slow-down in expenditures and other trendsin our industry, couldhave
a material adverse effect on our
results of operations.

Our business is dependent on current and
anticipated market demand for our products. In 2008, the growth rate in the
overall markets IT spending slowed down due to real estate and financial
issues globally which led to recession fears. This trend has continued into the
first quarter of 2009 and is expected to worsen in the near future. More
specifically, the growth rate of overall IT expenditures in the United States
has steadily declined since the last quarter of 2008, with estimates by IDC at
0.1% growth for 2009; in the Layer 4-7
(application delivery) sector, worldwide growth is estimated by IDC to be 3.2%
for 2009; and, in the Intrusion Prevention sector of the network security
market, the growth rate according to Gartner already slowed in 2008 down to
12.3% from a rate of 32.4% in 2007. The
economic outlook for 2009 has worsened significantly, including in our largest
markets, Europe and Asia Pacific, and the global economic recession appears set
to continue for some time although we are currently unable to predict how long
the recession will last or its full extent. Therefore, if
global conditions further 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 face the risk of a decrease in our cash balances
and losses in our investment portfolio

Investment income is an
important component of our net income. The ability to achieve our investment
objectives is affected by many factors, some of which are beyond our control.
Our cash throughout the world is invested in fixed-income securities and is
affected by changes in interest rates. Interest rates are highly sensitive to
many factors, including governmental monetary policies and domestic and
international economic and political conditions.

8

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The outlook for our
investment income is dependent on the future direction of interest rates, the
amount of any share repurchases or acquisitions that we effect and the amount
of cash flows from operations that are available for investment. Any
significant decline in our investment income or the value of our investments as
a result of continued falling interest rates, deterioration in the credit
worthiness of the securities in which we have invested, or general market
conditions, could have an adverse effect on our results of operations and
financial condition. For example, in 2008 our financial income totaled to $3.6
million, less than 50% of our financial income in 2007. This decrease is
attributed mainly to the decrease in prevailing market interest rates.

The current global credit crisis may significantly
decrease the value of our investment assets

The performance of the
capital markets affects the values of funds that are held in marketable
securities. These assets are subject to market fluctuations and will yield
uncertain returns, which may fall below our projected return rates. Due to
recent market developments, including a series of rating agency downgrades, the
fair value of these investments may decline. We expect that market conditions
will continue to fluctuate and that the fair value of our investments may be
impacted accordingly.

Our cash, cash
equivalents, short-term deposit and marketable securities totaled
$133.9 million as of December 31, 2008. Our investment portfolio policy is
buy and hold, while minimizing credit risk by setting maximum concentration
limit per issuer and credit rating. Our investments consist primarily of
government and corporate debentures. Although we believe that we generally
adhere to conservative investment guidelines, the continuing turmoil in the
financial markets may result in impairments of the carrying value of our
investment assets. We classify our investments as available-for-sale. Changes
in the fair value of investments classified as available-for-sale are not
recognized to income during the period, but rather are recognized as a separate
component of equity until realized. Realized losses in our investments portfolio
may adversely affect our financial position and results. Had we reported all
the changes in the fair values of our investments into income, our reported net
loss for the year ended December 31, 2008, would have increased by $0.9
million.

One of our primary
market risk exposures is changes in interest rates, which relates primarily to
our investments in marketable securities. A decline in market interest rates,
such as the significant global decline in recent months, has had an adverse
effect on our investment income. In a declining interest rate environment,
borrowers may seek to refinance their borrowings at lower rates and,
accordingly, prepay or redeem securities we hold more quickly than we initially
expected. This action may cause us to reinvest the redeemed proceeds in lower
yielding investments. Currently we do not hold any securities which can be
early redeemed. An increase in market interest rates could also have an adverse
effect on the value of our investment portfolio, for example, by decreasing the
fair values of the fixed income securities that comprise a substantial majority
of our investment portfolio.

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 features; 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.

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 year-over-year 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 first quarter of 2009, since some of our customers are still
planning their annual purchasing budget in the beginning of the year, and in
the third quarter of 2009 because of the slowdown in business activities during
the summer months in Europe. We further believe that our sales during the
fourth quarter of 2009 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.

9

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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. and Brocade Communications Systems, Inc.
(Foundry 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 Technologies, Inc.), McAfee, Inc., Sourcefire, Inc., and IBM
Corporation (Internet Security Systems). We expect to continue to face
additional competition as new participants enter the market or extend their
portfolios into related technologies. 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. 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.

10

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We must develop new products as well as enhancements
and new features 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.                 

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. During 2008, we invested in, and plan to continue to invest in
2009 in developing or when appropriate, acquiring, capabilities to advance our
APSolute product family and market vision for business-smart networking. As
part of such investments, we acquired Covelight Systems, Inc., or Covelight in
April 2007 for their web channel intelligence technology that allows business
events to be captured in real-time on the network. To date we have not realized
substantial revenue from the Inflight product acquired through the acquisition
of Covelight, however based on this technology we have launched a new product
(Virtual Director) for the virtualized data center environments.

These investments are part
of our 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 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 three years we
acquired the businesses of V-Secure Technologies Inc., or V-secure and
Covelight. In addition, we have entered into an asset purchase agreement with
Nortel Networks Ltd., Nortel Networks Inc. and other Nortel entities (Nortel)
to purchase certain assets of Nortel in relation to the Alteon product line
(the Alteon Acquisition). This transaction was subject to higher and better
bids and is now pending court approvals. In connection with future
acquisitions, including the Alteon Acquisition, we may assume liabilities
or write-offs, incur amortization expenses related to intangible
assets or realize large write-offs based on management decision that such
assets will no longer be used or will be phased out. 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. For example, during 2008 we had an impairment charge of $2.0
million in connection with intangible assets acquired as a result of the
Covelight acquisition. Moreover, 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.                                                                                                                                               

11

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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. Furthermore, even if we successfully integrate the acquired business
with our own, we may not receive the intended benefits of the acquisition. In
addition, our pursuit of potential acquisitions, including the Alteon
Acquisition, may divert our managements attention from our core business and
require considerable cash outlays at the expense of our existing operations,
whether or not such transactions are consummated.

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

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
several dozen 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 reduce 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 pre-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.

12

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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 started implementing 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 2007 and 2008 our sales outside the Americas
represented approximately 72% and 75%, 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. We are currently in compliance with
the RoHs Directive.

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 New Israel Shekels (NIS), whereas most of our revenues are generated in
 dollars and partially in Euros. We have witnessed a significant strengthening
 of the NIS against the dollar during 2007 and most of 2008, which has
 considerably increased the dollar value of our expenses in Israel. Should the
 NIS 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.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|· | We incur expenses in
 several other currencies in connection with our operations in Europe and
 Asia-Pacific. The devaluation of the dollar relative to such local currencies
 causes our operational expenses to increase.                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|· | The majority 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.  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.

13

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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 defects and 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.

We rely on third-party manufacturing vendors to
provide key components of our products. If such vendors are 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 Technologies and Electronics
(2003) Ltd. (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. In addition, we rely on Nexcom International Co. Ltd.
(Nexcom), to provide us with circuit boards for our new OnDemand Switch
platform. In 2008 we used both USR and Nexcom to manufacture our products,
purchasing approximately half of our products from each of those manufacturers.
We expect that in 2009 our relative portion of purchases from Nexcom will
further increase. If we must rely on 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 or Nexcom, respectively.

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. If there is growth in the economy, such growth
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.

14

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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 Radware®,
APSolute®, Web Server Director®, Cache Server Director®, FireProof®,
LinkProof®, Triangulation®, Smart Nat®, Get Certain®, CertainT®,
Peer Director®, Synapps Architecture®, DefensePro®, StringMatch
Engine®, CID  Content Inspection Director®, SIPDirector®, AppDirector®,
AppXcel®, AppXML® and SecureFlow® and we have trademark applications
pending for OnDemand Switch, Uplink, Virtual Director, APSolute
Vision, Apsolute Insite and AppWall. 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, for our method
for controlling traffic on links between autonomous BGP systems and for our
method of monitoring anomalies in users communication with server applications
in our Inflight product. 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.

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 on the rights of such
third parties. For example, in 2003 F-5 filed a patent infringement case
against us, which was thereafter settled.

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.

15

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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 bank deposits are
invested in banks in the United States and in Israel. 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 March 20, 2009, Yehuda Zisapel, a member of our Board of Directors,
beneficially owned 17.37% of our ordinary shares outstanding and Yehuda
Zisapels son, Roy Zisapel, our Chief Executive Officer, President and
director, beneficially owned approximately 3.43% of our ordinary shares
outstanding (See Item 6  Share Ownership). Additionally, Yehuda Zisapels brother,
Zohar Zisapel, beneficially owns 5.62% of our outstanding ordinary shares (See
Item 7  Major Shareholders). As a result, these shareholders, who do
not have a voting agreement,
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.

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 (i) 75% or more of our gross income is passive income,
or (ii) at least 50% of the fair market value of our assets, averaged quarterly
over our taxable year, are held for the production of, or produce, passive
income, we would be characterized as a passive foreign investment company
(PFIC), for U.S. federal income tax purposes. The market capitalization
approach has generally been used to determine the fair market value of the
assets of a publicly traded corporation. If we are classified as a PFIC, our
U.S. shareholders could suffer adverse U.S. tax consequences, 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, and to certain excess distributions
with respect to our ordinary shares.

Based
on applying the market capitalization approach using our closing stock price as
of the end of each quarter in 2008, it is likely that we would be a PFIC for
2008. However, by applying alternative valuation methodologies, including
valuation methodologies that make certain adjustments to our market
capitalization, we believe that we will not be classified as a PFIC for 2008.
There are no assurances that the IRS will not challenge this treatment and it
is possible that the IRS will attempt to treat us as a PFIC for 2008 and
possibly prior taxable years. However, the IRS has accepted other valuation
methods besides the market capitalization approach in certain valuation
contexts. The tests for determining PFIC status are applied
annually and it is difficult to make accurate predictions of our future income
and assets, and the future price of our ordinary shares which are all relevant
to this determination of whether we are classified as a PFIC. Accordingly,
there can be no assurance that we will not become a PFIC in 2009 or in
subsequent taxable years. 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. For a more detailed discussion of the rules relating to
PFICs and related tax consequences, please see the section of this annual
report entitled Item 10  Additional Information  Taxation  United States
Federal Income Tax Considerations.

We do not intend to pay cash dividends.

Our
policy is to retain earnings for use in our business and, for this reason, we
do not intend to pay cash dividends on our ordinary shares in the foreseeable
future.

16

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Our share price has decreased significantly and could
continue to fluctuate and further decrease significantly.

The
market price for our ordinary shares, as well as the prices of shares of other
technology companies, has been volatile. Our share price has decreased
significantly since the end of 2007. The highest closing price of our share, as
reported by the NASDAQ Global Select Market, during the last quarter of 2007
was $16.92, compared to the lowest closing price of $5.15 during the first
quarter of 2009. Numerous factors, many of which are beyond our control, may
cause the market price of our ordinary shares to fluctuate significantly and
further decrease, such as:

| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| | · | Fluctuations in our
 quarterly revenues and earnings and those of our publicly held competitors;    
| |   |                                                                                                     
| | · | Shortfalls in our
 operating results from levels forecast by securities analysts;                   
| |   |                                                                                                     
| | · | Announcements concerning
 us or our competitors;                                                    
| |   |                                                                                                     
| | · | The introduction of new
 products and new industry standards;                                       
| |   |                                                                                                     
| | · | Changes in pricing
 policies by us or our competitors;                                              
| |   |                                                                                                     
| | · | General market conditions
 and changes in market conditions in our industry;                        
| |   |                                                                                                     
| | · | The general state of the
 securities market (particularly the technology sector); and               
| |   |                                                                                                     
| | · | Political, economic and
 other developments in the State of Israel, the United States and worldwide.

Risks
Related to Operations 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 election in 2006 of representatives of the Hamas movement to a
majority of the seats in the Palestinian Legislative Council and its subsequent
seizure of control of the Gaza strip have created additional unrest and
uncertainty in the region. Further, in the summer of 2006, Israel
engaged in a war with Hezbollah, a Lebanese Islamist Shiite militia group,
which involved thousands of missile strikes and disrupted most day-to-day
civilian activity in northern Israel. Since June 2007, thousands of missiles
have been fired from Gaza at population centers in southern Israel, leading to
an armed conflict between Israel and the Hamas in January 2009. In addition,
Iran has threatened to attack Israel and is widely believed to be developing
nuclear weapons.

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.

17

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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.

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
and other currencies is volatile, and may negatively impact our costs.

The
majority 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 NIS, in Europe, in
Euros and in Asia-Pacific in several local currencies. In 2008, we sold in
Euros in most European countries. In this respect, the NIS may increase in
value relative to the dollar. In such event, 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.
If the dollar decreases in value relative to Chinese, Indian, Australian and/or
Japanese currencies, the dollar cost of our operations in Asia-Pacific will
increase and our operating profit will be negatively affected. For example, during
2008, the average value of the dollar decreased in relation to the NIS and Euro. As a result, during 2008, we had an
increase in expenses which was partially 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.

Because we received grants from the Israeli Office of
the Chief Scientist, we are subject to ongoing restrictions.

We
received, and may in the future apply for, royalty-bearing or
non-royalty-bearing grants from the Office of the Chief Scientist of the
Israeli Ministry of Industry, Trade and Labor, or the Chief Scientist, for
research and development programs that meet specified criteria. The terms of
the Chief Scientist grants limit our ability to manufacture products or
transfer technologies outside of Israel if such products or technologies were
developed using know-how developed with or based upon Chief Scientist grants.
In addition, any non-Israeli who becomes a holder of 5% or more of our share
capital is generally required to notify the Chief Scientist and to undertake to
observe the law governing the grant programs of the Chief Scientist, the
principal restrictions and penalties of which are the transferability limits
described above.

The tax benefits we may receive in connection with our
approved enterprise program or benefited 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.

We
have in the past received, and may in the future apply to receive, certain
Israeli government grants and may in the future utilize certain tax benefits in
Israel by virtue of these programs. To remain eligible for these grants and tax
benefits, we must continue to meet certain conditions, including making some
specified investments in fixed assets and maintaining a certain level of
foreign investors holdings in our ordinary shares. If we fail to comply with these conditions
in the future, the benefits we receive could be canceled and we may have to
refund payments previously received under these programs (with interest and
linkage differentials) or pay certain taxes. We cannot guarantee that these
programs and tax benefits will be continued in the future, at their current
levels or at all. If these programs and tax benefits are ended, our business,
financial condition and results of operations could be negatively affected.

18

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Provisions of Israeli law and of our Articles of
Association 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 and of our Articles of Association 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. In addition, our Articles of Association provide that our
directors, other than external directors, are elected in three staggered
classes by the vote of a majority of the shareholders present, in person or by
proxy, at a shareholders meeting. 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 and the
classified structure of our board of directors. 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;                       
|  |                                                                                                                                                     
|· | 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.

19

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

|   |                                       
|-- | --------------------------------------
|A. | History
and Development of the Company

Radware
Ltd. was organized in May 1996 as a corporation under the laws of the State of
Israel. 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.

We
commenced operations in April 1997. In September 1999, we conducted the
initial public offering of our ordinary shares and our ordinary shares
commenced trading on the NASDAQ. In January 2000, we completed a secondary
public offering.

In
December 2005, we acquired the business of V-Secure which included the
acquisition of
intellectual property, technology, customers relationship and goodwill, and added enhanced
capabilities to our portfolio.

In
April 2007, we acquired Covelight, a U.S.-based company providing web channel
intelligence technology, which added enhanced capabilities to our portfolio.

In
February 2009, we
entered into an asset purchase agreement with Nortel, to acquire Nortels
Layer 4-7 application delivery business. This agreement was subject to higher
and better bids and is now subject to bankruptcy court approvals. See Item 10CAdditional Information  Material
Contracts.

For
a discussion of our capital expenditures and divestitures, see Item
5Operating and Financial Review and Prospects  Liquidity and Capital
Resources.

|   |                  
|-- | -----------------
|B. | Business
Overview

General

Our
target market is comprised of two main market sectors: Application Delivery and
Network Security.

The
Application Delivery market sector consists of simple load balancing
application switches (Layer 4-7) targeted at the small- and medium-size
business sector; advanced application delivery platforms targeted at the
medium- to large-size enterprise sector; and wide area network (WAN)
optimization controllers. This market is also referred to by select industry
analysts as the Application Acceleration market. Our Application Delivery
product portfolio consists of advanced application delivery platforms, which
offer in addition to Layer 4-7 switching more sophisticated features (Web
application firewall, extensible Markup Language (XML) validation, Session
Initiation Protocol (SIP) Load Balancing, Application Program Interfaces
(APIs), content transformation, etc.) that are designed to meet complex
networking infrastructure and data center demands.

The
Network Security market sector is more diffuse and consists of firewall/Virtual
Private Networks (VPN), Unified
Threat Management (UTM), intrusion detection systems, intrusion prevention
systems, network behavioral analysis (NBA) systems and Secure Sockets
Layer/ Internet Protocol Security (SSL/IPSec)
VPN appliances. Our proprietary offering to this market focuses on network
intrusion prevention systems, which are in-line devices that monitor
network and/or system activities for malicious or unwanted behavior and can
react, in real-time, to block or prevent those activities.

We
develop, manufacture and market networking solutions that allow our enterprise
and carrier customers to deliver their mission critical applications
successfully between data centers and remote locations, over all critical
points in the network.

20

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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. In addition our solutions enable our
customers to monitor and extract business events from their network traffic -
and in real-time - allow business decisions to take place on these events as
they unfold. Our solutions help customers
increase business agility, save capital expenditures and operating
expenditures, improve productivity and extract the greatest value from
investments in network infrastructures.

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).

Most
recently, we have received the following recognition and/or awards:

|  |  |                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------
|· |  | Internet
 Telephony Magazine(2008
 Product of the Year),                                                                              
|  |  |                                                                                                                                       
|· |  | Internet
 Telephony Magazine(2008
 Internet Telephony Excellence Award),                                                              
|  |  |                                                                                                                                       
|· |  | Network
 Products Guide (2008
 Readers Trust Award for Best in Global Load Balancing),                                                
|  |  |                                                                                                                                       
|· |  | Internet
 Telephony Magazine
 (2008 TMC Labs Innovation Award),                                                                       
|  |  |                                                                                                                                       
|· |  | Network
 Products Guide (2008
 Product Innovation Award  Behavioral Security),                                                       
|  |  |                                                                                                                                       
|· |  | SC Magazine (Finalist  2008 SC Award Europe  Best
 Network Security) and                                                            
|  |  |                                                                                                                                       
|· |  | Info Security Products
 Guide (2008 Global Product Excellence Award; Winner  Application
 Security; Finalist  Intrusion Prevention).

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;
|  |  |                                                                                                                       
|· |  | FIPS 140-2 through the
 National Institute of Standards (NIST); and                                                   
|  |  |                                                                                                                       
|· |  | ISO 9001:2000 Quality of
 Management.                                                                                 

In addition, we have been
recognized as among the top industry players in our respective markets by
independent, third-party IT analysts such as Forrester Research, Frost &
Sullivan, Gartner, IDC and Yankee Group.

21

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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 (Application Switch series and OnDemand Switch series) 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.

If
the Alteon Acquisition is consummated, the Alteon product line is planned to
enhance the Companys application delivery portfolio.

Products (APSolute Product Suite)

The
APSolute® product suite consists of the following product families:

·          AppDirector®Intelligent Application Delivery Controllerensures a
reliable, fast and secure delivery of mission critical data center
applications, eliminating the costs of application downtime and service
degradation while enhancing productivity. AppDirector provides for data center
optimization with advanced Layer 4-7 policies and granular packet
classification in order to eliminate traffic surges, server bottlenecks,
connectivity disconnects and downtime for ensured business continuity.
AppDirector also provides for web compression and Hypertext Transfer Protocol
(HTTP or Web) multiplexing, and accelerates web applications for high
performance content serving and Secure Sockets Layer (SSL) encryption and
decryption, providing secure and effective SSL processing.

·          AppXcel®Application Acceleratoraccelerates response time to end users and
free server resources, improving profitability and cost saving through web
compression and Web multiplexing, and accelerates web applications for high
performance content serving and SSL encryption and decryption, providing secure
and effective SSL processing.

·          Application Performance Monitoring (APM) provides
real-time detailed visibility into application performance and accurately
pinpointing the source of performance degradation using existing application
delivery infrastructure.

·          AppXML® provides secure, high-performance XML and web services
communications for Service Oriented Architecture (SOA) based mission-critical
applications between an enterprise and its business partners

·          DefensePro® Intrusion Prevention and Denial
of Service products protect against worms, bots, viruses, malicious intrusions
and Denial of Service attacks at up to 12-Gigabit speeds, preventing attacks in
real-time for intrusion prevention and multi-layer application defense.

·          CID - Content Inspection Director® is a
service delivery platform for carriers that enables centralized and optimized
IP value added service deployment. It also provides high-performance security,
media services and customizing delivery, to guarantee Service Level Agreements
and generate new sources of revenues.

·          Inflight is a hardware device that
provides online, network-based pervasive monitoring solution that delivers
actionable, real-time business-level events to any back-end analytic system to
optimize business processes and ensure compliance.

·          Insite ManageProis an appliance-based
management and monitoring system for IT staff to centrally manage distributed
devices and check the health, real-time status, performance and security of
enterprise-wide application delivery infrastructures.

·          LinkProof®manages multiple WAN and
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, optimized performance and cost
effective WAN connectivity.

22

---

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·          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.

·          SecureFlowsimplifies the management and
optimizes performance of best of breed enterprise security tools to 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.

·          SIP Director®is a comprehensive SIP-aware
application delivery controller (ADC) for application vendors, telecom
equipment manufacturers (TEMs) and system integrators (SIs). SIP director
ensures the delivery of a reliable, fast and secure SIP service in a cost
effective manner.

·          Virtual Director an application delivery
optimization solution for the virtualized data center providing real-time,
dynamic allocation of data center resources based to ensure positive user
experience and improved response time. The solution aligns virtual data center
operations with business policies while optimizing the use of virtual as well
as physical resources to further generate CAPEX and OPEX savings.

Application Switch Platforms

Our
previous generation of products is powered by our Application Switch platforms.
Our 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.

Our
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.

Application
Switch 5 is a high-end platform for large enterprises and carriers 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.

23

---

---



In
the beginning of 2008, we introduced our new generation of hardware platforms,
the OnDemand Switch 1 & 2 series, designed for medium and large-sized
enterprises and carriers. OnDemand Switch provides expandable throughput from
0-4 Gbps via software license upgrade to meet the ever-changing needs of
growing businesses, simplifying the upgrade process and providing investment
protection, with on-demand throughput and services scalability, supporting all
layer 4-7 network requirements. The OnDemand Switch 1 Series features nominal
throughput from 0 to 4Gbps with 4 traffic ports of gigabit Ethernet; the
OnDemand Switch 2 Series features nominal throughput from 1-4 Gbps and 16
traffic ports of gigabit Ethernet. In the fourth quarter of 2008, we introduced
the OnDemand Switch 3 series, which delivers the same acclaimed on demand,
pay-as-you-grow software license upgrade capability. The OnDemand Switch 3 Series features
scalability and investment protection up to 16Gbps of throughput capacity, high
port density including 10GE traffic ports, and dual redundant AC/DC power
supply.

We
intend to offer the entire APSolute® product
family on the OnDemand Switch series. The AppDirector® product
line is the first to be followed by the DefensePro® and
LinkProof® product lines.

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.

Operating System (APSolute OS)

APSolute
OS is a modular operating system for our products. 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.

·APSolute OS Application-Smart Classification and Flow
Management

Our
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
and application servers to optimize the utilization of local and global
resources, and ensure service availability, security 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 response time,
custom algorithm, 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).

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·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, Web compression and advanced image and content compression.

·APSolute OS Intrusion Prevention

Automatically
secures application network resources by continuously monitoring and inspecting
all network 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.

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.

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 products for
availability, performance and security of their applications from headquarters
to branch offices.

In
2008, approximately 25% of our sales were in the Americas (principally in the
United States), 32% were in EMEA (Europe, Middle East and Africa) and 43% in
Asia-Pacific, compared to 28%, 33% and 39%, respectively, in 2007, and 34%, 34%
and 32%, respectively, in 2006. Other than the United States and China, no
single country accounted for more than 10% of our sales for 2008. For
additional details regarding the breakdown of our revenues by geographical
distribution and by activity, see Item 5A.

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In
2008, approximately 63% of our sales derived from product sales and 37% derived
from service sales, compared to approximately 67% and 33%, respectively, in
2007 and approximately 70% and 30%, respectively, in 2006. For the years ended December 31, 2008 and
2007, no single customer accounted for more than 10% of our sales. For the year
ended December 31, 2006, one single customer (a distributor) accounted for 12%
of our sales. As of December 31, 2008 and 2007, no single customer
represented more than 10% of the trade receivables balance.

Seasonality

Our
quarterly operating results have been, and are likely to continue to be,
influenced by seasonal fluctuations in our sales and by
seasonal purchasing patterns of some of our customers. Some of our customers plan their annual
purchasing budget at the beginning of each year which causes the first quarter
of the year to be slow compared to other quarters. In addition the third
quarter may be weak compared to other quarters because of the slowdown in
business activities during the summer months in Europe. Furthermore, certain of
our customers tend to make greater capital expenditures towards the end of
their own fiscal years thus increasing our sales for such period.

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 mainly in the United States. 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, 2008, we employed a total of 31 sales
managers and sales staff in the Americas with locations in various states. We
also employed 88 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 to help drive demand for our products. 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, generating demand and providing support to our
distributors/resellers to promote sales. We participate in major trade shows,
regionally-based events/seminars and offer support to our distributors who
participate in these events. We also invest in online and search engine
advertising campaigns, global public relations and regionalized field marketing
campaigns. 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 sectors, in order to broaden our customer base by selling joint
solutions comprised of such complementary products. As an example, an
applications vendor could sell our AppDirector to its customers in conjunction
with its application in order to load-balance and optimize the application
performance. Such co-marketing arrangements include: ArcSight Inc; Comverse;
Hewlett Packard Company; IBM, Inc.; InfoSys Technologies Ltd; Microsoft
Corporation; Oracle Corporation; Riverbed Technology Inc.; SAP AG.; Juniper
Networks, Inc.; Intellitactics, Inc. and VMWare, Inc. However, there is no
assurance that the above co-marketing and strategic alliance agreements would
result in a substantial increase in our revenues.

26

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Strategic Alliances and Original Equipment
Manufacturer Agreements.We have entered into strategic alliances
and original equipment manufacturer agreements with other software and hardware
vendors, 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. 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. We have also entered
into original equipment manufacturer agreements with several software vendors,
in which we incorporate such vendors software into our products to create
additional value to our customers.

Technical Management

Our
technical team, which consists of 130 employees worldwide as of December 31,
2008, 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 Delivery and Network Security
markets, 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 sectors.

As
of December 31, 2008, our research and development staff consisted of 191
employees. Research and development activities take place mainly 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 into
Security, Application Delivery and Management groups. Within those groups the
organization is divided according to our existing products. Each product group
is headed by a group leader and includes team leaders and engineers. Each group
has a dedicated quality assurance team. In addition, we have an infrastructure
department responsible for the development of our platforms which are the basis
for all products, serving all product groups, which consists of a senior group
leader, group leaders, team leaders, and engineers. The heads of all research
and development divisions report to the Chief Operating Officer.

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

Manufacturing and Suppliers

The
assembly and integration of our products, quality assurance testing, packaging
and shipping operations are primarily performed at our facility in Jerusalem,
Israel.

We
rely on third-party manufacturing vendors to provide key components of our
products.

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. In addition,
we rely on Nexcom to provide us with circuit boards for our new OnDemand Switch
platform.

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Circuit
boards are the principal component which we use in the manufacturing process 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. In 2007 we entered into agreement with Nexcom, an
additional supplier, and in 2008 shifted approximately 50% of our purchases to
such second supplier. The manufacturing process with this supplier, who is ISO
9001 certified, is similar to the process with USR. We expect that in 2009 we
would shift an additional share of our purchases to Nexcom, which is the sole
manufacturer of the circuit board for our new OnDemand Switch platform,
converting Nexcom to our main supplier. Therefore, our dependency of Nexcom may
increase.

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 Radware®, APSolute®, Web Server Director®,
Cache Server Director®, FireProof®, LinkProof®, Triangulation®, Smart
Nat®, Get Certain®, CertainT®, Peer Director®, Synapps Architecture®,
DefensePro®, StringMatch Engine®, CID  Content Inspection Director®,
SIP Director®, AppDirector®, AppXcel®, SecureFlow® and AppXML® and we
have trademark applications pending for OnDemand Switch, Uplink, Virtual
Director, AppWall, Apsolute Insite and APSolute Vision. 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, for our method for controlling traffic on links
between autonomous BGP systems and for our passive monitoring and event
detection mechanisms, used for business event monitoring in our Inflight
product. 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.

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. and Brocade Communications
Systems, Inc. (Foundry 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 Technologies Inc.), McAfee, Inc., Sourcefire, Inc., and IBM
Corporation (Internet Security Systems), we expect to continue to face
additional competition as new participants enter the market or extend their
portfolios into related technologies. Larger companies with substantial
resources, brand recognition and sales channels may also form alliances with or
acquire competing Application Delivery or Network Security solutions and emerge
as significant competitors. For example, Brocade became a competitor in the
Application Delivery market by acquiring Foundry. 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.

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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.

Government Regulations

Environmental Regulations

Our
activities in Europe require that we comply with European Union Directives with
respect to product quality assurance standards and environmental standards. The RoHs Directive requires
products sold in Europe to meet certain design specifications, which exclude
the use of hazardous substances. Directive 2002/96/EC on Waste Electrical and Electronic Equipment (known
as the WEEE Directive) requires produces of electrical and electronic
equipment to register in different European countries and to provide collection
and recycling facilities for used products. We are currently in compliance with the RoHs and
WEEE regulations.

Israeli 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
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. The increased royalty rate and repayment amount will
be required in such cases.

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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 consortium 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. No future grants are expected in relation to
this project.

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 special 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.

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|   |                         
|-- | ------------------------
|C. | Organizational Structure

We
have 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. An additional subsidiary of
ours is Covelight Systems, Inc., acquired in April 2007 and located in the
United States. We have also established representative offices in China, Taiwan
and Russia. All of our subsidiaries are wholly-owned. Our subsidiaries include:

|                            |                                     
|--------------------------- | ------------------------------------
|Name of Subsidiary          | Country of Incorporation            
|Radware Inc.                | New Jersey, United States of America
|Radware UK Limited          | United Kingdom                      
|Radware France              | France                              
|Radware Srl                 | Italy                               
|Radware GmbH                | Germany                             
|Nihon Radware KK            | Japan                               
|Radware Australia Pty. Ltd. | Australia                           
|Radware Singapore Pte.
Ltd. | Singapore                           
|Radware Korea Ltd.          | Korea                               
|Radware Canada Inc.         | Canada                              
|Radware GmbH                | Switzerland                         
|Radware India Pvt. Ltd.     | India                               
|Covelight Systems, Inc.     | Delaware, United States of America  

Yehuda
Zisapel, one of our co-founders and shareholders, is a member of our Board of
Directors and the father of our Chief Executive Officer and President, Roy
Zisapel. Individually or together with his brother, Zohar Zisapel, who is also
one of our shareholders, Yehuda Zisapel is also a founder, director and/or
principal shareholder of several other companies which, together with our
Company and our subsidiaries listed above, are known as the RAD-Bynet Group.
These companies include, among others:

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

The
RAD-Bynet 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.

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|   |                               
|-- | ------------------------------
|D. | Property, Plants and Equipment

Israel.Our headquarters and
principal administrative, finance, research and development and marketing
operations are located in approximately 66,000 square feet of leased office
space in Tel Aviv, Israel, in two buildings: one, consisting of approximately
36,000 square feet, with a lease expiring in November 2012, and the other
consisting of 30,000 square feet, with a lease expiring in May 2011. Both
facilities are leased from 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 of approximately 5,920 square feet in
a nearby location in Israel from an unaffiliated party. The lease for such office
space expires in March 2009.

For further details
regarding the lease agreements of our headquarters please refer to the summary
of the lease agreements filed by us as Exhibit 4.7 in Item 19.

In
addition, we lease approximately 6,291 square feet of space in Jerusalem for
development facilities from an affiliated company owned by Messrs. Yehuda and
Zohar Zisapel. The lease expires in February 2011. We also sublease
approximately 2,150 square feet in Jerusalem for our manufacturing facility.
The sublease expires in April 2009. For more information see  Item 7 - Major
Shareholders and Related Parties Transactions.

The
aggregate annual rent for the premises in Israel for 2008 was approximately
$1,439,000.

Other
locations.In the United States, we lease approximately 14,838
square feet of property in Mahwah, New Jersey from a company owned by Yehuda
and Zohar Zisapel. The lease for such property is set to expire in April 2010.
For more information see  Item 7 - Major Shareholders and Related Parties
Transactions. We lease approximately 6,881 square feet of property for our
research and development facilities in North Carolina, the lease for which will
expire in September 2012. In addition, we lease facilities for the operation of
our subsidiaries and representative offices in several locations in Europe and
Asia-Pacific, all from unrelated third parties.

The
aggregate annual rent for our premises located outside Israel was approximately
$2,132,000 in 2008.

|         |                          
|-------- | -------------------------
|ITEM 4A. | UNRESOLVED STAFF COMMENTS

None.

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

|   |        
|-- | -------
|A. | 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 to a large
extent through sales channels such as resellers and distributors. Most of our
direct sales are to strategic customers in the United States.

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, net.
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.

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 of 2002, and additional consulting fees),
bad debt expenses and other general corporate expenses.

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 amortized to operating expenses over the vesting
period of the individual options.

33

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On January 1, 2006, we
adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment (SFAS 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 (the SEC) issued Staff
Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). We have
applied the provisions of SAB 107 in our adoption of SFAS 123(R).

Our adoption of SFAS No.
123(R) resulted in additional operating expenses of $4.5 million and $8.1
million in 2007 and 2008, respectively, and contributed 23 cents and 42 cents
loss per diluted share in each of these years, respectively. The impact of SFAS
123(R) on our results of operations in future periods 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.

On December 31, 2007, we
granted 500,000 stock options to Roy Zisapel, our Chief Executive Officer, with
an exercise price of $15.22 per share. The exercise of these options is
contingent upon the increase in the market price of our ordinary shares above
certain share closing prices as detailed in the grant terms. The options expire
seven years from the grant date. For details on the calculation of the fair
market value of the options see note 10 to our Consolidated Financial
Statements included in this annual report.

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 ordinary shares to the public, from the exercise of options to purchase our
ordinary 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 27% for the 2008 tax year and 26% for the 2009
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 to 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,
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 approved enterprise
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 utilizing these
capital losses in subsequent years. In addition, we and our U.S. subsidiary
have carry-forward tax losses to offset against future taxable profit. During
2008 we provided a full valuation allowance with respect to these carry-forward
tax losses due to uncertainty in its future utilization. Other two subsidiaries
of ours also 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 of these two subsidiaries and we anticipate that we
will utilize part of these tax losses in 2009 and subsequent years. Other
subsidiaries of ours are taxed according to the laws in their countries of incorporation
and tax expenses are recorded accordingly. We may incur tax expenses in 2009
which we anticipate to be at a rate of up to 10% of our operating income,
assuming we are profitable in 2009.

34

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Market Trends. According to IT analyst estimations, the IT
market in 2008 continued to grow slightly but at a lesser rate than 2007. Thus
far in 2009, growth
has been slow due to real-estate and financial issues leading to recession
fears. More specifically, the growth rate of overall IT expenditure in the US
has steadily declined since the last quarter of 2008, with estimates by IDC at
0.1% growth for 2009. IDC further advises that
hardware spending has suffered a sharper cutback than software expenditures as
companies try to extend asset lifecycles. Furthermore, in the Layer 4-7 (application
delivery) sector, worldwide growth is estimated by IDC to be 3.2% for 2009;
and, in the Intrusion Prevention sector of the network security market,
the growth rate according to Gartner already slowed in 2008 down to 12.3% from
a rate of 32.4% in 2007. In light of the foregoing, 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 decide to reduce
capital expenditures or if our customers continue to experience low visibility
of future market trends, we may experience a reduction in sales, as well as
downward pressure on the price of our products. The above mentioned scenarios
would have a material adverse effect on our business, operating results and
financial condition.

We
expect to continue to face additional competition as new participants enter the
market or extend their portfolios into related technologies. For example, F5
acquired Attune Systems adding further virtualization capabilities post its
acquisition of Acopia Networks, Citrix acquired XenSource to add virtualization
to its respective portfolios and Brocade entered the space by way of its
acquisition of Foundry Networks. The dynamic market environment, which is
demonstrated by the above acquisitions, poses a challenge in predicting market
trends and expected growth.

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: participation in high-touch regional seminars; investment
in online marketing and advertising programs; co-marketing with distributors,
resellers and alliances; testing of our products by leading firms in the
industry; and similar related activities. 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, customer relationships 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. The agreement by
the parties provided for additional cash consideration of $6,000,000 subject to
meeting certain requirements. Pursuant to an addendum signed by the parties in
2006, 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 2008, 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 the business of Covelight which included the acquisition of its
working capital, property and equipment, technology, customer relationships and
goodwill. The total consideration for the acquisition was $7,660,000 which was
paid in cash, of which $160,000 was related to acquisition costs. Additional
cash consideration of $8,500,000 was to be payable contingent upon reaching
sales performance targets by April 2008. Since the sales targets were not
achieved we were not required to pay the additional earn-out amount.
Accordingly the total consideration for the acquisition amounted to $7,660,000.

The acquisition of
Covelight was accounted for under the purchase method of accounting. The
purchase price was allocated to the identifiable intangible assets acquired
(which have been valued by management using a third-party valuation specialist)
based upon their estimated fair values. During 2008, we assessed whether there
has been an impairment of the intangible assets acquired in the acquisition of
Covelight. In order to make such assessment, our management has developed the
required assumptions and the related forecasts underlying the valuation and
used a third party valuator in applying the customary valuation techniques and
required economic models. Following this valuation, an impairment charge of
approximately $2.0 million was recorded in connection with the acquired
intangible assets. See also note 1f to our Consolidated Financial Statements
included in this annual report.

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In February 2009, we
entered into an asset purchase agreement with Nortel, to acquire Nortels Layer
4-7 application delivery business. This transaction was subject to higher and
better bids and is now pending bankruptcy court approvals. See Item
10CAdditional Information  Material Contracts.

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 included in this
annual report, 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;                                  
|  |                                                                    
|· | Marketable securities;                                             
|  |                                                                    
|· | Inventory valuation;                                               
|  |                                                                    
|· | Goodwill and intangible assets valuation, and
 impairment analysis;
|  |                                                                    
|· | 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 to a
large extent through distributors and resellers, all of which are considered
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, which is not considered essential to the functionality of the product,
is recognized ratably over the contract period, which is typically one year.

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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.

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.

Marketable
Securities. We account for investments in marketable debt
securities in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115). Management determines the
appropriate classification of its investments in debt securities at the time of
purchase and reevaluates such determinations at each balance sheet date.

As of December 31, 2008,
all of our debt securities are classified as available-for-sale securities.
Available-for-sale securities 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. As of December 31, 2007 and December 31, 2008, no
impairment losses have been identified.

Valuation
of financial instruments

Effective
January 1, 2008, we adopted SFAS 157, Fair Value Measurements, and
effective October 10, 2008, we adopted FSP No. SFAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active, except as it applies to the non-financial assets and non-financial
liabilities subject to FSP 157-2. SFAS 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or
a liability. As a basis for considering such assumptions, SFAS 157 establishes
a three-tier value hierarchy, as set forth below, which prioritizes the inputs
used in the valuation methodologies in measuring fair value:

| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| | · | Level 1 - Observable inputs that reflect quoted
 prices (unadjusted) for identical assets or liabilities in active markets.
|
| | · | Level 2 - Include other inputs that are
 directly or indirectly observable in the marketplace.                             
|
| | · | Level 3 - Unobservable inputs which are
 supported by little or no market activity.                                        

The fair value hierarchy
also requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.

The actual value at
which such securities could actually be sold or settled with a willing buyer or
seller may differ from such estimated fair values depending on a number of
factors, including, but not limited to, current and future economic conditions,
the quantity sold or settled, the presence of an active market and the availability
of a willing buyer or seller.

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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, inventory write-downs may be required and would
be reflected in cost of sales for such period. During 2007 we performed
inventory write-offs in a total amount of $2.1 million, mainly in connection
with the release of our new generation platforms. During 2008 we performed
inventory write-offs in a total amount of $0.6 million, mainly in connection
with slow-moving items and discontinued products.

Goodwill
and Intangible assets. Goodwill represents excess of the
costs over the fair value of net assets of businesses acquired. Under SFAS No.
142 (SFAS 142), goodwill is not amortized. SFAS 142 requires goodwill to be
tested for impairment at least annually thereafter or between annual tests in
certain circumstances, and written down when impaired. 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 years
ended December 31, 2007 and December 31, 2008 no such impairment losses were
recorded.

Intangible assets, other
than goodwill, 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
142. Acquired technology and customer relationships are amortized over an
estimated period between one to ten years during which benefits are expected to
be received. During 2008, an amount of $906,000 was recorded as amortization
expenses, included in cost of revenues and sales and marketing expenses. As of
December 31, 2007, no impairment losses have been identified. As of December
31, 2008 an impairment loss of approximately $2.0 million was recorded in
connection with the acquired technology of Covelight, included in costs of
revenues.

Stock-based
compensation. For a discussion of the accounting of
stock-based compensation - see Item 5  Operating and Financial Review and
Prospects - General - Stock-based
compensation, and note 2p to our Consolidated Financial Statements
included in this annual report.

Income
Taxes.We and our subsidiaries account for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 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. We and our 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.

In July 2006, the
Financial Accounting Standards Board (the FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109 (FIN 48). 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 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) otherwise a full liability in respect
of a tax position not meeting the more-than-likely-than-not criteria is
recognized. Under step two, the tax benefit is measured as the largest amount
of benefit, determined on a cumulative probability basis, which is
more-likely-than-not to be realized upon ultimate settlement.

FIN 48 applies to all
tax positions related to income taxes subject to FAS 109. This includes tax
positions considered to be routine as well as those with a high degree of
uncertainty. FIN 48 has expanded disclosure requirements, which include a
tabular roll forward of the beginning and ending aggregate unrecognized tax
benefits as well as specific detail related to tax uncertainties for which it
is reasonably possible the amount of unrecognized tax benefit will
significantly increase or decrease within twelve months (See also note 12a to
the consolidated financial statements). FIN 48 is effective for fiscal years
beginning after December 15, 2006. The cumulative effect of applying FIN 48 is
reported as an adjustment to the opening balance of retained earnings. The
adoption of FIN 48 as of January 1, 2007, did not have any effect on our
retained earnings and financial position.

38

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Legal
Contingencies.We are a party to a number of litigation
proceedings as described in Item 8  Financial Information - Legal
Proceedings.

Impact
of recently issued Accounting Standards

In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), to delay the
effective date of FASB Statement 157 for one year for certain non-financial assets and non-financial liabilities,
excluding those
that are recognized or disclosed in financial statements at fair value on a
recurring basis (that is, at least annually). For purposes of applying the
FSP 157-2, non-financial assets
and non-financial liabilities
include all assets and liabilities other than those meeting the definition of a
financial asset or a financial liability in FASB Statement 159. FSP 157-2
defers the effective date of Statement 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP 157-2. We do not expect the adoption of FAS 157
with respect to certain non-financial assets and non-financial liabilities,
excluding those that are recognized or disclosed in the consolidated financial
statements at fair value on a recurring basis (at least annually), to have a
material impact on our financial position, results of operations or cash flow.

In
March 2008, the FASB issued Statement 161 Disclosures about Derivative
Instruments and Hedging Activities (SFAS 161) an amendment to FASB No.
133. This statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why and entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Early application is
encouraged. We do not expect the adoption of SFAS 161 to have a material
impact on our financial position, results of operations or cash flow.

In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and
Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008. We do not expect the adoption of FAS 142-3 to
have a material impact on our consolidated financial statements, results of
operations or cash flow.

In
June 2008, the FASB issued FSP EITF No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities. Under the FSP, unvested share-based payment
awards that contain rights to receive non-forfeitable dividends (whether paid
or unpaid) are participating securities, and should be included in the
two-class method of computing EPS. The FSP is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years,
and is not expected to have a significant impact on our consolidated financial
statements, results of operations or cash flow.

In
November 2008, the FASB ratified Emerging Issues Task Force Issue
No. 08-7, Accounting for Defensive Intangible Assets. EITF 08-7
clarifies the accounting for certain separately identifiable intangible assets
which an acquirer does not intend to actively use but intends to hold to
prevent its competitors from obtaining access to them. EITF 08-7 requires
an acquirer in a business combination to account for a defensive intangible
asset as a separate unit of accounting which should be amortized to expense
over the period the asset diminishes in value. EITF 08-7 is effective for
fiscal years beginning after December 15, 2008, with early adoption
prohibited. We are currently evaluating the potential impact, if any, of the
adoption of EITF 08-7 on our consolidated financial statements.

39

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In
December 2007, the FASB issued SFAS No. 141(R) Business Combinations (SFAS
141(R)) and SFAS No. 160 Accounting and Reporting of Non-controlling
Interests in Consolidated Financial Statements  an amendment of ARB No. 51
(SFAS 160). These standards will significantly change the accounting and
reporting for business combination transactions and non-controlling interests in consolidated
financial statements. SFAS 141(R) requires companies to recognize all the
assets acquired and liabilities assumed in a business combination and
establishes the acquisition date fair value as the measurement objective,
including capitalizing at the acquisition date the fair value of acquired
in-process research and development, and re-measuring and writing down these
assets, if necessary, in subsequent periods during their development. SFAS
141(R) will also impact the determination of acquisition-date fair value of
consideration paid in a business combination (including contingent
consideration), exclude transaction costs from acquisition accounting, and
change accounting practices for acquired contingencies, acquisition-related
restructuring costs, indemnification assets, and tax benefits. SFAS 141(R) and
SFAS 160 will be applied prospectively for business combinations that occur on
or after January 1, 2009, except that presentation and disclosure requirements
of SFAS 160 regarding non-controlling
interests shall be applied retrospectively. We will adopt SFAS 141(R) and SFAS
160 as of January 1, 2009, as required. If the Alteon acquisition is consummated, the accounting and business combination transaction will be
recorded in accordance with both pronouncements.

EITF
issue No. 08-6, Equity-Method Investment Accounting(EITF 08-6)
concludes that the cost basis of a new equity-method investment would be
determined using a cost-accumulation model, which would continue the practice
of including transaction costs in the cost of investment and would exclude the
value of contingent consideration. Equity-method investment should be subject
to other-than-temporary impairment analysis. It also requires that a gain or
loss to be recognized on the portion of the investors ownership sold. EITF
08-6 will be effective for the reporting period beginning after December 15,
2008. We do not expect the adoption of EITF 08-6 to have a material impact on
our financial position, results of operations or cash flows.

40

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|   |                  
|-- | -----------------
|B. | Operating Results

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

|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|--------------------------------------------- |  | ------------------------------ | ----- | ------------------------------ |  | ------------------------------ | - | ------------------------------ | ----- | ------------------------------ |  | ------ | - |  | ------ | -
|                                              |  | Year ended
 December 31,
 2004 |       | Year ended
 December 31,
 2005 |  | Year ended
 December 31,
 2006 |   | Year ended
 December 31,
 2007 |       | Year ended
 December 31,
 2008 | 
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                | 
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                | 
|Revenues:                                     |  |                                | 76.3  | %                              |  | 72.1                           | % |                                | 70.4  | %                              |  | 67.0   | % |  | 63.1   | %
|Products                                      |  |                                | 23.7  |                                |  | 27.9                           |   |                                | 29.6  |                                |  | 33.0   |   |  | 36.9   |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Services                                      |  |                                | 100.0 |                                |  | 100.0                          |   |                                | 100.0 |                                |  | 100.0  |   |  | 100.0  |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Cost of Revenues:                             |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Products                                      |  |                                | 11.8  |                                |  | 12.0                           |   |                                | 12.6  |                                |  | 14.8   |   |  | 16.0   |  
|Services                                      |  |                                | 6.0   |                                |  | 7.2                            |   |                                | 6.8   |                                |  | 6.7    |   |  | 6.8    |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|                                              |  |                                | 17.8  |                                |  | 19.2                           |   |                                | 19.4  |                                |  | 21.5   |   |  | 22.8   |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Gross profit                                  |  |                                | 82.2  |                                |  | 80.8                           |   |                                | 80.6  |                                |  | 78.5   |   |  | 77.2   |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Operating expenses:                           |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Research and development, net                 |  |                                | 15.1  |                                |  | 16.8                           |   |                                | 21.7  |                                |  | 26.5   |   |  | 30.0   |  
|Sales and marketing                           |  |                                | 46.6  |                                |  | 51.5                           |   |                                | 61.6  |                                |  | 65.4   |   |  | 67.2   |  
|General and administrative                    |  |                                | 6.6   |                                |  | 6.8                            |   |                                | 7.6   |                                |  | 8.0    |   |  | 12.8   |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Total operating expenses                      |  |                                | 68.3  |                                |  | 75.1                           |   |                                | 90.9  |                                |  | 100.0  |   |  | 110.0  |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Operating profit (loss)                       |  |                                | 13.9  |                                |  | 5.7                            |   |                                | (10.3 | )                              |  | (21.5  | ) |  | (32.8  | )
|Financial income, net                         |  |                                | 6.7   |                                |  | 6.6                            |   |                                | 9.1   |                                |  | 8.4    |   |  | 3.8    |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Income (loss) before income Taxes             |  |                                | 20.6  |                                |  | 12.3                           |   |                                | (1.2  | )                              |  | (13.1  | ) |  | (29.0  | )
|Income taxes                                  |  |                                | (0.5  | )                              |  | (0.3                           | ) |                                | (0.4  | )                              |  | (0.5   | ) |  | (3.8   | )
|Minority interest in earnings Of a subsidiary |  |                                |      |                                |  |                               |   |                                |      |                                |  |       |   |  |       |  
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  
|Net income (loss)                             |  |                                | 20.1  | %                              |  | 12.0                           | % |                                | (1.6% | )                              |  | (13.6% | ) |  | (32.8% | )
|                                              |  |                                |       |                                |  |                                |   |                                |       |                                |  |        |   |  |        |  

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.

41

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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, 2006, 2007 and 2008:

|                                                                  |  |                                 |        |                                 |  |                                 |   |                 |        |                           |  |                   |   |  |        |  |  |      |  
|----------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------- |  | ------------------------------- | - | --------------- | ------ | ------------------------- |  | ----------------- | - |  | ------ |  |  | ---- | -
|                                                                  |  | Year Ended
 December 31, 
 2006 |        | Year Ended
 December 31, 
 2007 |  | Year Ended
 December 31, 
 2008 |  
|                                                                  |  |                                 |        |                                 |  |                                 |  
|                                                                  |  | (in
 thousands 
 of U.S. $)     |        | (by 
 percentage)               |  | (in
 thousandsof U.S. $)        |   | (by percentage) |        | (in
 thousands of U.S. $) |  | (by 
 percentage) |  
|                                                                  |  |                                 |        |                                 |  |                                 |   |                 |        |                           |  |                   |   |  |        |  |  |      |  
|North,
 Central and South America (principally the United States) |  |                                 | 27,646 |                                 |  | 34.0                            | % |                 | 24,368 |                           |  | 27.5              | % |  | 23,715 |  |  | 25.1 | %
|EMEA
 (Europe, the Middle East and Africa)                        |  |                                 | 27,529 |                                 |  | 33.8                            | % |                 | 29,412 |                           |  | 33.2              | % |  | 29,836 |  |  | 31.6 | %
|Asia-Pacific                                                      |  |                                 | 26,235 |                                 |  | 32.2                            | % |                 | 34,851 |                           |  | 39.3              | % |  | 41,030 |  |  | 43.4 | %
|                                                                  |  |                                 |        |                                 |  |                                 |   |                 |        |                           |  |                   |   |  |        |  |  |      |  
|                                                                  |  |                                 |        |                                 |  |                                 |   |                 |        |                           |  |                   |   |  |        |  |  |      |  
|Total                                                             |  |                                 | 81,410 |                                 |  | 100                             | % |                 | 88,631 |                           |  | 100               | % |  | 94,581 |  |  | 100  | %
|                                                                  |  |                                 |        |                                 |  |                                 |   |                 |        |                           |  |                   |   |  |        |  |  |      |  

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, 2006, 2007 and 2008:

|         |  |                                 |        |                                 |  |                                 |   |                   |        |                            |  |                   |   |  |        |  |  |      |  
|-------- |  | ------------------------------- | ------ | ------------------------------- |  | ------------------------------- | - | ----------------- | ------ | -------------------------- |  | ----------------- | - |  | ------ |  |  | ---- | -
|         |  | Year Ended
 December 31, 
 2006 |        | Year Ended
 December 31, 
 2007 |  | Year Ended
 December 31, 
 2008 |  
|         |  |                                 |        |                                 |  |                                 |  
|         |  | (in thousands 
 of U.S. $)      |        | (by 
 percentage)               |  | (in thousands 
 of U.S. $)      |   | (by 
 percentage) |        | (in thousands 
 of U.S. $) |  | (by 
 percentage) |  
|         |  |                                 |        |                                 |  |                                 |   |                   |        |                            |  |                   |  
|Products |  |                                 | 57,335 |                                 |  | 70.4                            | % |                   | 59,422 |                            |  | 67.0              | % |  | 59,678 |  |  | 63.1 | %
|        
|Services |  |                                 | 24,075 |                                 |  | 29.6                            | % |                   | 29,209 |                            |  | 33.0              | % |  | 34,903 |  |  | 36.9 | %
|         |  |                                 |        |                                 |  |                                 |   |                   |        |                            |  |                   |   |  |        |  |  |      |  
|         |  |                                 |        |                                 |  |                                 |   |                   |        |                            |  |                   |   |  |        |  |  |      |  
|Total    |  |                                 | 81,410 |                                 |  | 100                             | % |                   | 88,631 |                            |  | 100               | % |  | 94,581 |  |  | 100  | %
|         |  |                                 |        |                                 |  |                                 |   |                   |        |                            |  |                   |   |  |        |  |  |      |  

Executive Summary  Year Ended
December 31, 2008

Sales
in 2008 were approximately $94.6 million, an increase of 7% compared with sales
of $88.6 million in 2007. In 2008 we continued the trend of sequential increase
in sales, year over year, since our inception. The cost of sales as percentage
of revenues increased slightly compared to 2007, mainly due to an impairment of
intangible asset in 2008. In order to continue to strengthen and broaden our
product lines we have increased our investments in research and development
during 2008, mainly increasing the manpower and subcontractors 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
general and administrative expenses increased during 2008, mainly in connection
with the implementation of our ERP system, aimed to provide an adequate
infrastructure to support our above mentioned research and development and
sales and marketing activities, and in connection with the employment of our
Executive Chairman of the Board. Our sales increased at a lower rate than the
increase of our operating expenses. As a result of the aforementioned, our
operating results in 2008 reflected a loss of $31.0 million, compared to an
operating loss of $19.0 million in 2007. In order to return to profitability
and due to the future uncertainty in connection with the global economic
crisis, we started reducing our operating expenses in the second half of 2008,
mainly by decreasing the number of our employees worldwide. These reductions
caused our operating expenses to decrease significantly toward the end of 2008.
Our operating expenses in the fourth quarter of 2008 totaled to $22.7 million,
down by 16% compared to operating expenses of $27.0 million in the first
quarter of 2008. An additional decrease in expenses is expected to take place
in the beginning of 2009 due to the above mentioned reduction in costs, which
partially affected our results in the last quarter of 2008 and will have a full
effect on our results in the first quarter of 2009. The financial income in
2008 decreased to $3.6 million during 2008, compared with $7.4 million in 2007,
mainly due to lower interest rates.

42

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In
2009 we intend to align our investments in the development of new products as
well as in the improvement of existing products, with our sales levels in order
to return to operating profitability. In February 2009 we entered into an asset
purchase agreement with Nortel for the purchase of Nortels Layer 4-7
application delivery business, which was subject to higher and better bids and
is still pending bankruptcy court approvals. This purchase, if completed, is
strategic to the Company, aimed at broadening our products lines, customers and
installed base. We believe such transaction, if consummated, will increase our
revenues and operating profitability. There is no assurance, however, that we
will complete the transaction, or if we do complete it, that we will succeed in
returning to operating profitability due to the inherent risks of such
acquisition and the uncertainty of the effects of the global economic crisis on
our results of operations.

Year Ended December 31, 2008
Compared with Year Ended December 31, 2007

Revenues. Sales in 2008 were approximately $94.6
million, including sales of products of $59.7 million and services revenue of
$34.9 million, an increase of approximately 7% compared with sales of
approximately $88.6 million in 2007 which included sales of products of $59.4
million and services revenue of $29.2 million. The increase in services
revenues derives mainly from the growth of our installed base which enables us
to generate increased revenues form service contracts renewals. From a
geographical prospective, our revenues from the North America region continued
to decline percentage-wise, and represented 25% in 2008 compared to 28% in
2007, though remained the same in absolute figures as in 2007. On the other
hand, our revenues from the Asia-Pacific region in 2008 increased and represent
43% compared to 39% in 2007. Our revenues from the EMEA region declined
percentage-wise and represented 32% of our revenues in 2008 compared to 33% in
2007, though remain the same in their absolute figure as in 2007. Though we are
focused on increasing our sales in 2009, it is hard to estimate the outcome of
such efforts, mainly due to the current global economic crisis.

Cost of Sales. Cost of sales was approximately $21.6
million in 2008, comprised of $15.2 million as cost of products sales and $6.4
million as cost of services revenue, compared with cost of sales of
approximately $19.0 million in 2007 which was comprised of $13.1 million of
cost of products sales and $5.9 million as cost of services revenue. Cost of
products sales as a percentage of products sales was 25.4% in 2008, compared to
approximately 22.1% in 2007. Disregarding the loss from the impairment of
Covelights acquired technology in 2008 in an amount of $2.0 million and inventory
write-offs in an amount of $1.2 million and $0.6 million in 2007 and 2008,
respectively, our cost of sales as percentage of product sales represented
approximately 21% of product sales in 2008, a small increase compared to 20% in
2007. In addition, as some of the products we offer have stronger performance,
the manufacturing costs for these products are higher, but these higher costs
are only partially offset by higher sales prices charged to our customers. Cost
of sales related to services revenues in 2008 was 18.4% compared to 20.2% in
2007. As a major portion of these costs were 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 increases, the
related costs decrease as a percentage of sales. Stock-based compensation
expenses totaled $0.1 million in 2008, the same as in 2007. During 2008, we
assessed whether there has been an impairment of the intangible assets acquired
in the acquisition of Covelight. Following this assessment, an impairment
charge of approximately $2.0 million was recorded to the cost of sales, in
connection with the acquired intangible assets.

43

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Research and Development
Expenses.Research
and development expenses were approximately $28.4 million in 2008, an increase
of 21.0% compared with research and development expenses of approximately $23.5
million in 2007. The increase was primarily attributed to increased expenses
due to the devaluation of the U.S. dollar against the NIS during 2008 compared
with 2007 (mainly impacting salaries of R&D personnel), the increase in
payments to subcontractors and consultants, which assist and promote certain
R&D projects and the higher average number of R&D employees during 2008
compared to 2007. Stock-based compensation expenses totaled $1.5 million in
2008, compared to $1.2 million in 2007. This increase is attributed mainly to
the increase in the average number of employees throughout 2008 compared to
2007. Excluding the exchange rates effect, we expect our research and
development expenses in 2009 to be lower than 2008, mainly due to the reduction
in the number of our employees during the second half of 2008, which will
affect 2009 as well. If the trend of appreciation of the U.S. Dollar against
the NIS, as occurred in the first quarter of 2009, continues we expect an
additional decline in our R&D expenses in 2009.

Sales and Marketing Expenses. Sales and marketing expenses were
approximately $63.6 million in 2008, an increase of 10.0% compared with sales
and marketing expenses of approximately $58.0 million in 2007. As a percentage
of total revenues, the share of sales and marketing expenses increased from
65.4% in 2007 to 67.2% in 2008. The increase of our sales and marketing
expenses in 2008 was related mainly to our continued investment in
strengthening the sales team in Asia-Pacific, the devaluation of the dollar
against the Euro, the NIS and the Asian currencies, especially the Chinese Yuan
and Japanese Yen and to increased investments in promoting our brand awareness
and market acceptance of our products. Stock-based compensation expenses
totaled $2.3 million in 2008, compared to $1.9 million in 2007. This increase
is attributed mainly to the increase in the average number of employees
throughout 2008 compared to 2007. Excluding the exchange rates effect we expect
our sales and marketing expenses in 2009 to be lower than 2008, mainly due to the
reduction in the number of our employees worldwide in the second half of 2008,
which will affect 2009 as well.

General and Administrative
Expenses. General
and administrative expenses were approximately $12.1 million in 2008, compared
with general and administrative expenses of approximately $7.1 million in 2007.
Disregarding stock-based compensation expenses in an amount of $4.2 million in
2008 and $1.3 million in 2007, and expenses related to the former Chairman of
the Board in connection with his office termination in an amount of $0.8
million, our general and administrative expenses in 2008 totaled to $7.1
million, compared to $5.8 million in 2007. The increase is attributed mainly to
the increase of salaries expenses, due to the devaluation of the U.S. dollar
against the NIS (as most of the general and administrative salaries are paid in
NIS) and due to amortization expenses related to our ERP system. Stock-based
compensation expenses totaled to $4.2 million in 2008 compared to $1.3 million
in 2007. The increase is mainly due to expenses related to the options granted
to our Chief Executive Officer in December 31, 2007 and to accelerated vesting
of options in connection with the termination of office of our Chairman of
Board.

Financial
Income, Net.
Financial income, net was approximately $3.6 million in 2008, compared with
$7.4 million in 2007. The decrease was primarily a result of lower market
prevailing interest rates, which resulted in an average yield on our
investments portfolio of 2.8% in 2008 compared to 4.6% in 2007. The decline in
our total cash position, including cash, bank deposits and marketable
securities negatively affected our financial income as well. In addition, in
2008 we incurred loss from foreign currency translation differences in an
amount of $0.4 million compared to gain in an amount of $0.1 million in 2007.

Income
Taxes. Income taxes were approximately $3.6 million in 2008
(in and outside Israel), compared with $0.4 million in 2007. This amount
derives mainly from the valuation allowance provided with respect to deferred
tax assets in the amount of $2.7 million during 2008, in connection with the
uncertainty regarding the future utilization of carry-forward tax losses.

Year Ended December 31, 2007
Compared with Year Ended December 31, 2006

Revenues. Sales in 2007 were approximately $88.6
million, including sales of products of $59.4 million and services revenue of
$29.2 million, an increase of approximately 9.0% compared with sales of approximately
$81.4 million in 2006 which included sales of products of $57.3 million and
services revenue of $24.1 million. The increase in services revenue is
attributed mainly to renewal of service contracts. During 2007 we moderately
increased our sales compared to 2006. We performed restructuring of our
American sales team, beginning in the fourth quarter of 2006 and continued
through the first half of 2007. This restructuring negatively affected our
sales in North America in 2007, due to the need to train new employees, and the
time required to build customer relationships and sales pipelines, and caused
the portion of our sales in North America to decrease to 28% of our sales,
compared to 34% in 2006. On the other hand, the increase in sales in the Asia-Pacific
region in 2007, which represented 39% of our total sales in 2007, compared to
32% in 2006, enabled us to present moderate growth in sales in 2007 compared to
2006 despite the weakness in the North American region as described above.

44

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Cost of Sales. Cost of sales was approximately $19.0
million in 2007, comprised of $13.1 million as cost of products sales and $5.9
million as cost of services revenue, compared with cost of sales of
approximately $15.8 million in 2006 which was comprised of $10.3 million of
cost of products sales and $5.5 million as cost of services revenue. Cost of
products sales as a percentage of products sales was 22.1% in 2007, compared to
approximately 17.9% in 2006. The main reason for this increase is inventory
write-offs we performed during 2007. In addition, as some of the products we
offer have stronger performance, the manufacturing costs for these products are
higher, but these higher costs are only partially offset by higher sales prices
charged to our customers. Cost of sales related to services revenues in 2007
was 20.2% compared to 22.9% in 2006. As a major portion of these costs were
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 increases, the related costs decrease as a percentage of sales.

Research and Development
Expenses.Research
and development expenses were approximately $23.5 million in 2007, an increase
of 33.0% compared with research and development expenses of approximately $17.7
million in 2006. The increase was primarily due to hiring of new R&D
personnel, the increase in salary level needed to obtain high level personnel,
increase in payments to subcontractors and the devaluation of the U.S. dollar
against the NIS (as most of the R&D salaries are paid in NIS), due to the
depreciation of R&D equipment purchased during 2007 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 2007 in order
to support the development of new platforms and products, including enhancement
of our quality assurance department.

Sales and Marketing Expenses. Sales and marketing expenses were
approximately $58.0 million in 2007, an increase of 16.0% compared with sales
and marketing expenses of approximately $50.1 million in 2006. As a percentage
of total revenues, the share of sales and marketing expenses increased from
61.6% in 2006 to 65.4% in 2007. The increase of our sales and marketing
expenses in 2007 was related mainly to our continued investment in
strengthening the sales teams in some of our offices in the U.S., Asia-Pacific
and EMEA.

General and Administrative
Expenses. General
and administrative expenses were approximately $7.1 million in 2007, compared
with general and administrative expenses of approximately $6.2 million in 2006.
This increase is primarily due to the increase of salaries expenses which
resulted from hiring of new personnel, salary increases, the devaluation of the
U.S. dollar against the NIS (as most of the general and administrative salaries
are paid in NIS) and due to amortization expenses related to our ERP system.

Financial
Income, Net.
Financial income, net was approximately $7.4 million in 2007, the same as in
2006. The average yield on our investments in 2007 was higher than in 2006,
which resulted in an increase in our financial income from our investments.
This increase was offset by a decrease in our gains resulting from foreign
currency translation differences.

Income
Taxes. Income taxes were approximately $0.4 million in 2007
(in and outside Israel), the same as in 2006. This amount derives mainly from
current taxes and changes in deferred taxes.

|   |                                
|-- | -------------------------------
|C. | 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.

45

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Capital
expenditures for the years ended December 31, 2006, 2007 and 2008 were
approximately $5.8 million, $6.7 million and $4.6 million, respectively. These
expenditures were mainly comprised of machinery and equipment, computers, lab
equipment and testing tools, CRM and ERP systems. During 2008 we continued our investment in
purchasing and implementing our ERP system which became partially operational
during 2007. Additional investments, mainly
related to the implementation of the CRM module, took place during 2008. We may
have additional capital spending consistent with possible growth in our
operations, infrastructure and personnel.

Net
cash used in operating activities for the year ended December 31, 2008 was
approximately $9.7 million compared to net cash used in operating activities of
approximately $1.1 million for 2007 and net cash provided by operating
activities of approximately $7.3 million for 2006. Net cash used in operating
activities for the years 2008, 2007 and 2006 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 exceeded the pace of increase in
sales in these years. Net cash used in operating activities for 2008 consisted
primarily of net loss, adjusted for non-cash activity, plus an increase in
inventories and decrease in trade payables offset by an increase in deferred
revenue and other payables and accrued expenses, decrease in trades receivables
and decrease in prepayments and other receivables. Net cash used in operating
activities for 2007 consisted primarily of net loss, adjusted for non-cash
activity, partially offset by a decrease in inventories and increase in
deferred revenues and other payables and accrued expenses, plus an increase in
other receivables and prepaid expenses. Net cash provided by operating
activities for 2006 consisted primarily of net loss, adjusted for non-cash
activity, plus increase in trade payables and deferred revenues, offset by an
increase in trade receivables and in inventories.

Net
cash used in investing activities was approximately $18.9 million for 2008,
compared to net cash provided by investing activities of approximately $35.8
million for 2007, and to net cash used in investing activities of approximately
$39.8 million for 2006. Cash was used in 2008 mainly for the purchase of
marketable securities and purchase of property and equipment, partially offset
by proceeds from redemption of long term bank deposit. Cash was provided in
2007 mainly from redemption of marketable securities, partially offset by
purchase of marketable securities, purchase of property and equipment and
payment for the acquisition of Covelight. 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, partially
offset by the sales and redemption of marketable securities and bank deposits.

Net
cash used in financing activities in 2008 was $4.6 million, compared to net
cash provided by financing activities of $1.4 and $1.6 million for the years
2007 and 2006, respectively. The cash used in financing activities in 2008 was
for the repurchase of our ordinary shares, which was partially offset by
amounts generated from options exercises 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).
Net cash provided by financing activities for the years 2007 and 2006, was
generated from options exercised by our employees under the Key Employee Share
Option Plans and Employee Stock Purchase Plans. In 2006 the amount generated
from options exercises was nearly fully offset by the repurchase of our
ordinary shares (see Item 16E  Purchase of Equity Securities by the Issuer
and Affiliated Purchasers).

As
of December 31, 2008, we had cash and cash equivalents, including short-term
and long-term bank deposits and marketable securities of approximately $133.9
million, as compared to approximately $154.8 million as of December 31, 2007.
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. As indicated above, in February 2009 we entered into an asset
purchase agreement with Nortel for the purchase of Nortels Layer 4-7
application delivery business, which was subject to higher and better bids and
is still pending bankruptcy court approvals. As of the date of this report, the total
consideration for the transaction is expected to be $ 17.65 million. In
addition, we expect additional transaction related costs in a total amount of
approximately $3.5 million. We estimate that we will have to invest up to
additional $8.0 million in working capital in order to operate the acquired
business in the first few months following the acquisition. 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 marketing and sales activities and research and
development efforts for a period of no less than the next twelve months.

46

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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.

In
addition, we purchase 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 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 U.S. 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, in Europe  in Euros and in Asia-Pacific in several local
currencies. An appreciation of the NIS
relatively to the U.S. Dollar, will have a negative effect on our
profitability. Conversely, devaluations of the NIS relative to the U.S. 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.If the dollar
decreases in value relative to Chinese, Indian, Australian and/or Japanese
currencies, the dollar cost of our operations in Asia-Pacific will increase and
our operating profit will be negatively affected.

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

|                        |  |                           |     |                            |       |    | 
|----------------------- |  | ------------------------- | --- | -------------------------- | ----- | -- | 
|Year ended December 31, |  | U.S. dollar against 
 NIS |     | U.S. dollar against 
 Euro |      
|                        |  |                           |     |                            |      
|                        |  |                           |     |                            |       |    | 
|2004                    |  | (1.6                      | ) % |                            | (7.4  | )% | 
|2005                    |  | 6.8                       | %   |                            | 15.3  | %  | 
|2006                    |  | (8.2                      | )%  |                            | (10.2 | )% | 
|2007                    |  | (9.0                      | )%  |                            | (10.5 | )% | 
|2008                    |  | (1.1                      | )%  |                            | 5.6   | %  | 
|2009(1)                 |  | 9.5                       | %   |                            | 10.0  | %  | 

(1) January 1,
2009 through February 28, 2009

We
cannot assure you that we will not be materially and adversely affected in the
future 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, other currencies 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.

47

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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:

The
majority of our cash throughout the world is invested in fixed-income
securities and is affected by changes in interest rates. Interest rates are
highly sensitive to many factors, including governmental monetary policies and
domestic and international economic and political conditions.

A
decline in market interest rates, such as the significant global decline in
recent months, has had an adverse effect on our investment income. In a
declining interest rate environment, borrowers may seek to refinance their
borrowings at lower rates and, accordingly, prepay or redeem securities held
earlier than initially expected. This action may cause us to reinvest the redeemed
proceeds in lower yielding investments. Currently we do not hold any securities
which can be early redeemed. An increase in market interest rates could also
have an adverse effect on the value of our investment portfolio, for example,
by decreasing the fair values of the fixed income securities that comprise a
substantial majority of our investment portfolio.

Our
investments consist primarily of government and corporate debentures. As of
December 31, 2008, approximately 16% of our portfolio was invested in U.S.
Government debentures, 42% in foreign banks and government debentures, 22% in
other corporate debentures and the rest of the funds were invested in bank
deposits and money market funds. Although we believe that we generally adhere
to conservative investment guidelines, the continuing turmoil in the financial
markets may result in impairments of the carrying value of our investment
assets. Realized losses in our investments portfolio may adversely affect our
financial position and results.

Any
significant decline in our investment income or the value of our investments as
a result of falling interest rates, deterioration in the credit of the
securities in which we have invested, or general market conditions, could have
an adverse effect on our results of operations and financial condition.

We
currently have no debt.

|   |                                               
|-- | ----------------------------------------------
|D. | 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, 2008, we had 190
employees engaged primarily in research and development activities, compared to
216 employees at the end of 2007.

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.

|   |                  
|-- | -----------------
|E. | Trend Information

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

|   |                               
|-- | ------------------------------
|F. | Off-Balance Sheet Arrangements

None.

48

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---



|   |                                               
|-- | ----------------------------------------------
|G. | Tabular Disclosure of Contractual
 Obligations

The
following table summarizes our contractual obligations as of December 31, 2008
and the effect those commitments are expected to have on our liquidity and cash
flow.

|                                   |  |                                             |       |                    |  |             |  |            |       |                       |  |     |  |  |   | 
|---------------------------------- |  | ------------------------------------------- | ----- | ------------------ |  | ----------- |  | ---------- | ----- | --------------------- |  | --- |  |  | - | 
|                                   |  | Payments Due By Period (US $ in
 thousands) |      
|                                   |  |                                             |      
|Contractual obligations            |  | Total                                       |       | Less than 
 1 year |  | 1-3 
 years |  | 3-5
 years |       | More 
 than 5 
 years | 
|                                   |  |                                             |       |                    |  |             |  |            |       |                       | 
|                                   |  |                                             |       |                    |  |             |  |            |       |                       | 
|Operating leases(1)                |  |                                             | 6,958 |                    |  | 2,975       |  |            | 3,207 |                       |  | 776 |  |  |  | 
|Uncertain tax positions(2)         |  |                                             | 1,559 |                    |  |             |  |            |       |                       |  |     |  |  |   | 
|Total contractual cash obligations |  |                                             | 8,517 |                    |  | 2,975       |  |            | 3,207 |                       |  | 776 |  |  |  | 

(1) Consist of outstanding
operating leases for the Companys facilities. The lease agreements expire in
the years 2009 to 2013 (some with renewal options). The data in this row
details our future minimum payments under non-cancelable operating lease
agreements at December 31, 2008.

(2) Uncertain income tax
positions under FIN 48 are due upon settlement and we are unable to reasonably
estimate the timing of settlement. See also Notes 2q and 12a of our
Consolidated Financial Statements.

We
operate from leased premises mainly in Tel Aviv and Jerusalem in Israel and New
Jersey and North Carolina in the United States. We also lease premises in
several locations in the United States, Europe and Asia-Pacific for the
activities of our subsidiaries, representative offices and branches. Our
aggregate annual rent expenses under these leases were approximately $3.6
million for 2008.

49

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

|   |                                
|-- | -------------------------------
|A. | Directors and Senior Management

The
following table lists our current directors and executive officers:

| |                                |  |     |  |                                                  | 
| | ------------------------------ |  | --- |  | ------------------------------------------------ | 
| | Name                           |  | Age |  | Position                                         | 
| |                                |  |     |  |                                                  | 
| |                                |  |     |  |                                                  | 
| | Roy
 Zisapel(1)                |  | 38  |  | Chief
 Executive Officer, President and Director | 
| | Meir
 Moshe                    |  | 55  |  | Chief
 Financial Officer                         | 
| | Efrat
 Baruh-Noy               |  | 32  |  | General
 Counsel and Secretary                   | 
| | Ilan
 Kinreich                 |  | 51  |  | Chief
 Operating Officer                         | 
| | Amir
 Peles                    |  | 37  |  | Chief
 Technology Officer                        | 
| | Sharon
 Trachtman              |  | 42  |  | VP
 Global Marketing                             | 
| | Yehuda
 Zisapel (2)            |  | 67  |  | Director                                         | 
| | Zohar
 Gilon (2)(3)(4)(5)      |  | 61  |  | Director                                         | 
| | Orna
 Berry (2)(3)(4)(5)(6)(8) |  | 60  |  | Director                                         | 
| | Hagen
 Hultzsch (4)(5)(6)(7)   |  | 68  |  | Director                                         | 

| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | (1) Term as director expires at the annual meeting of
 shareholders to be held in 2010.
| |                                                                                        
| | (2) Term as director expires at the annual meeting of
 shareholders to be held in 2009.
| |                                                                                        
| | (3) External Director, as defined in the Israeli
 Companies Law.                       
| |                                                                                        
| | (4) Qualified as an independent director, as determined under
 the NASDAQ rules.       
| |                                                                                        
| | (5) Serves on the Audit Committee of the Board of Directors.                           
| |                                                                                        
| | (6) Serves on the Compensation Committee of the
 Board of Directors.                   
| |                                                                                        
| | (7) Term as director expires at the annual meeting of
 shareholders to be held in 2011.
| |                                                                                        
| | (8) Interim Chairperson.                                                               

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.

Efrat
Baruh-Noy has served as our General Counsel since November 2008. From February
2005 to November 2008, Mrs. Baruh-Noy was legal counsel at Gilat Satellite
Networks Ltd. Prior to that, from July 2001 to January 2005, Mrs. Baruh-Noy was
an associate at the law firm of Amit, Pollak Matalon & Co. Mrs. Baruh-Noy
has LL.B and B.A. in Economics and M.B.A degrees from Tel Aviv University.

Sharon Trachtman has served as our Global Marketing Vice
President as of September 2008. Prior to that she has presided in various
senior positions such as Product management Vice President and Marketing Vice
President. From November 1994 to September 1997, Ms. Trachtman was a product
line marketing manager for Scitex Corporation. Ms. Trachtman has a B.A. degree
in computer science and philosophy from Bar Ilan University.

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.

50

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Ilan
Kinreichhas served as our Chief Operating Officer since
December 2007. From 1993 until 2005 Mr. Kinreich was the founder and CEO of
Radview Software Ltd., a company that developed performance testing and
management solutions. From 1989 until 1991 Mr. Kinreich was a co-founder and VP
R&D of Mercury Interactive. From 1984 until 1989 Mr. Kinreich was
R&D manager at Daisy Systems. Mr. Kinreich began his career in 1977 at the
technology units of the Israel Defense Forces where he oversaw the deployment
of command and control systems and reached the rank of a Captain. Mr. Kinreich
holds a Bs.C. degree in Mathematics and Computer Sciences from Bar-Ilan
University, Israel.

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 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 a 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.

Dr.
Hagen Hultzschhas 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, among
others, as a Board Member of the following companies: TranSwitch
Inc., SCM-Microsystems Inc., T-Systems Solutions for Research 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., Tvinci Ltd., HCL CleanTech 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 January 2006 she has served as the
Chairperson of the IVA (Israel Venture Association). 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. From 1997 to 2000 Dr.
Berry served 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. and Prime
Sense Ltd.

Additional Information

At
our 2008 annual meeting, the three-year term of service of Mr. Chris McCleary,
who served as our Chairman of the Board since August 2006 and as a
director since February 2000,
expired and he was not nominated for re-election. In addition, Mr. Herbert
Anderson, who served on our Board since January 2007, stepped down from office
for personal reasons.

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 and Dr.
Hagen Hultzsch, i.e., three out of our five directors, qualify as independent
directors under such NASDAQ rules.

51

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Yehuda
Zisapel, a director and co-founder of the Company, is the father of Roy
Zisapel, a director and the Companys President and Chief Executive Officer.
There are no other family relationships between any of the directors or members
of senior management named above.

|   |             
|-- | ------------
|B. | 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, 2008. 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 13 persons* |  | $1,832,000                                  |  | $226,000                                         

* Includes fees and benefits incurred in relation to our
former Executive Chairman of the Board (Christopher McCleary), our former
director (Herbert Anderson) and our former General Counsel and Secretary (Vered
Raviv-Schwarz), each of whom left the Company during 2008.

As
of March 20, 2009 our directors and officers as a group, consisting of 13
persons, of which 3 left the Company during 2008, held options to purchase an
aggregate of 1,412,500 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.

During
2008, we granted to our directors and officers options to purchase 125,000
ordinary shares, in the aggregate, at a weighted average exercise price of
$10.3. The options expire sixty-two months after grant.

52

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Chief
Executive Officer Compensation

On
October 4, 2006 our shareholders approved the increase of our 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 would
be based on achievement of the target revenue and 25% of the bonus would 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.
Based on the above milestones, the Chief Executive Officer was not granted a
bonus for the year 2007. On December 31, 2007 our shareholders approved an
increase of our Chief Executive Officers base salary to an amount in NIS
equivalent to $250,000. The annual bonus remains unchanged. The Compensation
Committee determined the following bonus milestones for 2008: 75% of the bonus
based on achievement of target revenue, and 25% of the bonus based on improving
profitability by at least 10% compared to the 2008 annual budget. Based on the
above milestones, the Chief Executive Officer was not granted a bonus for the
year 2008.

On December 31, 2007,
following the approval of our shareholders, we granted our Chief Executive
Officer 500,000 stock options, with an exercise price of $15.22 per share. The
exercise of these options is contingent upon the increase in the market price
of our ordinary shares. The options expire seven years from the grant date.

|   |                 
|-- | ----------------
|C. | 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 of Directors consists of
five 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 Select
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 of directors 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 Zisapel
|Class
 II  |  | 2010                                               |  | Roy Zisapel   
|Class
 III |  | 2011                                               |  | Hagen Hultzsch

53

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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 such 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, to the nearest extent 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 and 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                                        
|  |                                                                                                                                                            
|· | 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.

54

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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. We believe we satisfy this requirement.

Board
Meetings

Our
Board of Directors met 10 times during 2008 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 reports the results of
its meetings to 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 Select 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 which has accounting or related financial management expertise. The members
of the Audit Committee, Mr. Zohar Gilon,
Dr. Orna Berry and Mr. Hagen Hultzsch qualify as independent directors under
the current NASDAQ listing requirements. The Board of Directors has determined
that each Audit Committee member is financially literate as such term is
defined by the NASDAQ rules and that Mr. Zohar Gilon and Dr. Orna Berry are
considered audit committee financial expert within the meaning of the current
rules of the SEC. 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 2008 and all members attended at
least 75% of all Audit Committee meetings.

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;

55

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|  |                                                                                                  
|- | -------------------------------------------------------------------------------------------------
|· | 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 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 the 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. Orna
Berry, who is also one of our External Directors, and Dr. Hagen Hultzsch. This
committee was created in 1999 as the Share Incentive Committee and was renamed
the Compensation Committee in 2004. The Compensation Committee met 4 times
during fiscal year 2008 and all members attended 100% 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.

56

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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.

57

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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.

|   |          
|-- | ---------
|D. | 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, including our executive officers,
generally 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, 2008, we had 534 employees worldwide, of whom 262were based in Israel, 89 were based in
the United States and 183 were based in our other subsidiaries and offices. Of
these 534 employees, 191 were employed in research and development, 270 were
employed in sales, technical support, business development and marketing, and
73 were employed in management, operations and administration. As of December
31, 2007, we had 593 employees worldwide, of whom 276were based in Israel, 138 were based in the United States
and 179 were based in our other subsidiaries and offices, and as of December
31, 2006, we had 475 employees worldwide, of whom 229were based in Israel, 96 were based in the United States
and 150 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,
our Israeli employees and we 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 social benefits, 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.

58

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

|   |                 
|-- | ----------------
|E. | Share
 Ownership

The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares by our directors and officers as of March 20,
2009. The percentage of outstanding ordinary shares is based on 18,875,093
ordinary shares outstanding as of March 20, 2009.

|                                                                     |  |                            |  |                                            |       |   | 
|-------------------------------------------------------------------- |  | -------------------------- |  | ------------------------------------------ | ----- | - | 
|Name                                                                 |  | Number of ordinary
 shares |  | Percentage of outstanding
 ordinary shares |      
|                                                                     |  |                            |  |                                            |      
|Yehuda Zisapel(1)                                                    |  | 3,289,336                  |  |                                            | 17.37 | % | 
|Roy Zisapel(2)                                                       |  | 648,941                    |  |                                            | 3.43  | % | 
|Christopher McCleary(3)                                              |  | 500,000                    |  |                                            | 2.58  | % | 
|Meir Moshe(4)                                                        |  | 209,165                    |  |                                            | 1.10  | % | 
|All directors and executive officers as a group
 (12 persons) (5)(6) |  | 4,768,356                  |  |                                            | 24.33 | % | 

(1) Of the ordinary shares
beneficially owned by Mr. Yehuda Zisapel, (i) 2,505,243 are held directly, (ii)
295,000 ordinary shares are held of record by Carm-AD Ltd., an Israeli company
wholly owned by Yehuda Zisapel, (iii) 239,491 ordinary shares are held of
record by Radbit Computers, Inc., a New York corporation which is wholly owned
by Yehuda Zisapel, (iv) 189,602 ordinary shares are held of record by Neurim
Pharmaceuticals (1991) Ltd., an Israeli company wholly owned by Yehuda Zisapel
and his wife, Nava Zisapel, and (v) 60,000 ordinary shares underlying options
which were vested or exercisable within 60 days from March 16, 2009. This
information is based on information provided in the Statement on Schedule 13D
filed by Mr. Yehuda Zisapel on March 16, 2009.

(2) 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 2010. 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) Mr. McClearys three-year
term as a member of our Board of Directors expired at our 2008 annual meeting
and he was not nominated for re-election. Of the ordinary shares
beneficially owned by Mr. McCleary, 40,000 ordinary shares are held directly
and 460,000 are options fully vested upon termination of his office.

(4) Consists of 124,165
shares and 85,000 options which are fully vested or which will be fully vested
within the next 60 days.

(5) Consists of 4,044,606
shares and 723,750 options which are fully vested or which will be fully vested
within the next 60 days.

(6) 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.
Includes shares and options held by our former Executive
Chairman of the Board (Christopher McCleary) and our former General Counsel and
Secretary (Vered Raviv-Schwarz), each of whom left the Company during 2008.

59

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NASDAQ
Listing Standards

Our ordinary shares are
currently listed on the NASDAQ Global Select Market and are thereby subject to
the rules and regulations established by the 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. See Item 16G 
Corporate Governance below.

| | 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, 2008, 9,937,236 ordinary
shares have been reserved for option grants under the plan, of which we have
granted options to purchase 8,806,725 ordinary shares, at a weighted average
exercise price of $10.86 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 January 27, 2008. 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, subject to the provisions of the Companies Law. 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 modify our share option
plan with respect to grantees that are not residents of Israel.

60

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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.

61

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|        |                                                   
|------- | --------------------------------------------------
|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 March 20, 2009, 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, or SEC. 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)               |  |                            | 3,289,336 |  |                                            | 17.37 | % | 
|FMR
 LLC (2)                      |  |                            | 1,199,742 |  |                                            | 6.35  | % | 
|P.A.W.
 Capital Corp. (3)         |  |                            | 1,412,000 |  |                                            | 7.48  | % | 
|Rima
 Management, LLC (4)         |  |                            | 1,295,405 |  |                                            | 6. 86 | % | 
|Federated
 Investors, Inc. (5)    |  |                            | 1,815,300 |  |                                            | 9.61  | % | 
|Renaissance
 Technologies LLC (6) |  |                            | 1,018,700 |  |                                            | 5.39  | % | 
|Zohar
 Zisapel(7)                 |  |                            | 1,061,392 |  |                                            | 5.62  | % | 

(1) Includes (i) 2,505,243
ordinary shares held directly, (ii) 295,000ordinary shares held of record by Carm-AD
Ltd., an Israeli company wholly owned by Yehuda Zisapel, (iii) 239,491 ordinary
shares held of record by Radbit Computers, Inc., a New York corporation which
is wholly owned by Yehuda Zisapel, (iv) 189,602 ordinary shares held of record
by Neurim Pharmaceuticals (1991) Ltd., an Israeli company wholly owned by
Yehuda Zisapel and his wife, Nava Zisapel, and (v) 60,000 ordinary shares
underlying options which were vested or exercisable within 60 days from March
16, 2009. This information is based on information provided in the Statement on
Schedule 13D filed by Mr. Yehuda Zisapel on March 16, 2009.

(2) Shares are beneficially
owned by FMR LLC (FMR) and Edward C. Johnson as a result of FMRs and Mr.
Johnsons control over (i) Fidelity Management & Research Company
(FM&RC), a wholly owned subsidiary of FMR which acts as an investment advisor registered under Section 203
of the Investment Company Act of 1940 and holds 89,700 ordinary shares and (ii)
Fidelity Canadian Opportunities Fund (Fidelity Canadian) and Pyramis Global
Advisors, LLC (Pyramis), an indirect wholly owned subsidiary of FMR and an investment
advisor registered under Section 203 of the Investment Company Act of 1940,
which hold 1,110,042 ordinary shares. Mr. Johnson and FMR LLC, through their
control of FM&RC, Fidelity Canadian and Pyramis, have sole power to vote
the shares held by Pyramis and Fidelity Canadian and the sole power to dispose
of the shares held by FM&RC, Pyramis and Canadian. This information is
based on information provided in the Amendment No. 3 to Statement on Schedule
13G filed with the SEC by FMR LLC, Mr. Johnson, FM&RC and Pyramis on
February 12, 2009.

(3) Shares are beneficially
owned by P.A.W. Capital Corp., a Delaware corporation (PAW), and Peter A.
Wright, President of PAW. Mr. Wright and PAW have shared voting and dispositive
power over the shares. This information
is based on information provided in the Amendment No. 5 to Statement on
Schedule 13G filed with the SEC by Mr. Wright and PAW on January 14, 2009.

(4) Shares are beneficially
owned by Rima Managmnet, LLC, a Delaware corporation (Rima), and Richard
Mashaal, a Canadian citizen. This information is based on information provided
in the Amendment No. 2 to Statement on Schedule 13G filed with the SEC by Mr.
Mashall and Rima on February 17, 2009.

(5) Share are beneficially
owned by Federated Investors, Inc. (the Parent), the parent holding company
of Federated Equity Management Company of Pennsylvania and Federated Global
Investment Management Corp. (the Investment Advisers), which act as
investment advisers to registered investment companies and separate accounts
that own Ordinary Shares. The Investment Advisers are wholly owned subsidiaries
of FII Holdings, Inc., which is wholly owned subsidiary of the Parent. All of
the Parents outstanding voting stock is held in the Voting Shares Irrevocable
Trust (the Trust) for which John F. Donahue, Rhodora J. Donahue and J.
Christopher Donahue act as trustees (collectively, the Trustees). The
Trustees have shared voting and dispositive power over the outstanding voting
stock of the Parent, which has sole voting and dispositive power over the
shares. This information is based on
information provided in the Amendment to Statement on Schedule 13G filed with
the SEC by Parent, the Trust and the Trustees on February 10, 2009.

(6) Shares are beneficially
owned by Renaissance Technologies LLC, a Delaware corporation (Renaissance),
and James H. Simons, a United States citizen. This information is based on
information provided in the Amendment to Statement on Schedule 13G filed with
the SEC by Renaissance and Mr. Simons on February 12, 2009.

(7) As of March 3, 2009, Mr.
Zohar Zisapel, who is the brother or Mr. Yehuda Zisapel, beneficially owned
1,061,392 Ordinary Shares, out of which (i) 402,168 Ordinary Shares are held
directly and (ii) 659,224 Ordinary Shares are held of record by Lomsha Ltd., an
Israeli company controlled by Mr. Zohar Zisapel.This information is based on
information provided in the Statement on Schedule 13G filed with the SEC by Mr.
Zohar Zisapel on March 5, 2009.

62

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Major Shareholders
Voting Rights

Our major
shareholders do not have different voting rights from those of other
shareholders.

Record Holders

Based on a review
of the information provided to us by our transfer agent, as of March 23, 2009,
there were 44 holders of record of our ordinary shares, of which 24 record
holders, holding approximately 15.1% of our ordinary shares, had registered
addresses in Israel, and of which 18 record holders, holding
approximately 84.9% of our ordinary shares, had registered addresses in the
United States. These numbers are not representative of the number of beneficial
holders of our ordinary shares nor is it representative of where such
beneficial holders reside, since many of these ordinary shares were held of
record by brokers or other nominees (including one U.S. nominee company, CEDE
& Co., which held approximately 84.8% of our outstanding ordinary shares as
of said date).

|   |                           
|-- | --------------------------
|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 to 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 based on negotiations between the parties. Members of our management reviewed the
pricing of the lease agreement, as well as used a third-party consulting firm,
and confirmed that it was 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 obtaining certain terms and conditions that may not
be available from unaffiliated third parties on similar products and services.

All
transactions and arrangements with affiliated parties, including other members
of the RAD-Bynet Group, require the approval of our 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 $1,178,000 in 2008. During 2008 we purchased from members of the
RAD-Bynet Group computer and testing equipment in the amount of $859,000.

Lease of
Property

We
lease the office space for our headquarters and principal R&D,
administrative, finance and marketing and sales operations from private
companies owned by Messrs. Zohar Zisapel and Yehuda Zisapel. The facilities are located in 2 locations:
One is a five-story building in Tel Aviv, Israel, consisting of approximately
36,000 square feet, plus storage and parking space. The monthly rent amounts to approximately $45,000. The lease expires in November 2012. The
second location consists of two floors in the Or Tower in Tel Aviv, Israel with
approximately 30,000 square feet, plus parking spaces. The lease expires in May
2011. The monthly rent for such 2 floors amounts to approximately $50,000. We
also lease office space of approximately 5,920 square feet in a nearby location
in Israel from an unaffiliated party. The lease expires in March 2009. In
addition we lease approximately 6,291 square feet of space in Jerusalem,
Israel, for development facilities from an affiliated company owned by Messrs.
Yehuda and Zohar Zisapel. The lease expires in February 2011. The monthly rent
amounts to $9,000. In addition we
sublease 2,150 square feet in Jerusalem for our manufacturing facility from an
affiliated company owned by Messrs. Yehuda and Zohar Zisapel. The sublease
expires in April 2009. The monthly rent amounts to $2,200. We entered into an
agreement with RAD Data Communications, Inc., a company controlled by Yehuda
and Zohar Zisapel, pursuant to which we lease approximately 14,838square feet in Mahwah, New Jersey, consisting of
10,577 square feet of office space and 4,261square
feet of warehouse space, in consideration for monthly rent of approximately
$18,500 (including taxes, electricity and management fees). The lease expires
on April 20, 2010.

63

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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 (and its subsidiaries and/or affiliates) amounted to approximately $3.8
million during 2008.

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.

|   |                  
|-- | -----------------
|B. | 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
for the Southern District of New York (the district court). The complaint sought unspecified damages as
a result of alleged violations of Section 11 of the Securities Act of 1933, as
amended (the Securities Act) against all the defendants and Section 15 of the
Securities Act 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 our 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, as amended
(the Exchange Act) against us and a claim under Section 20(a) of the Exchange
Act against the Individual Defendants.
Plaintiffs allege that the prospectuses for our 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 district court. On October 9, 2002,
the Court dismissed the Individual Defendants from the case without
prejudice. 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
December 5, 2006, the United States Court of Appeals for the Second Circuit
(the Second Circuit) vacated a decision by the district court granting class
certification in six focus cases, which are intended to serve as test
cases. Plaintiffs selected these six
cases, which do not include us. On
April 6, 2007, the Second Circuit denied a petition for rehearing filed by the
plaintiffs, but noted that the plaintiffs could ask the district court to certify
more narrow classes than those that were rejected.

64

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Prior
to the Second Circuits decision, the majority of issuers, including the
Company, had submitted a settlement agreement to the district court for
approval. In light of the Second Circuit
opinion, the parties agreed that the settlement could not be approved. On June 25, 2007, the district court
approved a stipulation filed by the plaintiffs and the issuers that terminated
the proposed settlement. On August 14, 2007, the plaintiffs filed amended
complaints in the six focus cases. The
six focus case issuers and the underwriters named as defendants in the focus
cases filed motions to dismiss the amended complaints against them on November
14, 2007. On September 27, 2007, the
plaintiffs filed a motion for class certification in the six focus cases. On March 26, 2008, the district court
dismissed the Section 11 claims of those members of the putative classes in the
focus cases who sold their securities for a price in excess of the initial
offering price and those who purchased outside the previously certified class
period. With respect to all the other
claims, the motions to dismiss were denied. On October 10, 2008, at the request of Plaintiffs,
Plaintiffs motion for class certification was withdrawn, without prejudice.

The
parties in the approximately 300 coordinated class actions, including Radware,
the underwriter defendants in the Radware class action, and the plaintiffs in
the Radware class action, have reached an agreement in principle under which
the insurers for the issuer defendants in the coordinated cases will make the
settlement payment on behalf of the issuers, including Radware. The settlement is subject to approval by the
parties, termination by the parties under certain circumstances, and Court
approval. There is no assurance that
the settlement will be concluded or that the Court will approve the settlement.

Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the matter. Should the settlement
not be concluded or approved and the Company is found liable, we are, at this
time, unable to estimate or predict the potential damages that might be
awarded, whether such damages would be greater than our 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.

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, in a total amount of approximately 387,000
Euros. The hearings with respect to two of these matters are scheduled for
March 26, 2009 and April 30, 2009. At this stage 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 our financial results and operations.

The
Companys Canadian subsidiary, Radware Canada Inc., is a party to a litigation
proceeding before the Ontario Superior Court of Justice, brought against the
subsidiary by its former employee claiming damages in connection with its
dismissal for approximately 150,000 Canadian Dollars. At this stage we cannot
asses the outcome or the risks associated with this matter but in any event we
do not expect it to have a material affect on our financial results and
operations.

We
have conducted some other legal proceeding
or arbitration which we do not believe to have significant effects on our
financial condition or profitability.

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.

|   |                    
|-- | -------------------
|C. | Significant
Changes

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

65

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|        |            
|------- | -----------
|ITEM 9. | THE LISTING

|   |                
|-- | ---------------
|A. | Listing
Details

Our
ordinary shares have been listed for quotation on the NASDAQ Global Select
Market as of September 30, 1999, and, since May 12, 2004 on the Tel
Aviv Stock Exchange, or TASE, both under the symbol RDWR. Due primarily to low volumes of trade, we have
voluntarily delisted our ordinary shares from trade on the TASE, effective
March 8, 2009.

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

|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|----------------------- |  | --------------------------- | ----- | ----------------------- | - | ----- |  | ---------- |  |  | --------- |  | 
|                        |  | NASDAQ Global Select Market |       | Tel Aviv Stock Exchange |  
|                        |  |                             |       |                         |  
|Annual High and Low     |  | High                        |       | Low                     |   | High  |  | Low        | 
|                        |  |                             |       |                         |   |       |  |            | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|2004                    |  | $                           | 32.42 |                         | $ | 14.94 |  | NIS118.00  |  |  | NIS 69.60 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|2005                    |  | $                           | 26.56 |                         | $ | 15.19 |  | NIS 115.00 |  |  | NIS 67.93 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|2006                    |  | $                           | 21.49 |                         | $ | 11.44 |  | NIS 101.10 |  |  | NIS 50.43 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|2007                    |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|First Quarter           |  | $                           | 15.62 |                         | $ | 12.84 |  | NIS 67.97  |  |  | NIS 55.24 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|Second Quarter          |  | $                           | 14.60 |                         | $ | 12.31 |  | NIS 61.97  |  |  | NIS 49.73 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|Third Quarter           |  | $                           | 16.05 |                         | $ | 12.94 |  | NIS 64.62  |  |  | NIS 53.68 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|Fourth Quarter          |  | $                           | 16.92 |                         | $ | 12.72 |  | NIS 67.33  |  |  | NIS 49.64 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|ANNUAL                  |  | $                           | 16.92 |                         | $ | 12.31 |  | NIS 67.97  |  |  | NIS 49.64 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|2008                    |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|First Quarter           |  | $                           | 14.84 |                         | $ | 10.19 |  | NIS 59.40  |  |  | NIS 34.51 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|Second Quarter          |  | $                           | 10.93 |                         | $ | 8.81  |  | NIS 39.72  |  |  | NIS 29.50 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|Third Quarter           |  | $                           | 9.80  |                         | $ | 7.50  |  | NIS 35.64  |  |  | NIS 26.09 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|Fourth Quarter          |  | $                           | 8.06  |                         | $ | 4.99  |  | NIS 28.38  |  |  | NIS 18.11 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|ANNUAL                  |  | $                           | 14.84 |                         | $ | 4.99  |  | NIS 59.40  |  |  | NIS 18.11 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|Most
 recent six months |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|2009                    |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|March*                  |  | $                           | 5.80  |                         | $ | 5.15  |  | **         |  |  | **        |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|February                |  | $                           | 6.48  |                         | $ | 5.31  |  | NIS 27.30  |  |  | NIS 21.17 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|January                 |  | $                           | 6.21  |                         | $ | 5.51  |  | NIS 25.24  |  |  | NIS 21.09 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|2008                    |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|December                |  | $                           | 6.75  |                         | $ | 4.99  |  | NIS 27.39  |  |  | NIS 18.11 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|November                |  | $                           | 6.99  |                         | $ | 5.73  |  | NIS 27.71  |  |  | NIS 21.50 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|October                 |  | $                           | 8.06  |                         | $ | 5.76  |  | NIS 28.38  |  |  | NIS 21.98 |  | 
|                        |  |                             |       |                         |   |       |  |            |  |  |           |  | 
|September               |  | $                           | 9.80  |                         | $ | 7.92  |  | NIS 35.64  |  |  | NIS 27.01 |  | 

* Through
March 23, 2009

**
Effective March 8, 2009, the Company was voluntarily de-listed from the TASE.

66

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|   |                     
|-- | --------------------
|B. | Plan
of Distribution

Not applicable.

|   |        
|-- | -------
|C. | Markets

Our ordinary shares are
listed for quotation on the NASDAQ Global Select Market under the symbol
RDWR.

|   |                     
|-- | --------------------
|D. | Selling
Shareholders

Not applicable.

|   |         
|-- | --------
|E. | Dilution

Not applicable.

|   |                      
|-- | ---------------------
|F. | Expenses
of the Issue

Not applicable.

67

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

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 objective 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 deems fit,
and is obliged to do so upon the request of any of: two directors or one fourth of then serving directors; one or
more shareholders who hold at least 5% of the issued share capital and at least
1% of the voting rights; or one or more shareholders who hold 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.

68

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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.

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 certain related party transactions and
 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.

69

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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), except those
relating to the staggered board as described in Item 6 above and certain
provisions of the Companies Law which 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.

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
acquirer. 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 acquirer 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.

70

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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 of Association
or under Israeli law for directors to retire on attaining a specific age. Our
Articles of Association do not require directors to hold our ordinary shares to
qualify for election.

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.                                                                                                                      

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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                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|· | 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 SEC
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 consideration of up to $16
million, consisting of $7.5 million paid at closing and up to $8.5 million
(earn-out) to be paid in 12 months following 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 equal to or exceed $8 million. Since
the sales targets were not achieved we were not required to pay the additional
earn-out amount and the total
consideration for the acquisition was $7,660,000, including $160,000 of costs
related to the acquisition. 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.

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The foregoing description of the
agreement and plan of merger with Covelight is only a summary and does not
purport to be complete and is qualified by reference to the full text of the
agreement filed by us as Exhibit 4.5 in Item 19.

On
February 19, 2009 we entered into an asset purchase agreement (APA) with
Nortel Networks Ltd., Nortel Networks Inc. and other Nortel entities, whereby
we agreed to purchase certain assets, including intellectual property,
inventory and service contracts, related to Nortels Layer 4-7 Application
Delivery Business for $17.65 million in cash. The Application Delivery Business
was acquired by Nortel in 2000 by way of its corporate acquisition of Alteon
WebSystems, Inc. Nortel has filed the APA with the United States Bankruptcy
Court for the District of Delaware along with a motion seeking the
establishment of bidding procedures for an auction that allows other qualified
bidders to submit higher or otherwise better offers, as required under Section
363 of the U.S. Bankruptcy Code. A similar motion for the approval of the
bidding procedures was filed with the Ontario Superior Court of Justice.
Consummation of the transaction was subject to higher or otherwise better
offers, none of which were received by the bidding deadline, and approval by
the United States Bankruptcy Court for the District of Delaware, and the
Ontario Superior Court of Justice and the satisfaction of other conditions. The
APA contains very limited ongoing representations and undertakings by Nortel
with respect to the purchased assets and assumed liabilities. If the deal is
consummated, we plan to offer the Nortels application delivery products under
a merged brand, Radware Alteon, and to hire certain Nortel employees who will
be dedicated to the Radware Alteon brand.

The foregoing description of
the APA is only a summary and does not purport to be complete and is qualified
by reference to the full text of the agreement filed by us as Exhibit 4.6 in
Item 19.

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.

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.

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General
Corporate Tax Structure

Generally,
Israeli companies are subject to Corporate Tax on their taxable income at the
rate of 27% for the 2008 tax year and 26% for the 2009 year tax.Following an amendment to the Tax
Ordinance, which came into effect on January 1, 2006, the Corporate Tax rate is
scheduled to decrease to 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, the effective tax rate payable by a
company which derives income from an approved enterprise (as further discussed
below) may be considerably less.

Following
an additional amendment to the Tax Ordinance, which came into effect on January
1, 2009, an Israeli corporation may elect a 5% rate of corporate tax (instead
of 25%) for income from dividend distributions received from a foreign
subsidiary which is used in Israel in 2009, or within one year after actual
receipt of the dividend, whichever is later. The 5% tax rate is subject to
various conditions, which include conditions with regard to the identity of the
corporation that distributes the dividends, the source of the dividend, the
nature of the use of the dividend income, and the period during which the dividend
income will be used in Israel.

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).

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.

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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 and manufacturing 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.

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In 2004, the Company
began to utilize the above mentioned tax benefits, and they are scheduled to
gradually expire according to the law. As of December 31, 2008, retained
earnings included approximately $25.0 million 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 with respect to the gross amount as if the Company
had not elected the alternative tax benefits (currently between 10% - 25%,
based on percentage of foreign ownership at the date of declaration).

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 by notifying the ITA
within 12 months of the end of that year, 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 distributes 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 of the gross amount (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

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|  |                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | 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 Approved
Enterprise 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;
|  |                                                                                                                                      
|· | 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.                

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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 2009.

On
March 6, 2008, an amendment to the Inflationary Adjustments Law came into
force. Pursuant to this amendment, as of the 2008 tax year, most of the
provisions of the Inflationary Adjustments Law will no longer be in force,
except for certain transitional orders.

Israeli
Transfer Pricing Regulations

On
November 29, 2006, Income Tax Regulations (Determination of Market Terms),
2006, promulgated under Section 85A of the Tax Ordinance, came into effect (the
TP Regs). Section 85A of the Tax Ordinance and the TP Regs generally requires
that all cross-border transactions carried out between related parties be
conducted on an arms length principle basis and will be taxed accordingly. The TP Regs are not expected to have a
material affect on the Company.

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
listed 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).

78

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The
tax basis of our ordinary shares acquired prior to January 1, 2003 will
generally 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.

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 Israeli
residents (i) have a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) are the beneficiaries or are 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 applicable 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, if the income
out of which the dividend is paid is not generated by an Approved Enterprise
(or Benefited Enterprise), and not more than 25% of our gross income consists of
interest or dividends, dividends 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.

79

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United
States Federal Income Tax Considerations

Subject
to the limitations described herein, the following discussion summarizes
certain 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:

|  |                                                                                                                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | An individual citizen or resident of the United
 States for U.S. federal income tax purposes;                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                    
|· | A corporation (or other entity taxable as a
 corporation 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 or the District of Columbia;                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                    
|· | An estate, the income of which is subject to U.S.
 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 (generally, for investment) 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. Certain 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 U.S. 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 U.S.
federal income tax consequences to U.S. Holders that are subject to special
treatment, including U.S. Holders that:

|  |                                                                                                      
|- | -----------------------------------------------------------------------------------------------------
|· | Are broker-dealers or
 insurance companies;                                                          
|  |                                                                                                      
|· | Have elected mark-to-market
 accounting;                                                             
|  |                                                                                                      
|· | Are tax-exempt organizations
 or retirement plans;                                                   
|  |                                                                                                      
|· | Are grantor trusts;                                                                                  
|  |                                                                                                      
|· | Are financial institutions or
 financial services entities;                                        
|  |                                                                                                      
|· | Hold their shares as part of a
 straddle, hedge or conversion transaction with other investments;
|  |                                                                                                      
|· | Certain former citizens or
 long-term residents of the United States;                                
|  |                                                                                                      
|· | Acquired their shares upon the
 exercise of employee stock options or otherwise as compensation;     
|  |                                                                                                      
|· | Are real estate investment
 trusts or regulated investment companies;                                
|  |                                                                                                      
|· | 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.                                             

If
a partnership (or any other entity treated as a partnership for U.S. federal
income tax purposes) holds our ordinary shares, the tax treatment of the
partnership and a partner in such partnership will generally depend on the
status of the partner and the activities of the partnership. Such a partner or partnership should consult
its own tax advisor as to its tax consequences.

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

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Each
holder of our ordinary shares is advised to consult such holders own tax
advisor with respect to the specific tax consequences to such holder 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 holder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 non-U.S. taxes withheld from the amount paid, to the extent the
distribution is paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of such earnings and profits will be
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.

Dividends
that are received by non-corporate U.S. Holders will be taxed at the rate
applicable to long-term capital gains (currently 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 the United States 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 non-U.S. 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 may 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 non-U.S. income
taxes withheld on a dividend distribution either as a deduction from gross
income or as a dollar-for-dollar credit against their U.S. 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 non-U.S. income taxes withheld, but such
amount may be claimed as a credit against the individuals U.S. 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 U.S. federal income taxes
otherwise payable with respect to each such class of income. A U.S. Holder will be denied a foreign tax
credit with respect to non-U.S. 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 generally will be foreign source
passive income for U.S. foreign tax credit purposes.

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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
generally will be treated as U.S. source income for U.S. 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, may 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.

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 corporate subsidiaries) either (i) 75
percent or more of our gross income in a taxable year is passive income or (ii)
the average percentage (by value, determined on a quarterly basis) of our total
assets that are 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
certain nonresident aliens) would be denied the normally-available step-up in
basis for such shares to fair market value on the date of death and, instead,
would generally have a tax basis in such shares equal to the lower of the
decedents basis or the fair market value of such shares on the date of the
decedents death.

As an alternative to the
tax treatment described above, a U.S. Holder could elect to treat us as a
qualified electing fund (QEF), in which case the U.S. Holder would be
required to include in income, for each taxable year that we are
a PFIC, its pro rata share of our ordinary earning as ordinary income and its
pro rata share of our net capital gain as long-term capital gain, subject to a separate
election to defer payment of taxes, which deferral is subject to an interest
charge. Any income inclusion will be
required whether or not such U.S. Holder owns our ordinary shares for an entire
taxable year or at the end of our taxable year. The amount so includable will be determined without regard to our
prior year losses or the amount of cash distributions, if any, received from
us. 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 will supply U.S.
Holders with the information needed to report income and gain under a QEF
election if we are a PFIC. A U.S.
Holders basis in its ordinary shares will increase by any amount included in
income and decrease by any amounts not included in income when distributed
because such amounts were previously taxed under the QEF rules. So long as a U.S. Holders QEF election is
in effect beginning with the first taxable year in which we were a PFIC during
the U.S. Holders holding period for its ordinary shares, any gain or loss
realized by such holder on the disposition of its ordinary shares held as a
capital asset ordinarily would be a capital gain or loss. Such capital gain or loss ordinarily would
be long-term if such U.S. Holder had held such ordinary shares for more than
one year at the time of the disposition.
The QEF election is made on a shareholder-by-shareholder basis, applies
to all ordinary shares held or subsequently acquired by an electing U.S. Holder
and can be revoked only with the consent of the United States Internal Revenue
Service (IRS).

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As an alternative to
making a QEF election, a U.S. Holder of PFIC stock which is marketable stock
(e.g., regularly traded on the NASDAQ Global Select Market) may in certain
circumstances avoid certain of the tax consequences generally applicable to
holders of stock in a PFIC by electing to mark the stock to market as of the
beginning of such U.S. Holders holding period for the ordinary shares. As a result of such election, in any taxable
year that we are a PFIC, a U.S. Holder would generally be required to report
gain or loss to the extent of the difference between the fair market value of
the ordinary shares at the end of the taxable year and such U.S. Holders tax
basis in its ordinary shares at that time.
Any gain under this computation, and any gain on an actual disposition
of the ordinary shares in a taxable year in which we are a PFIC, would be
treated as ordinary income. Any loss
under this computation, and any loss on an actual disposition of the ordinary
shares in a taxable year in which we are a PFIC, generally would be treated as
ordinary loss to the extent of the cumulative net-mark-to-market gain
previously included. Any remaining loss
from marking ordinary shares to market will not be allowed, and any remaining
loss from an actual disposition of ordinary shares generally would be capital
loss. A U.S. Holders tax basis in its
ordinary shares is adjusted annually for any gain or loss recognized under the
mark-to-market election. There can be
no assurances that there will be sufficient trading volume with respect to the
ordinary shares for the ordinary shares to be considered regularly traded or
that our ordinary shares will continue to trade on the NASDAQ Global Select
Market. Accordingly, there are no
assurances that the ordinary shares will be marketable stock for these
purposes. As with a QEF election, a
mark-to-market election is made on a shareholder-by-shareholder basis, applies
to all ordinary shares held or subsequently acquired by an electing U.S. Holder
and can only be revoked with consent of the IRS (except to the extent the
ordinary shares no longer constitute marketable stock).

As indicated above, we
will be a PFIC for any taxable year if the average percentage (by fair market
value determined on a quarterly basis) 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 IRS or the courts.  The market capitalization approach has generally
been used to determine the fair market value of the assets of a publicly traded
corporation.  Based on applying a pure market capitalization approach
using our closing stock price as of the end of each quarter in 2008, it is
likely that we would be a PFIC for 2008.
However, by applying alternative valuation methodologies, including
valuation methodologies that make certain adjustments to our market
capitalization, we believe that we will not be classified as a PFIC for
2008. There are no assurances that the
IRS will not challenge this treatment and it is possible that the IRS will
attempt to treat us as a PFIC for 2008 and possibly prior taxable years. However, the IRS has accepted other
valuation methods besides the market capitalization approach in certain other
valuation contexts. The tests for
determining PFIC status are applied annually and it is difficult to make
accurate predictions of future income and assets, and the future price of our
ordinary shares, which are all relevant to the determination of whether we are
classified as a PFIC. Accordingly,
there can be no assurance that we will not become a PFIC in 2009 or in
subsequent taxable years.

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.

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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, in the case of U.S. federal income
taxes:

|  |                                                                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | 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; or
|  |                                                                                                                                                                                                                                                                                                                                                               
|· | 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;                                                                                                                              

Information
Reporting and Backup Withholding

U.S.
Holders (other than exempt recipients such as corporations) 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
U.S. 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 U.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 backup
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. | Statement by Experts

Not
applicable.

|   |                     
|-- | --------------------
|H. | Documents on Display

We
are subject to the informational requirements of the Exchange Act, applicable
to foreign private issuers and fulfill the obligations with respect to such
requirements by filing reports with the SEC. You may read and copy any document
we file with the SEC without charge at the SEC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
SEC at such address, at prescribed rates.
Please call the SEC 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 SEC at www.sec.gov.

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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 SEC as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act.

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 SEC.

|   |                       
|-- | ----------------------
|I. | Subsidiary Information

Not
applicable.

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|         |                                                            
|-------- | -----------------------------------------------------------
|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.
Our investments consist
primarily of government and corporate debentures. As of December 31, 2008,
approximately 16% of our portfolio was invested in U.S. Government debentures,
42% in foreign banks and government debentures, 22% in other corporate
debentures and the rest of the funds were invested in bank deposits and money
market funds. Although we believe that we generally adhere to conservative
investment guidelines, the continuing turmoil in the financial markets may
result in impairments of the carrying value of our investment assets. Realized
losses in our investments portfolio may adversely affect our financial position
and results.

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

Not
applicable.

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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

Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act), as of December 31, 2008. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December
31, 2008, our 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
our 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 SECs rules and forms.

87

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---



b.        Managements
Annual Report on Internal Control Over Financial Reporting and Attestation
Report of Registered Public Accounting
Firm

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for us. Our internal control over financial
reporting is a process to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting
principles. Our internal control over financial reporting includes those
policies and procedures that:

|  |                                                                                                                                                                                                                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | pertain to the maintenance of records that, in
 reasonable detail, accurately and fairly reflect the transactions and
 dispositions of our assets,                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                          
|· | provide reasonable assurance that transactions are
 recorded as necessary to permit preparation of financial statements in
 accordance with generally accepted accounting principles, and that our
 receipts and expenditures are being made only in accordance with
 authorizations of our management and directors, and
|  |                                                                                                                                                                                                                                                                                                                          
|· | provide reasonable assurance regarding prevention or
 timely detection of unauthorized acquisition, use or disposition of our
 assets that could have a material effect on our financial statements.                                                                                                                     

Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projection of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In conducting its assessment of internal
control over financial reporting, our management based its evaluation on the
framework in Internal Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Our management
has concluded based on its assessment, that our internal control over financial
reporting was effective as of December 31, 2008 based on these criteria.

The
effectiveness of our internal control over financial reporting as of December
31, 2008, has been audited by Kost, Forer, Gabbay & Kasierer (A Member of
Ernst & Young Global), an independent registered public accounting firm who
audited and reported on the consolidated financial statements of the
company for the year ended December 31, 2008.

c.        Attestation
Report of the Registered Public Accounting Firm

This
annual report includes an attestation report of our registered public accounting
firm regarding internal control over financial reporting on page F-3 of our
audited consolidated financial statements set forth in Item 18  Financial
Statements, and are incorporated herein by reference.

d.       Changes
In Internal Control Over Financial Reporting

During
the period covered by this annual report, no changes in our internal control
over financial reporting have occurred that materially affected, or are
reasonably likely to materially affect, our 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 financial experts 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.

88

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---



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

|          |                                        
|--------- | ---------------------------------------
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND
 SERVICES

In
the annual meeting held on November 30, 2008 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, |    
|                    |  |                          |    
|                    |  | 2007                     |     | 2008 | 
|                    |  |                          |     |      |  | (US$ in thousands) |   |  |    
|                    |  |                          |     |      |  |                    |   |  |     |  |  |     |  
|Audit
 Fees         |  |                          | 144 |      |  | 47                 | % |  | 150 |  |  | 59  | %
|Audit-Related
 Fees |  |                          | 33  |      |  | 11                 | % |  | 33  |  |  | 13  | %
|Tax
 Fees           |  |                          | 129 |      |  | 42                 | % |  | 71  |  |  | 28  | %
|All
 Other Fees     |  |                          |    |      |  |                   |   |  |     |  |  |     |  
|Total               |  |                          | 306 |      |  | 100                | % |  | 254 |  |  | 100 | %

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 2008 fiscal year for non-audit services in certain categories,
unless pre-approved. Our Director of Finance reviews 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.

89

---

---



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

None.

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

During
2008 we repurchased our ordinary shares under a share repurchase plan, in an
aggregate amount of $6.6 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 (1) |  | (d)
 Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May
 Yet Be Purchased Under the Plans or Programs (1) | 
|                       |  |                                                  |  |                                                       |  |                                                                                                       |  |                                                                                                                                   | 
|                       |  |                                                  |  |                                                       |  |                                                                                                       |  |                                                                                                                                   |  |  |   |            | 
|January 1 through 31   |  | 0                                                |  |                                                       |  | N/A                                                                                                   |  | 0                                                                                                                                 |  |  | $ | 13,931,269 | 
|February 1 through 29  |  | 0                                                |  |                                                       |  | N/A                                                                                                   |  | 0                                                                                                                                 |  |  | $ | 13,931,269 | 
|March 1 through 31     |  | 0                                                |  |                                                       |  | N/A                                                                                                   |  | 0                                                                                                                                 |  |  | $ | 13,931,269 | 
|April 1 through 30     |  | 0                                                |  |                                                       |  | N/A                                                                                                   |  | 0                                                                                                                                 |  |  | $ | 13,931,269 | 
|May 1 through 31       |  | 0                                                |  |                                                       |  | N/A                                                                                                   |  | 0                                                                                                                                 |  |  | $ | 13,931,269 | 
|June 1 through 30      |  | 0                                                |  |                                                       |  | N/A                                                                                                   |  | 0                                                                                                                                 |  |  | $ | 13,931,269 | 
|July 1 through 31      |  | 95,000                                           |  |                                                       |  | 8.00                                                                                                  |  | 95,000                                                                                                                            |  |  | $ | 13,171,269 | 
|August 1 through 31    |  | 333,097                                          |  |                                                       |  | 8.74                                                                                                  |  | 333,097                                                                                                                           |  |  | $ | 10,261,238 | 
|September 1 through 30 |  | 30,000                                           |  |                                                       |  | 9.00                                                                                                  |  | 30,000                                                                                                                            |  |  | $ | 9,991,310  | 
|October 1 through 31   |  | 0                                                |  |                                                       |  | N/A                                                                                                   |  | 0                                                                                                                                 |  |  | $ | 9,991,310  | 
|November 1 through 30  |  | 393,699                                          |  |                                                       |  | 6.19                                                                                                  |  | 393,699                                                                                                                           |  |  | $ | 7,553,871  | 
|December 1 through 31  |  | 28,519                                           |  |                                                       |  | 6.56                                                                                                  |  | 28,519                                                                                                                            |  |  | $ | 7,366,835  | 

(1) In July 2008, our board
of directors authorized the reactivation of our share repurchase program under
which the total amount to be paid for the repurchase of shares would not exceed
$25 million in the aggregate as of the original board approval in 2006. Such
share repurchase program was approved by the Tel Aviv District Court in Israel
in October 2006, pursuant to the requirement of Israeli law. The timing and the
amounts purchased will be at the Companys discretion, and the purchases may
occur in the open market or in private transactions or block transactions, all
subject to regulatory requirements. The
Companys current intention is to implement the repurchase program in
accordance with the safe harbour rules of Rule 10b-18 under the US Securities
Exchange Act of 1934.

|          |                                              
|--------- | ---------------------------------------------
|ITEM 16F. | CHANGE IN REGISTRANTS CERTIFYING
 ACCOUNTANT

Not
applicable.

90

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---



|          |                     
|--------- | --------------------
|ITEM 16G. | CORPORATE GOVERNANCE

We
are a foreign private issuer whose ordinary shares are listed on the NASDAQ
Global Select Market. As such, we are
required to comply with U.S. federal securities laws, including the
Sarbanes-Oxley Act, and the NASDAQ rules, including the NASDAQ corporate
governance requirements. The NASDAQ
rules provide that foreign private issuers may follow home country practice in
lieu of certain qualitative listing requirements subject to certain exceptions
and except to the extent that such exemptions would be contrary to U.S. federal
securities laws, so long as the foreign issuer discloses that it does not
follow such listing requirement and describes the home country practice
followed in its reports filed with the SEC.
Below is a concise summary of the significant ways in which our
corporate governance practices differ from the corporate governance
requirements of NASDAQ applicable to domestic U.S. listed companies:

The
NASDAQ rules require that an issuer have a quorum requirement for shareholders
meetings of at least one-third of the outstanding shares of the issuers common
voting stock. We have chosen to follow home country practice with respect to
the quorum requirements of an adjourned shareholders meeting. Our articles of
association, as permitted under the Israeli Companies Law and Israeli practice,
provide that the quorum requirements for an adjourned meeting are the presence
of a minimum of two shareholders present in person.

The
NASDAQ rules require shareholder approval of stock option plans available to
officers, directors or employees. We have decided to follow home country
practice in lieu of obtaining shareholder approval for our stock option
plans. However, subject to exceptions
permitted under the Companies Law, we are required to seek shareholder approval
of any grants of options to directors and controlling shareholders or plans
that require shareholder approval for other reasons. Additionally, we have chosen to follow our home country practice
in lieu of the requirements of NASDAQ
Rule 4350(b)(1)(A), relating to an issuers furnishing of its annual report to
shareholders.

91

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---



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.

92

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---



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

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

|Exhibit No. |  | Exhibit                                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                            
|           
|1.1         |  | Memorandum
 of Association (A)                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                            
|1.2         |  | Articles
 of Association (B)                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                            
|1.3         |  | Amendment
 to the Articles of Association (D)                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                            
|4.1         |  | Lease
 Agreement for the Companys Mahwah office (C)                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                            
|4.2         |  | Distributor
 Agreement with Bynet Data Communications Ltd. (C)                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                            
|4.3         |  | Form
 of Directors and Officers Indemnity Deed (D)                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                            
|4.4         |  | Asset
 Purchase Agreement with V-Secure Technologies (U.S.) Inc. (D)                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                            
|4.5         |  | Agreement
 and Plan of Merger by and Between the Company, its subsidiary, Covelight and
 its stockholders and note-holders (E)                                                                                                                             
|            |  |                                                                                                                                                                                                                                                            
|4.6         |  | Asset
 Purchase Agreement by and between NORTEL NETWORKS INC., NORTEL NETWORKS
 LIMITED and some EMEA Nortel entities, as sellers, A. R. BLOOM, S. HARRIS, A.
 M. HUDSON AND C. HILL and A.R. BLOOM AND D. HUGHES, as Joint Administrators
 and the Company
|            |  |                                                                                                                                                                                                                                                            
|4.7         |  | Summary
 of Material Terms of the Lease Agreements for the Companys Headquarters                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                            
|8.1         |  | List
 of Subsidiaries                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                            
|10.1        |  | Consent
 of Independent Registered Public Accounting Firm                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                            
|12.1        |  | Certification
 of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
 Act of 2002                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                            
|12.2        |  | Certification
 of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
 Act of 2002                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                            
|13.1        |  | 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 Annual
Report on Form 20-F for the year ended December 31, 2001, filed with the SEC on
April 5, 2002.

(D)
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.

(E)
Incorporated by reference to the Annual Report on Form 20-F for the year ended
December 31, 2006, filed with the SEC on June 5, 2007.

93

---

---



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
 Zisapel      
| |               |                        
| |               | Roy Zisapel            
| |               | Chief Executive Officer

Date: March 25, 2009

94



---

---

RADWARE LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF DECEMBER 31,
2008

U.S. DOLLARS IN
THOUSANDS

INDEX

|                                                                  |           
|----------------------------------------------------------------- | ----------
|                                                                  | Page      
|                                                                  |           
|Managements Report on Internal Control
 Over Financial Reporting | F-2       
|                                                                  |           
|Reports of Independent Registered Public
 Accounting Firm         | F-3       
|                                                                  |           
|Consolidated Balance Sheets                                       | F-4  F-5 
|                                                                  |           
|Consolidated Statements of Operations                             | F-6       
|                                                                  |           
|Statements of Changes in Shareholders Equity                     | F-7       
|                                                                  |           
|Consolidated Statements of Cash Flows                             | F-8       
|                                                                  |           
|Notes to Consolidated Financial Statements                        | F-9  F-41

---

---



(ERNST & YOUNG LOGO)

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Shareholders of
RADWARE LTD.

We have
audited Radware Ltd.s (the Company) internal control over financial
reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, is reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our
opinion, the Company maintained in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO
criteria.

We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
and its subsidiaries as of December 31, 2007 and 2008, and the related
consolidated statements of operations, changes in shareholders equity and cash
flows for each of the three years in the period ended December 31, 2008
and our report dated March 24, 2009 expressed an unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|Tel-Aviv, Israel | KOST FORER
 GABBAY & KASIERER   
|March 24, 2009   | A Member of Ernst & Young Global

F - 2

---

---



(ERNST & YOUNG LOGO)

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of
Directors and Shareholders of

RADWARE LTD.

We have
audited the accompanying consolidated balance sheets of Radware Ltd. (the
Company) and its subsidiaries as of December 31, 2007 and 2008, 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, 2008. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries at December 31, 2007 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.

As
discussed in Note 2q to the consolidated financial statements, in 2007 the Company
adopted Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109.

We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 24, 2009
expressed an unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|Tel-Aviv, Israel | KOST FORER
 GABBAY & KASIERER   
|March 24,
 2009  | A Member of Ernst & Young Global

F - 3

---

---





|                                 
|---------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES
|                                 
|CONSOLIDATED BALANCE SHEETS      
|                                 
|U.S. dollars in thousands        

|                                                                                                                 |  |               |         |      |   |         | 
|---------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- | - | ------- | 
|                                                                                                                 |  | December
 31, |        
|                                                                                                                 |  |               |        
|                                                                                                                 |  | 2007          |         | 2008 |  
|                                                                                                                 |  |               |         |      |  
|                                                                                                                 |  |               |         |      |   |         | 
|ASSETS                                                                                                           |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|CURRENT
 ASSETS:                                                                                                 |  |               |         |      |   |         | 
|Cash and cash equivalents                                                                                        |  | $             | 61,376  |      | $ | 28,065  | 
|Available-for-sale marketable securities                                                                         |  |               | 80,498  |      |   | 60,731  | 
|Structured deposit                                                                                               |  |               | 10,236  |      |   |        | 
|Trade receivables (net of allowance for
 doubtful accounts of $1,200 and $500 in 2007 and 2008, respectively) *) |  |               | 17,192  |      |   | 13,348  | 
|Other receivables and prepaid expenses                                                                           |  |               | 3,195   |      |   | 2,046   | 
|Inventories                                                                                                      |  |               | 5,428   |      |   | 6,712   | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|Total
 current assets                                                                                            |  |               | 177,925 |      |   | 110,902 | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|LONG-TERM
 INVESTMENTS:                                                                                          |  |               |         |      |   |         | 
|Available-for-sale marketable securities                                                                         |  |               | 2,735   |      |   | 45,112  | 
|Severance pay fund                                                                                               |  |               | 3,940   |      |   | 1,995   | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|Total
 long-term investments                                                                                     |  |               | 6,675   |      |   | 47,107  | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|PROPERTY AND
 EQUIPMENT, NET                                                                                     |  |               | 12,217  |      |   | 11,693  | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|LONG-TERM
 DEFERRED TAXES AND OTHER LONG-TERM ASSETS                                                             |  |               | 978     |      |   | 432     | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|INTANGIBLE
 ASSETS, NET                                                                                          |  |               | 4,798   |      |   | 1,856   | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|GOODWILL                                                                                                         |  |               | 13,474  |      |   | 13,474  | 
|                                                                                                                 |  |               |         |      |   |         | 
|                                                                                                                 |  |               |         |      |   |         | 
|Total
 assets                                                                                                    |  | $             | 216,067 |      | $ | 185,464 | 
|                                                                                                                 |  |               |         |      |   |         | 

|   |                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------
|*) | Include
 balances in the amount of $1,320 and $1,358 with related parties as of
 December 31, 2007 and 2008, respectively (see also Note 15a).

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

F - 4

---

---



|                                                          
|----------------------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES                         
|                                                          
|CONSOLIDATED BALANCE SHEETS                               
|                                                          
|U.S. dollars in thousands, except share and per share data

|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                                                                        |  | December
 31, |        
|                                                                                                                                                                                                                                                        |  |               |        
|                                                                                                                                                                                                                                                        |  | 2007          |         | 2008 |  
|                                                                                                                                                                                                                                                        |  |               |         |      |  
|                                                                                                                                                                                                                                                       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                    |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|CURRENT
 LIABILITIES:                                                                                                                                                                                                                                   |  |               |         |      |   |         |  
|Trade payables *)                                                                                                                                                                                                                                       |  | $             | 7,537   |      | $ | 4,646   |  
|Deferred revenues                                                                                                                                                                                                                                       |  |               | 12,391  |      |   | 14,096  |  
|Other payables and accrued expenses                                                                                                                                                                                                                     |  |               | 8,043   |      |   | 9,868   |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|Total
 current liabilities                                                                                                                                                                                                                              |  |               | 27,971  |      |   | 28,610  |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|LONG TERM
 LIABILITIES:                                                                                                                                                                                                                                 |  |               |         |      |   |         |  
|Deferred
 revenues                                                                                                                                                                                                                                      |  |               | 6,004   |      |   | 4,946   |  
|Accrued
 severance pay                                                                                                                                                                                                                                  |  |               | 5,379   |      |   | 3,846   |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|Total
 long term liabilities                                                                                                                                                                                                                            |  |               | 11,383  |      |   | 8,792   |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|COMMITMENTS
 AND CONTINGENT LIABILITIES                                                                                                                                                                                                                 |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|SHAREHOLDERS
 EQUITY:                                                                                                                                                                                                                                  |  |               |         |      |   |         |  
|Share capital -                                                                                                                                                                                                                                         |  |               |         |      |   |         |  
|Ordinary shares of NIS 0.1 par value -                                                                                                                                                                                                                  |  |               |         |      |   |         |  
|Authorized: 30,000,000 as of December 31,
 2007 and 2008; Issued: 20,406,758 and 20,645,608 shares as of
 December 31, 2007 and 2008, respectively; Outstanding 19,559,903 shares
 and 18,918,438 shares as of December 31, 2007 and 2008, respectively |  |               | 482     |      |   | 465     |  
|Additional paid-in capital                                                                                                                                                                                                                              |  |               | 176,004 |      |   | 185,985 |  
|Treasury stock, at cost                                                                                                                                                                                                                                 |  |               | (11,049 | )    |   | (17,619 | )
|Accumulated other comprehensive income
 (loss)                                                                                                                                                                                                          |  |               | 150     |      |   | (873    | )
|Retained earnings (accumulated deficit)                                                                                                                                                                                                                 |  |               | 11,126  |      |   | (19,896 | )
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|Total
 shareholders equity                                                                                                                                                                                                                             |  |               | 176,713 |      |   | 148,062 |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  
|Total
 liabilities and shareholders equity                                                                                                                                                                                                             |  | $             | 216,067 |      | $ | 185,464 |  
|                                                                                                                                                                                                                                                        |  |               |         |      |   |         |  

|   |                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------
|*) | Include balances
 in the amount of $175 and $305 with related parties as of December 31, 2007
 and 2008, respectively (see also Note 15a).

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

F - 5

---

---



|                                                           
|-----------------------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES                          
|                                                           
|CONSOLIDATED STATEMENTS OF OPERATIONS                      
|                                                           
|U.S. dollars in thousands, except share and
 per share data

|                                     |  |                          |        |      |   |         |   |   |         |  
|------------------------------------ |  | ------------------------ | ------ | ---- | - | ------- | - | - | ------- | -
|                                     |  | Year ended
 December 31, |       
|                                     |  |                          |       
|                                     |  | 2006                     |        | 2007 |   | 2008    |  
|                                     |  |                          |        |      |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Revenues:
 *)                        |  |                          |        |      |   |         |   |   |         |  
|Products                             |  | $                        | 57,335 |      | $ | 59,422  |   | $ | 59,678  |  
|Services                             |  |                          | 24,075 |      |   | 29,209  |   |   | 34,903  |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Total revenues                       |  |                          | 81,410 |      |   | 88,631  |   |   | 94,581  |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Cost of revenues: *)                 |  |                          |        |      |   |         |   |   |         |  
|Products **)                         |  |                          | 10,267 |      |   | 13,133  |   |   | 15,143  |  
|Services                             |  |                          | 5,524  |      |   | 5,895   |   |   | 6,431   |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Total cost of revenues               |  |                          | 15,791 |      |   | 19,028  |   |   | 21,574  |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Gross
 profit                        |  |                          | 65,619 |      |   | 69,603  |   |   | 73,007  |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Operating
 expenses: *)              |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Research and development, net        |  |                          | 17,659 |      |   | 23,515  |   |   | 28,357  |  
|Sales and marketing                  |  |                          | 50,128 |      |   | 57,977  |   |   | 63,591  |  
|General and administrative           |  |                          | 6,178  |      |   | 7,114   |   |   | 12,066  |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Total operating
 expenses            |  |                          | 73,965 |      |   | 88,606  |   |   | 104,014 |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Operating
 loss                      |  |                          | (8,346 | )    |   | (19,003 | ) |   | (31,007 | )
|Financial
 income, net               |  |                          | 7,422  |      |   | 7,420   |   |   | 3,612   |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Loss
 before taxes on income         |  |                          | (924   | )    |   | (11,583 | ) |   | (27,395 | )
|Taxes
 on income                     |  |                          | 356    |      |   | 428     |   |   | 3,627   |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Net loss                             |  | $                        | (1,280 | )    | $ | (12,011 | ) | $ | (31,022 | )
|                                     |  |                          |        |      |   |         |   |   |         |  
|                                     |  |                          |        |      |   |         |   |   |         |  
|Basic and diluted net loss per share |  | $                        | (0.07  | )    | $ | (0.62   | ) | $ | (1.60   | )
|                                     |  |                          |        |      |   |         |   |   |         |  

|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*)  | For
 transactions with related parties See Note 15b.                                                                                                                          
|    |                                                                                                                                                                               
|**) | Include an
 impairment loss of approximately $2,036 with respect to acquired technology
 derived from the acquisition of Covelight. See also Note 1, Note 2(i) and
 Note 7(b).

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

F - 6

---

---



|                                              
|----------------------------------------------
|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
 stock, at cost |   | Accumulated
 other
 comprehensive
 income (loss) |   | Retained
 earnings
 (accumulated
 deficit) |         | Total
 comprehensive
 income (loss) |   | Total  |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Balance as of January 1, 2006                                                                                 |  |                                          | 19,061,760 |                | $ | 470                         |   | $                                   | 153,010 |                          | $ | (67                                              | ) | $                                          |        |                                     | $ | (404   | ) | $ | 24,417  |   |   |         |   | $ | 177,426 |  
|Repurchase of shares                                                                                          |  |                                          | (846,855   | )              |   | (20                         | ) |                                     |        |                          |   |                                                 |   |                                            | (11,049 | )                                   |   |       |   |   |        |   |   |         |   |   | (11,069 | )
|Issuance of shares upon exercise of
 stock options                                                            |  |                                          | 1,196,998  |                |   | 28                          |   |                                     | 12,607  |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   |        |   |   |         |   |   | 12,635  |  
|Stock based compensation                                                                                      |  |                                          |           |                |   |                            |   |                                     | 4,540   |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   |        |   |   |         |   |   | 4,540   |  
|Reclassification of deferred stock
 compensation into additional paid-in capital upon adoption of SFAS 123(R) |  |                                          |           |                |   |                            |   |                                     | (67     | )                        |   | 67                                               |   |                                            |        |                                     |   |       |   |   |        |   |   |         |   |   |        |  
|Comprehensive income:                                                                                         |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Unrealized gain from available-for-sale
 securities, net                                                      |  |                                          |           |                |   |                            |   |                                     |        |                          |   |                                                 |   |                                            |        |                                     |   | 162    |   |   |        |   | $ | 162     |   |   | 162     |  
|Net loss                                                                                                      |  |                                          |           |                |   |                            |   |                                     |        |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   | (1,280  | ) |   | (1,280  | ) |   | (1,280  | )
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                      |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   | $ | (1,118  | ) |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2006                                                                               |  |                                          | 19,411,903 |                |   | 478                         |   |                                     | 170,090 |                          |   |                                                 |   |                                            | (11,049 | )                                   |   | (242   | ) |   | 23,137  |   |   |         |   |   | 182,414 |  
|Issuance of shares upon exercise of
 stock options                                                            |  |                                          | 148,000    |                |   | 4                           |   |                                     | 1,377   |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   |        |   |   |         |   |   | 1,381   |  
|Stock based compensation                                                                                      |  |                                          |           |                |   |                            |   |                                     | 4,537   |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   |        |   |   |         |   |   | 4,537   |  
|Comprehensive income:                                                                                         |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Unrealized gain from available-for-sale
 securities, net                                                      |  |                                          |           |                |   |                            |   |                                     |        |                          |   |                                                 |   |                                            |        |                                     |   | 392    |   |   |        |   | $ | 392     |   |   | 392     |  
|Net loss                                                                                                      |  |                                          |           |                |   |                            |   |                                     |        |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   | (12,011 | ) |   | (12,011 | ) |   | (12,011 | )
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                      |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   | $ | (11,619 | ) |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2007                                                                               |  |                                          | 19,559,903 |                |   | 482                         |   |                                     | 176,004 |                          |   |                                                 |   |                                            | (11,049 | )                                   |   | 150    |   |   | 11,126  |   |   |         |   |   | 176,713 |  
|Repurchase of shares                                                                                          |  |                                          | (880,315   | )              |   | (24                         | ) |                                     |        |                          |   |                                                 |   |                                            | (6,570  | )                                   |   |       |   |   |        |   |   |         |   |   | (6,594  | )
|Issuance of shares upon exercise of
 stock options                                                            |  |                                          | 238,850    |                |   | 7                           |   |                                     | 1,906   |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   |        |   |   |         |   |   | 1,913   |  
|Stock based compensation                                                                                      |  |                                          |           |                |   |                            |   |                                     | 8,075   |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   |        |   |   |         |   |   | 8,075   |  
|Comprehensive income:                                                                                         |  |                                          |           |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Unrealized loss on available-for-sale
 securities, net                                                        |  |                                          |           |                |   |                            |   |                                     |        |                          |   |                                                 |   |                                            |        |                                     |   | (1,023 | ) |   |        |   | $ | (1,023  | ) |   | (1,023  | )
|Net loss                                                                                                      |  |                                          |           |                |   |                            |   |                                     |        |                          |   |                                                 |   |                                            |        |                                     |   |       |   |   | (31,022 | ) |   | (31,022 | ) |   | (31,022 | )
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                      |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   | $ | (32,045 | ) |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2008                                                                               |  |                                          | 18,918,438 |                | $ | 465                         |   | $                                   | 185,985 |                          | $ |                                                  |   | $                                          | (17,619 | )                                   | $ | (873   | ) | $ | (19,896 | ) |   |         |   | $ | 148,062 |  
|                                                                                                              |  |                                          |            |                |   |                             |   |                                     |         |                          |   |                                                  |   |                                            |         |                                     |   |        |   |   |         |   |   |         |   |   |         |  

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

F - 7

---

---



|                                     
|-------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES    
|                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     
|U.S. dollars in thousands            

|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | ---- | - | ------- | - | - | -------- | -
|                                                                                                                                                   |  | Year ended December 31, |         
|                                                                                                                                                   |  |                         |         
|                                                                                                                                                   |  | 2006                    |          | 2007 |   | 2008    |  
|                                                                                                                                                   |  |                         |          |      |   |         |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Cash flows from operating activities:                                                                                                              |  |                         |          |      |   |         |   |   |          |  
|Net loss                                                                                                                                           |  | $                       | (1,280   | )    | $ | (12,011 | ) | $ | (31,022  | )
|Adjustments to reconcile net loss to net
 cash provided by (used in) operating activities:                                                         |  |                         |          |      |   |         |   |   |          |  
|Depreciation and amortization                                                                                                                      |  |                         | 2,976    |      |   | 5,056   |   |   | 6,073    |  
|Impairment of acquired technology                                                                                                                  |  |                         |         |      |   |        |   |   | 2,036    |  
|Stock based compensation                                                                                                                           |  |                         | 4,540    |      |   | 4,537   |   |   | 8,075    |  
|Amortization of premiums, accretion of
 discounts and accrued interest on available-for-sale and held-to-maturity
 marketable debt securities, net |  |                         | 458      |      |   | (3,485  | ) |   | 588      |  
|Accrued interest on bank deposits and
 structured deposit                                                                                          |  |                         | 51       |      |   | (634    | ) |   | 236      |  
|Accrued severance pay, net                                                                                                                         |  |                         | 556      |      |   | 402     |   |   | 412      |  
|Decrease (increase) in long-term
 deferred tax assets                                                                                              |  |                         | (241     | )    |   | (60     | ) |   | 594      |  
|Decrease (increase) in trade
 receivables, net                                                                                                     |  |                         | (2,792   | )    |   | 323     |   |   | 3,844    |  
|Decrease (increase) in other receivables
 and prepaid expenses                                                                                     |  |                         | (545     | )    |   | (1,192  | ) |   | 1,149    |  
|Decrease (increase) in inventories                                                                                                                 |  |                         | (1,520   | )    |   | 1,493   |   |   | (1,284   | )
|Increase (decrease) in trade payables                                                                                                              |  |                         | 1,627    |      |   | 581     |   |   | (2,891   | )
|Increase in deferred revenues                                                                                                                      |  |                         | 3,288    |      |   | 2,683   |   |   | 647      |  
|Increase in other payables and accrued expenses                                                                                                    |  |                         | 133      |      |   | 1,182   |   |   | 1,825    |  
|Other                                                                                                                                              |  |                         |         |      |   |        |   |   | (8       | )
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Net cash provided by (used in) operating
 activities                                                                                               |  |                         | 7,251    |      |   | (1,125  | ) |   | (9,726   | )
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Cash flows from investing activities:                                                                                                              |  |                         |          |      |   |         |   |   |          |  
|Purchase of property and equipment                                                                                                                 |  |                         | (5,843   | )    |   | (6,747  | ) |   | (4,645   | )
|Proceeds from sale of property and
 equipment                                                                                                      |  |                         |         |      |   |        |   |   | 10       |  
|Investment in other long-term assets,
 net                                                                                                         |  |                         | 11       |      |   | (15     | ) |   | (48      | )
|Purchase of available-for-sale
 marketable debt securities                                                                                         |  |                         | (109,336 | )    |   | (67,121 | ) |   | (161,706 | )
|Purchase of held-to-maturity marketable
 debt securities                                                                                           |  |                         | (6,000   | )    |   |        |   |   |         |  
|Proceeds from sale, redemption and
 maturity of available-for-sale marketable debt securities                                                      |  |                         | 29,327   |      |   | 94,237  |   |   | 137,485  |  
|Proceeds from redemption of
 held-to-maturity marketable debt securities                                                                           |  |                         | 45,085   |      |   | 22,735  |   |   |         |  
|Proceeds from structured deposit                                                                                                                   |  |                         | 10,000   |      |   |        |   |   | 10,000   |  
|Additional payment for the acquisition
 of V-Secure (1)                                                                                            |  |                         | (3,000   | )    |   |        |   |   |         |  
|Payment for the acquisition of Covelight
 (2)                                                                                                      |  |                         |         |      |   | (7,293  | ) |   |         |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Net cash provided by (used in) investing
 activities                                                                                               |  |                         | (39,756  | )    |   | 35,796  |   |   | (18,904  | )
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Cash flows from financing activities:                                                                                                              |  |                         |          |      |   |         |   |   |          |  
|Proceeds from exercise of stock options                                                                                                            |  |                         | 12,635   |      |   | 1,381   |   |   | 1,913    |  
|Repurchase of shares                                                                                                                               |  |                         | (11,069  | )    |   |        |   |   | (6,594   | )
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Net cash provided by (used in) financing activities                                                                                                |  |                         | 1,566    |      |   | 1,381   |   |   | (4,681   | )
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Increase (decrease) in cash and cash
 equivalents                                                                                                  |  |                         | (30,939  | )    |   | 36,052  |   |   | (33,311  | )
|Cash and cash equivalents at the
 beginning of the year                                                                                            |  |                         | 56,263   |      |   | 25,324  |   |   | 61,376   |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Cash and cash equivalents at the end of
 the year                                                                                                  |  | $                       | 25,324   |      | $ | 61,376  |   | $ | 28,065   |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|(1)   Additional
 payment for the acquisition of V-Secure:                                                                                         |  |                         |          |      |   |         |   |   |          |  
|Estimated fair value of assets acquired
 at the date of acquisition:                                                                               |  |                         |          |      |   |         |   |   |          |  
|Goodwill                                                                                                                                           |  |                         | 3,000    |      |   |        |   |   |         |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  | $                       | 3,000    |      | $ |        |   | $ |         |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|(2)   Payment
 for the acquisition of Covelight:                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Estimated fair value of assets acquired
 at the date of acquisition:                                                                               |  |                         |          |      |   |         |   |   |          |  
|Working capital deficiency, excluding
 cash and cash equivalents                                                                                   |  | $                       |         |      | $ | (121    | ) | $ |         |  
|Property and equipment                                                                                                                             |  |                         |         |      |   | 28      |   |   |         |  
|Acquired technology                                                                                                                                |  |                         |         |      |   | 3,191   |   |   |         |  
|Customer relationships                                                                                                                             |  |                         |         |      |   | 175     |   |   |         |  
|Goodwill                                                                                                                                           |  |                         |         |      |   | 4,020   |   |   |         |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  | $                       |         |      | $ | 7,293   |   | $ |         |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Cash paid during the year for:                                                                                                                     |  |                         |          |      |   |         |   |   |          |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  
|Taxes                                                                                                                                              |  | $                       | 438      |      | $ | 731     |   | $ | 743      |  
|                                                                                                                                                   |  |                         |          |      |   |         |   |   |          |  

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

F - 8

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | a.      | Radware Ltd.
 (the Company), an Israeli corporation commenced operations in April 1997.
 The Company and its subsidiaries (the Group), are 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 network 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, India,
 Australia and Italy. In addition, the Company established branches and
 representative offices in China, Russia and Taiwan. The Companys
 subsidiaries are engaged primarily in sales, marketing and support
 activities.                                                                                                                                                                                                                                                                                                                                                                                               
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | c.      | The Company
 depends on two major suppliers to supply certain components for the
 production of its products. If one of these suppliers 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 (see also Note 13b). For the years ended as of
 December 31, 2006, 2007 and 2008, one single customer (a distributor)
 represented 12%, 5% and 6%, 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
 Companys management believed that the complementary solution of V-Secure
 would provide the Company with advantage over the competitors in this market
 and the purpose of the acquisition was to integrate V-Secure solution into
 the Companys product offering. The total initial 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 potential consideration
 of $6,000 was paid according to amendment agreement between the Company and
 V-Secures shareholders. According to the agreement V-Secures shareholders
 waived any claim or demand for any additional payment. The amount paid
 resulted in the Company recording additional goodwill on account of an
 additional consideration paid for the acquisition.                                                                                                   

F - 9

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                 |                                                                                                                                                                                                                                 
|-------- | --------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |                                                                                                                                                                                                                                 
|         |                 | The purchase
 price was allocated to the identifiable intangible assets acquired (which
 have been valuated by management and assisted by a third party valuator
 specialist) based upon their estimated fair values as follows:

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The deferred
 compensation cost represents incentive to former employees of V-Secure that
 will remain with the Company for periods of no less than 12 to 24 months from
 the acquisition date. Such deferred compensation cost was amortized over the
 employment period, and was recorded as compensation costs. Any amount not
 used for bonuses would have been returned to V-Secure, and would have
 increased the goodwill. During 2006 and 2007, amounts of $84 and $316,
 respectively, were recorded as compensation costs, and included in research
 and development expenses. As of December 31, 2007, all deferred compensation
 costs were amortized and paid.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | 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 is not 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 years ended December 31, 2006, 2007 and 2008, no such impairment
 losses were recorded.                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | f. | Business
 combination - acquisition of Covelight Inc. (Covelight):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In April
 2007, the Company acquired the business of Covelight which included the
 acquisition of its working capital, property and equipment, technology,
 customer relationships and goodwill. The Companys management believed that
 the complementary solution of Covelight would provide the Company with
 advantage over the competitors in this market and the purpose of the
 acquisition was to integrate Covelight solution into the Companys product
 offering. The total consideration of the acquisition was $7,660 which was
 paid in cash of which $160 was related to acquisition costs.                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | An
 additional cash consideration of $8,500 (earn-out) was to be payable
 contingent upon reaching sales performance targets by April 2008. Resolution
 of the contingency with payment of the consideration would have resulted in
 recording additional goodwill. Since the sales targets were not achieved, the
 Company was not required to pay the additional earn-out amount. Accordingly, the
 total final consideration of the acquisition amounted to $7,660.                                                                                                                                                                                                   

F - 10

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                 |                                                                                                                                                                                                                                 
|-------- | --------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |                                                                                                                                                                                                                                 
|         |                 | The purchase
 price was allocated to the identifiable intangible assets acquired (which
 have been valuated by management and assisted by a third party valuator
 specialist) based upon their estimated fair values as follows:

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Working
 capital         |  | $ | 246   | 
|Property and
 equipment  |  |   | 28    | 
|                         |  |   |       | 
|                         |  |   |       | 
|Total
 tangible assets   |  |   | 274   | 
|                         |  |   |       | 
|                         |  |   |       | 
|Acquired
 technology     |  |   | 3,191 | 
|Customer
 relationships  |  |   | 175   | 
|Goodwill                 |  |   | 4,020 | 
|                         |  |   |       | 
|                         |  |   |       | 
|Total
 intangible assets |  |   | 7,386 | 
|                         |  |   |       | 
|                         |  |   |       | 
|Total
 consideration     |  | $ | 7,660 | 
|                         |  |   |       | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
 acquisition of Covelight was accounted for under the purchase method of
 accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | In
 accordance with 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 operations. The Company will also
 assess the impairment of goodwill whenever events or changes in circumstances
 indicate that the carrying value may not be recoverable. During the years
 ended December 31, 2006, 2007 and 2008, no such impairment losses was
 recorded.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Technology
 in the amount of $3,191 is amortized on a straight-line basis over an
 estimated useful life. In 2008, the Company recorded an impairment loss of
 $2,036 with respect to acquired technology on the acquisition of Covelight.
 As of December 31, 2008 the amortized acquired technology on the acquisition
 of Covelight amounted to $400. See also Note 2(i) and Note 7(b).                                                                                                                                                                                                                                           
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Customer
 relationships in the amount of $175 were amortized over an estimated useful
 life of one year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 11

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                 |                                                                                                                                                                                                                                                                         
|-------- | --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |                                                                                                                                                                                                                                                                         
|         |                 | Unaudited
 pro-forma results:                                                                                                                                                                                                                                           
|         |                 |                                                                                                                                                                                                                                                                         
|         |                 | The
 following represents the unaudited pro-forma results of operations of
 Covelight and the Companys consolidated statements of operations for the
 years ended December 31, 2006 and 2007, assuming that Covelight acquisition
 occurred on January 1, of each year:

|                                      |  |                         |        |      |   |         |  
|------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | -
|                                      |  | Year ended December 31, |       
|                                      |  |                         |       
|                                      |  | 2006                    |        | 2007 |  
|                                      |  |                         |        |      |  
|                                      |  | Unaudited               |       
|                                      |  |                         |       
|                                      |  | Total consolidated      |       
|                                      |  |                         |       
|                                      |  |                         |        |      |   |         |  
|Revenues                              |  | $                       | 82,124 |      | $ | 88,710  |  
|                                      |  |                         |        |      |   |         |  
|                                      |  |                         |        |      |   |         |  
|Loss before
 income taxes             |  | $                       | (4,670 | )    | $ | (12,880 | )
|                                      |  |                         |        |      |   |         |  
|                                      |  |                         |        |      |   |         |  
|Net loss                              |  | $                       | (5,301 | )    | $ | (13,032 | )
|                                      |  |                         |        |      |   |         |  
|                                      |  |                         |        |      |   |         |  
|Basic and
 diluted net loss per share |  | $                       | (0.27  | )    | $ | (0.67   | )
|                                      |  |                         |        |      |   |         |  

|         |                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 the consolidated financial
 statements in conformity with U.S. generally accepted accounting principles
 requires management to make estimates, judgments and assumptions. The
 Companys management believes that the estimates, judgments and assumptions used
 are reasonable based upon information available at the time they are made.
 These estimates, judgments and assumptions can affect the reported amounts of
 assets and liabilities and disclosure of contingent assets and liabilities at
 the dates of the financial statements, and the reported amounts of revenue
 and expenses during the reporting period. Actual results could differ from
 those estimates.                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | b.                                                                                                                                                         | Financial
 statements in United States dollars:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                            | 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). Changes in currency exchange rates between the Companys functional
 currency and the currency in which a transaction is denominated are included
 in the Companys results of operations as financial income (expense) in the
 period in which the currency exchange rates change.

F - 12

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         | c.                                      | Principles
 of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         | The
 consolidated financial statements include the accounts of the Company and its
 wholly-owned 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, at
 acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         | e.                                      | Investment in
 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 securities at the time of purchase
 and reevaluates such determinations at each balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         | As of December 31, 2008 the Company
 classified all of its debt securities as available-for-sale securities.
 Available-for-sale securities are carried at fair value, with the unrealized
 gains and losses reported in accumulated other comprehensive income (loss)
 in shareholders equity. Realized gains and losses on sales of investments
 are included in financial income and are derived using the specific
 identification method for determining the cost of securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         | The amortized cost of debt securities is
 adjusted for amortization of premiums and accretion of discounts to maturity.
 Such amortization together with interest and dividends on securities are
 included in financial income, net.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         | Prior to December 31, 2007 the Company also
 held debt securities that were classified as held-to-maturity. 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. No impairment has been
 identified as of December 31, 2006. As of December 31, 2007 and 2008, the
 Company has no debt securities as held to maturity.                                                                                                                                                                                                                                                                                                  
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         | In accordance with the Companys policy and
 FASB Staff Position (FSP) Nos. SFAS 115-1 (FSP 115-1) and SFAS 124-1, The
 Meaning of Other-Than-Temporary Impairment and Its Application to Certain
 Investments, the Company recognizes an impairment charge when a decline in
 the fair value of its investments below the cost basis is judged to be
 other-than-temporary. The Company considers various factors in determining
 whether to recognize an impairment charge, including the Companys intent and
 ability to hold the investment for a period of time sufficient to allow for
 any anticipated recovery in market value, the length of time and extent to
 which the fair value has been less than the cost basis, the credit ratings of
 the securities and the financial condition and near-term prospects of the
 issuers. During the years 2006, 2007 and 2008, the Company did not record any
 other-than-temporary impairment loss with respect to its holdings of
 marketable debt securities.

F - 13

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | f.                                      | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Inventories
 are stated at the lower of cost or market value. Inventory write off is
 provided to cover risks arising from slow-moving items, technological
 obsolescence, excess inventories and discontinued products. Inventory write
 off totaled $0, $2,091 and $585 in 2006, 2007 and 2008, respectively, and has
 been included in cost of revenues. Inventory write off of 2007 included a
 one-time write off in the amount of $1,400 following anticipated release of
 new generation platform.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Cost is
 determined as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Raw
 materials and components - using the first-in, first-out method.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Work-in-progress
 and finished products: Subcontracting costs - calculated on the basis of
 direct subcontractors costs and with direct overhead costs.                                                                                                                                                                                                                                                                                                                                                  
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | g.                                      | Structured
 deposit:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Structured
 deposit as of December 31, 2007, consisted of a callable structured deposit
 (Structured Deposit) with a maturity of six years. The Structured deposit
 bared interest that varies inversely with changes of the three-month U.S.
 dollar LIBOR-rate.                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | As of
 December 31, 2007, the Structured deposit amounted to $10,236 including
 accrued interest. Interest income resulting from investment in the Structured
 Deposit 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 deposit. Under EITF No.
 96-12, the retrospective interest method is used for recognizing interest
 income.                             
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | During
 April 2008, the Structured Deposit was called by the issuer and redeemed in the
 amount of $10,069.                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | h.                                      | Property and
 equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | 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,
 peripheral equipment and software |  |  | 15-33 (Mainly 33)                                                   | 
|Office
 furniture and equipment              |  |  | 7-15 (Mainly 15)                                                    | 
|Motor
 vehicles                              |  |  | 15                                                                  | 
|Leasehold
 improvements                      |  |  | Over the shorter of the term of
 the lease or the life of the asset | 

F - 14

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | i.                                      | Impairment
 or disposal of long lived assets and intangible asset:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | Property and
 equipment 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, 2007 and 2008, no
 impairment losses have been identified.                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | Intangible
 assets acquired in a business combination are recorded at fair value at the
 date of acquisition. Following initial recognition, intangible assets are
 carried at cost less any accumulated amortization and any accumulated impairment
 losses. The useful lives of intangible assets are assessed to be either
 finite or indefinite. Intangible assets with finite lives are amortized over
 their useful economic 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 and are assessed for impairment whenever there is an
 indication that the intangible asset may be impaired. The amortization period
 and the amortization method for an intangible asset with a finite useful life
 are reviewed at least at each financial year-end. The amortization expense on
 intangible assets with finite lives is recognized in the statement of
 operations.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | The
 Companys intangible assets consist of technology and customer relationships.
 Both assets are amortized over an estimated useful life in which benefits are
 expected to be received.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | In
 accordance with SFAS 144, the Companys management has assessed whether there
 has been an impairment of the Companys intangible assets during 2008. This
 was undertaken due to certain indicators of impairment such as declines in
 the Companys market capitalization below its shareholders equity, the
 current credit crisis, the global recession and since actual
 revenues derived from Covelight technology were significantly lower comparing
 to the management forecasts estimations as of the date of acquisition.
 Impairment is considered to exist if total estimated future cash flows on an
 undiscounted basis are less than the carrying value of the asset or asset
 group tested for impairment.                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | In
 performing that test, the Companys management first estimated the sum of the
 undiscounted future cash-flows, expected to be derived from its asset groups
 with the existing intangible assets of acquired technology and customer
 relationship acquired from V-secure and Covelight, in order to test their
 recoverability. The Companys management used significant assumptions and
 estimates, including but not limited to projected future revenues and cash
 flows, growth rates and market share, future gross margins and operating
 results, future working capital and future capital expenditures. The
 assumptions developed by the Companys management were based upon historical
 trends, estimates of future economic conditions and expected competition and
 the Companys strategic plans.                                                                                                                                                            
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | The analysis
 showed that the sum of the undiscounted cash-flow derived from the asset
 group of technology acquired from Covelight is lower than its carrying amount
 and accordingly the Companys management was required to perform an analysis
 of discounted cash flows of the asset group, in order to determine its fair
 value. Based on such analysis the Company recorded an impairment loss in the
 amount of $2,036 with respect to acquired technology derived from the
 acquisition of Covelight. The impairment loss was recoded as part of cost of
 revenues.                                                                                                                                                                                                                                                                                                                                                                                                    

F - 15

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | In
 performing the above analysis and tests, the Companys management developed
 the required assumptions and the related forecasts underlying the valuation,
 and was assisted by a third party valuator in applying the customary
 valuation techniques and required economic models.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | j.                                      | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Goodwill
 reflects the excess of the purchase price of business acquired over the fair
 value of net assets acquired. Goodwill is not amortized but instead is tested
 for impairment at least annually or more frequently if events or changes in
 circumstances indicate that the carrying value may be impaired. Annual
 impairment test is performed by the Company each year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | In
 accordance with SFAS No. 142 which requires the Company to perform an annual
 impairment test and due to certain indicators for impairment of the Companys
 goodwill which occurred in late 2008, such as decline in the Companys market
 capitalization below its shareholders equity, the current credit crisis and
 the global recession, the Company performed an assessment of goodwill
 impairment as of December 31, 2008. Goodwill is tested for impairment by
 comparing the estimated fair value of the Company as an entity with the
 carrying amounts of its total net assets. Fair value was determined using
 market comparables and multiples, and by applying a control premium based on
 market comparables. The analysis also used discounted cash flow model as
 corroboration. During the years ended December 31, 2006, 2007 and 2008, no
 such impairment losses were recorded.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | In
 performing the above analysis and tests, the Companys management developed
 the required assumptions and the related forecasts underlying the valuation,
 and was assisted by a third party valuator in applying the customary
 valuation techniques and required economic models.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | k.                                      | Revenue
 recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | The Company
 and its subsidiaries generate revenues mainly from selling their products and
 from post-contract customer support, which are sold primarily through
 distributors and resellers, all of which are considered end-users.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Revenues
 from product sales are recognized in accordance with SEC Staff Accounting
 Bulleting (SAB) No. 104, Revenue Recognition (SAB No. 104) when
 delivery has occurred, persuasive evidence of an agreement exists, the
 vendors 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 such element is sold
 separately for similar products. 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.                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Revenue
 derived from post-contract customer support, which represents mainly unit replacement
 and security update service which is not considered essential to the
 functionality of the product, is recognized ratably over the contract period,
 which is typically one year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Revenues
 from training and installation, which are not considered essential to the
 functionality of the product, included in multiple elements arrangements are
 recognized at the time they are rendered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F - 16

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | The Company
 and its subsidiaries provide a provision for product returns and stock
 rotation based on their experience with historical sales returns, stock
 rotations 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.                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | l.                                      | Warranty
 costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | The Company
 generally provides a one year warranty for all of its products. A provision
 is recorded for estimated warranty costs at the time revenues are recognized
 based on the Companys experience. Warranty expenses for the years ended
 December 31, 2006, 2007 and 2008 were immaterial.                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | m.                                      | Research and
 development expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | Research and
 development expenses, net of grants received are charged to the statement of
 operations, as incurred.                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | n.                                      | Non-royalty-bearing
 grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | Non-royalty-bearing
 grants for funding of approved research and development projects are
 recognized at the time the Company is entitled to such grants, on the basis
 of the costs incurred. These grants are presented as a reduction of research
 and development expenses. During the years 2006, 2007 and 2008, the Company
 received grants in the amount of $200, $0 and $0, respectively.                                                                                                  
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | o.                                      | Advertising
 expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | Advertising
 expenses are charged to the statements of operations as incurred. Advertising
 expenses for the years ended December 31, 2006, 2007 and 2008, amounted to
 approximately $373 $828 and $267, respectively.                                                                                                                                                                                                                                                                             
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | p.                                      | Accounting
 for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | The Company
 accounts for stock-based compensation in accordance with SFAS No. 123
 (revised 2004), Share-Based Payment (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 statement of
 operations.

F - 17

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         | The Company
 recognizes compensation expenses for the value of its awards based on the
 accelerated attribution method over the requisite service period of each of
 the awards, net of estimated forfeitures. SFAS No. 123(R) requires
 forfeitures to be estimated at the time of grant and revised, if necessary,
 in subsequent periods if actual forfeitures differ from those estimates.
 Estimated forfeitures are based on actual historical pre-vesting forfeitures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         | The Company
 selected the Black-Scholes-Merton option pricing model to account for the
 fair value of its stock-options, awards with only service conditions based on
 the market value of the underlying shares at the date of grant. The
 option-pricing model requires a number of assumptions, of which the most
 significant are the expected stock price volatility and the expected option
 term. Expected volatility was calculated based upon actual historical stock price
 movements over an historical period equivalent to the options expected term.
 The expected option term represents the period of time that options granted
 are expected to be outstanding. Prior to December 31, 2007 expected term of
 options was determined based on simplified method permitted by SAB No. 107 as
 the average of the vesting period and the contractual term. Starting January
 1, 2008 expected term of options granted is based upon historical experience
 complying with SAB 110. The risk-free interest rate is based on the yield
 from U.S. treasury bonds with an equivalent term. The Company has
 historically not paid dividends and has no foreseeable plans to pay
 dividends. The Company uses other models, such as the lattice model, only in
 case of grants having complex vesting terms such as market condition.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         | q.                                      | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         | Deferred tax
 liabilities and assets are classified as current or non current based on the
 classification of the related asset or liability for financial reporting, or
 according to the expected reversal dates of the specific temporary
 differences if not related to an asset or liability for financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         | On
 January 1, 2007, the Company adopted FASB Interpretation No. 48,
 Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
 Statement No. 109 (FIN 48). FIN 48 contains a two-step
 approach to recognizing and measuring uncertain tax positions accounted for
 in accordance with SFAS No. 109. The first step is to evaluate the tax position
 taken or expected to be taken in a tax return by determining if the weight of
 available evidence indicates that it is more likely than not that, on an
 evaluation of the technical merits, the tax position will be sustained on
 audit, including resolution of any related appeals or litigation processes.
 The second step is to measure the tax benefit as the largest amount that is
 more than 50% likely to be realized upon ultimate settlement. The adoption of
 FIN 48 as of January 1, 2007, did not have any material effects on the
 Companys retained earning and financial position. The Company accrues
 interest related to unrecognized tax benefits as part of financial income,
 net.                                                                                                                                                                                                                                                              

F - 18

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | r.                                      | 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, available-for-sale marketable securities and trade receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         | The majority
 of the Companys and its subsidiaries cash and cash equivalents are invested
 in major banks in the United States in U.S. dollars. Such cash and cash
 equivalents in the United States may be in excess of insured limits and are
 not insured in other jurisdictions. Generally, these cash equivalents may be
 redeemed upon demand and, therefore management believes that it bear lower
 risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         | The
 Companys marketable securities include investments in U.S. government
 debentures, foreign banks and government debentures and corporate debentures.
 The Companys investment policy limits the amount the Company may invest in
 each type of investment, thereby reducing credit risk concentration (see also
 Note 3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         | During the
 recent turmoil in capital markets, the Company has tightened its control and
 monitoring over its marketable securities portfolio. The Company has taken
 several measures in order to minimize potential risks stemming from current
 capital markets environment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         | 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. The doubtful accounts
 expenses for the years ended December 31, 2006, 2007 and 2008 were $94, $94
 and $0, respectively.                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | s.                                      | Severance
 pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         | The
 Companys liability for severance pay with respect to their Israeli
 employees, for periods of employment prior to March 31, 2007 is calculated
 pursuant to Israeli severance pay law based on the most recent salary of the
 employees multiplied by the number of years of employment, as of the balance
 sheet date. Employees whose employment is terminated by the Company or who
 are otherwise entitled to severance pay in accordance with Israeli law or
 labor agreements are entitled to one months salary for each year of
 employment or a portion thereof. For periods of employment until March 31,
 2007, the Companys liability for all of its Israeli employees is partly
 provided by monthly deposits for insurance policies and the remainder by an
 accrual. The carrying value of these policies is recorded as an asset in the
 Companys consolidated balance sheet.

F - 19

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|-------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|         |                                         | Effective
 April 1, 2007, the Companys agreements with employees in Israel, in
 accordance with section 14 of the Severance Pay Law - 1963, provide that the
 Companys contributions to severance pay fund shall cover its entire
 severance liability with respect to period of employment subsequent to April
 1, 2007. Upon termination, the release of the contributed amounts from the
 fund to the employee shall relieve the Company from any further severance
 liability and no additional payments shall be made by the Company to the
 employee. As a result, the related obligation and amounts deposited on behalf
 of such obligation are not stated on the balance sheet, as the Company is
 legally released from severance obligation to employees once the amounts have
 been deposited, and the Company has no further legal ownership on the amounts
 deposited. Consequently, effective from April 1, 2007, the Company increased
 its contribution to the deposited funds to cover the full amount of the
 employees salaries.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|         |                                         | The carrying
 value of the deposited funds for the Companys employees severance pay for
 employment periods prior to April 1, 2007 include profits and losses
 accumulated up to the balance sheet date. The deposited funds may be
 withdrawn only upon the fulfillment of the obligation pursuant to Israeli
 severance pay law or labor agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|         |                                         | Severance
 pay expenses for the years ended December 31, 2006, 2007 and 2008, amounted
 to approximately $1,015 $965 and $1,824, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|         | t.                                      | Fair value
 of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         | The carrying
 amounts of our financial instruments, including cash and cash equivalents,
 trade receivables, trade payables and accrued liabilities, generally
 approximate fair value due to their short maturities. Marketable securities
 are presented at their fair value as discussed below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|         |                                         | Effective
 January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements
 and, effective October 10, 2008, adopted FSP No. SFAS 157-3, Determining
 the Fair Value of a Financial Asset When the Market for That Asset Is Not
 Active, except as it applies to the nonfinancial assets and nonfinancial
 liabilities subject to FSP 157-2. SFAS 157 clarifies that fair value is an
 exit price, representing the amount that would be received to sell an asset
 or paid to transfer a liability in an orderly transaction between market
 participants. As such, fair value is a market-based measurement that should
 be determined based on assumptions that market participants would use in
 pricing an asset or a liability. As a basis for considering such assumptions,
 SFAS 157 establishes a three-tier value hierarchy, which prioritizes the
 inputs used in the valuation methodologies in measuring fair value:                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|         |                                         | Level 1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | - | Observable
 inputs that reflect quoted prices (unadjusted) for identical assets or
 liabilities in active markets.
|        
|         |                                         | Level 2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | - | Include
 other inputs that are directly or indirectly observable in the marketplace.                              
|        
|         |                                         | Level 3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | - | Unobservable
 inputs which are supported by little or no market activity.                                         
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                   
|         |                                         | The fair
 value hierarchy also requires an entity to maximize the use of observable
 inputs and minimize the use of unobservable inputs when measuring fair value (see
 also Note 4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F - 20

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | u.                                      | Comprehensive
 income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         | The Company
 accounts for comprehensive income in accordance with SFAS No. 130, Reporting
 Comprehensive Income. This statement establishes standards for the reporting
 and display of comprehensive income and its components in a full set of
 general purpose financial statements. Comprehensive income generally
 represents all changes in shareholders equity during the period except those
 resulting from investments by, or distributions to shareholders. The
 Companys items of other comprehensive income relates to unrealized gains and
 losses, net on available for sale marketable debt securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | v.                                      | Treasury
 stock:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         | From time to
 time the Company repurchases its Ordinary shares on the open market or in
 other transactions and holds such shares as treasury stock. The Company
 presents the cost to repurchase treasury stock as a reduction of
 shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | w.                                      | Basic and
 diluted net loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         | Basic net
 loss per share is computed based on the weighted average number of Ordinary
 shares outstanding during each period. Diluted net loss per share is computed
 based on the weighted average number of Ordinary shares outstanding during
 each period, plus dilutive potential Ordinary shares considered outstanding
 during the period, in accordance with Statement of Financial Standard No.
 128, Earnings per Share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         | The weighted
 average number of shares related to outstanding anti dilutive options
 excluded from the calculation of diluted loss per share as they would have
 been anti dilutive was 3,284,999, 4,704,129 and 4,313,072 for the years ended
 December 31, 2006, 2007 and 2008, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | x.                                      | Impact of
 recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         | In February
 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
 Date of FASB Statement No. 157 (FSP 157-2), to delay the effective date of
 FASB Statement 157 for one year for certain nonfinancial assets and
 nonfinancial liabilities, excluding those that are recognized or disclosed in
 financial statements at fair value on a recurring basis (that is, at least
 annually).  For purposes of applying the FSP 157-2, nonfinancial
 assets and nonfinancial liabilities include all assets and liabilities other
 than those meeting the definition of a financial asset or a financial
 liability in FASB Statement 159.   FSP 157-2 defers the effective
 date of Statement 157 to fiscal years beginning after November 15, 2008, and
 interim periods within those fiscal years for items within the scope of this
 FSP 157-2. The Company does not expect the adoption of FAS 157 with respect
 to certain nonfinancial assets and nonfinancial liabilities, excluding those
 that are recognized or disclosed in the financial statements at fair value on
 a recurring basis (at least annually), to have a material impact on its
 financial position, results of operations or cash flows.

F - 21

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         | In March
 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
 and Hedging Activities (SFAS 161) an amendment to FASB No.
 133.  This statement changes the disclosure requirements for
 derivative instruments and hedging activities.  Entities are required
 to provide enhanced disclosures about (a) how and why and entity uses
 derivative instruments, (b) how derivative instruments and related hedged
 items are accounted for under Statement 133 and its related interpretations,
 and (c) how derivative instruments and related hedged items affect an
 entitys financial position, financial performance, and cash
 flows.  This statement is effective for financial statements issued
 for fiscal years and interim periods beginning after November 15,
 2008.  Early application is encouraged.  The Company does
 not expect the adoption of SFAS 161 to have a material impact on its
 financial position, results of operations or cash flows.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         | In April
 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
 Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
 considered in developing renewal or extension assumptions used to determine
 the useful life of a recognized intangible asset under SFAS No. 142,
 Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal
 years beginning after December 15, 2008. The Company does not expect the
 adoption of FAS 142-3 to have a material impact on its consolidated
 financial position, results of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         | In
 June 2008, the FASB issued FSP EITF No. 03-6-1,
 Determining Whether Instruments Granted in Share-Based Payment Transactions
 Are Participating Securities. Under the FSP, unvested share-based payment
 awards that contain rights to receive non-forfeitable dividends (whether paid
 or unpaid) are participating securities, and should be included in the
 two-class method of computing EPS. The FSP is effective for fiscal years
 beginning after December 15, 2008, and interim periods within those
 years, and is not expected to have a significant impact on the Companys
 consolidated financial statements position, results of operations or cash
 flows.                                                                                                                                                                                                                                                                                                                   
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         | In November
 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7,
 Accounting for Defensive Intangible Assets. EITF 08-7 clarifies the
 accounting for certain separately identifiable intangible assets which an
 acquirer does not intend to actively use but intends to hold to prevent its
 competitors from obtaining access to them. EITF 08-7 requires an
 acquirer in a business combination to account for a defensive intangible
 asset as a separate unit of accounting which should be amortized to expense
 over the period the asset diminishes in value. EITF 08-7 is effective
 for fiscal years beginning after December 15, 2008, with early adoption
 prohibited. The Company is currently evaluating the potential impact, if any,
 of the adoption of EITF 08-7 on its consolidated financial statements.                                                                                                                                                     

F - 22

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | In December
 2007, the FASB issued SFAS No. 141(R) Business Combinations (SFAS 141(R))
 and SFAS No. 160 Accounting and Reporting of Noncontrolling Interests in
 Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160).
 These standards will significantly change the accounting and reporting for
 business combination transactions and noncontrolling interests in
 consolidated financial statements. SFAS 141(R) requires companies to
 recognize all the assets acquired and liabilities assumed in a business
 combination and establishes the acquisition date fair value as the measurement
 objective, including capitalizing at the acquisition date the fair value of
 acquired in-process research and development, and re-measuring and writing
 down these assets, if necessary, in subsequent periods during their
 development. SFAS 141(R) will also impact the determination of
 acquisition-date fair value of consideration paid in a business combination
 (including contingent consideration), exclude transaction costs from
 acquisition accounting, and change accounting practices for acquired contingencies,
 acquisition-related restructuring costs, indemnification assets, and tax
 benefits. SFAS 141(R) and SFAS 160 will be applied prospectively for business
 combinations that occur on or after January 1, 2009, except that presentation
 and disclosure requirements of SFAS 160 regarding noncontrolling interests
 shall be applied retrospectively. The Company will adopt SFAS 141(R) and SFAS
 160 as of January 1, 2009, as required. At the effective time of Nortel
 acquisition (see also Note 17), the accounting and business combination
 transaction will be recorded in accordance with both pronouncements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | EITF Issue
 No. 08-6, Equity-Method Investment Accounting(EITF 08-6) concludes
 that the cost basis of a new equity-method investment would be determined using
 a cost-accumulation model, which would continue the practice of including
 transaction costs in the cost of investment and would exclude the value of
 contingent consideration. Equity-method investment should be subject to
 other-than-temporary impairment analysis. It also requires that a gain or
 loss to be recognized on the portion of the investors ownership sold. EITF
 08-6 will be effective for the reporting period beginning after December 15,
 2008. The Company does not expect the adoption of EITF 08-6 to have a
 material impact on its financial position, results of operations or cash
 flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | y. | Reclassification:
 Certain 2007 figures have been reclassified to conform to the 2008
 presentation. The reclassification had no effect on previously reported net
 loss shareholders equity or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F - 23

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|NOTE 3:- | MARKETABLE SECURITIES                                                                         
|         |                                                                                               
|         | Marketable
 debt securities with contractual maturities of less than one year are as
 follows:

|                                              |  |               |        |                         |   |                        |   |             |     |               |   |                       |  |                         |        |               |   |      |   |   |     |  |   |        | 
|--------------------------------------------- |  | ------------- | ------ | ----------------------- | - | ---------------------- | - | ----------- | --- | ------------- | - | --------------------- |  | ----------------------- | ------ | ------------- | - | ---- | - | - | --- |  | - | ------ | 
|                                              |  | December 31,  |       
|                                              |  |               |       
|                                              |  | 2007          |        | 2008                    |  
|                                              |  |               |        |                         |  
|                                              |  | Amortizedcost |        | Gross
 unrealizedlosses |   | Gross
 unrealizedgains |   | Marketvalue |     | Amortizedcost |   | Grossunrealizedlosses |  | Gross 
 unrealizedgains |        | Market
 value |  
|                                              |  |               |        |                         |   |                        |   |             |     |               |   |                       |  |                         |        |               |  
|                                             
|Available-for-sale:                           |  |               |        |                         |   |                        |   |             |     |               |   |                       |  |                         |        |               |   |      |   |   |     |  |   |        | 
|U.S. Government debentures                    |  | $             | 57,616 |                         | $ | (4                     | ) | $           | 160 |               | $ | 57,772                |  | $                       | 20,384 |               | $ |     |   | $ |    |  | $ | 20,384 | 
|Foreign banks and government debentures       |  |               | 6,276  |                         |   | (3                     | ) |             | 1   |               |   | 6,274                 |  |                         | 22,173 |               |   | (175 | ) |   | 50  |  |   | 22,048 | 
|Corporate debentures                          |  |               | 7,285  |                         |   | (4                     | ) |             |    |               |   | 7,281                 |  |                         | 18,284 |               |   | (73  | ) |   | 88  |  |   | 18,299 | 
|Auction rate securities *)                    |  |               | 9,171  |                         |   |                       |   |             |    |               |   | 9,171                 |  |                         |       |               |   |     |   |   |    |  |   |       | 
|                                              |  |               |        |                         |   |                        |   |             |     |               |   |                       |  |                         |        |               |   |      |   |   |     |  |   |        | 
|                                              |  |               |        |                         |   |                        |   |             |     |               |   |                       |  |                         |        |               |   |      |   |   |     |  |   |        | 
|Totalavailable-for-sale marketable securities |  | $             | 80,348 |                         | $ | (11                    | ) | $           | 161 |               | $ | 80,498                |  | $                       | 60,841 |               | $ | (248 | ) | $ | 138 |  | $ | 60,731 | 
|                                              |  |               |        |                         |   |                        |   |             |     |               |   |                       |  |                         |        |               |   |      |   |   |     |  |   |        | 

| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Marketable
 securities with contractual maturities of from one to three years are as
 follows:

|                                              |  |               |       |                         |   |                        |   |             |   |               |   |                       |  |                      |        |               |   |        |   |   |     |  |   |        | 
|--------------------------------------------- |  | ------------- | ----- | ----------------------- | - | ---------------------- | - | ----------- | - | ------------- | - | --------------------- |  | -------------------- | ------ | ------------- | - | ------ | - | - | --- |  | - | ------ | 
|                                              |  | December 31,  |      
|                                              |  |               |      
|                                              |  | 2007          |       | 2008                    |  
|                                              |  |               |       |                         |  
|                                              |  | Amortizedcost |       | Gross
 unrealizedlosses |   | Gross
 unrealizedgains |   | Marketvalue |   | Amortizedcost |   | Grossunrealizedlosses |  | Grossunrealizedgains |        | Market
 value |  
|                                              |  |               |       |                         |   |                        |   |             |   |               |   |                       |  |                      |        |               |  
|                                              |  |               |       |                         |   |                        |   |             |   |               |   |                       |  |                      |        |               |  
|Available-for-sale:                           |  |               |       |                         |   |                        |   |             |   |               |   |                       |  |                      |        |               |   |        |   |   |     |  |   |        | 
|U.S. Government debentures                    |  | $             |      |                         | $ |                       |   | $           |  |               | $ |                      |  | $                    | 1,020  |               | $ |       |   | $ | 35  |  | $ | 1,055  | 
|Foreign banks and government debentures       |  |               | 2,735 |                         |   | (4                     | ) |             | 4 |               |   | 2,735                 |  |                      | 34,353 |               |   | (925   | ) |   | 138 |  |   | 33,566 | 
|Corporate debentures                          |  |               |      |                         |   |                       |   |             |  |               |   |                      |  |                      | 10,502 |               |   | (75    | ) |   | 64  |  |   | 10,491 | 
|                                              |  |               |       |                         |   |                        |   |             |   |               |   |                       |  |                      |        |               |   |        |   |   |     |  |   |        | 
|                                              |  |               |       |                         |   |                        |   |             |   |               |   |                       |  |                      |        |               |   |        |   |   |     |  |   |        | 
|Totalavailable-for-sale marketable
securities |  | $             | 2,735 |                         | $ | (4                     | ) | $           | 4 |               | $ | 2,735                 |  | $                    | 45,875 |               | $ | (1,000 | ) | $ | 237 |  | $ | 45,112 | 
|                                              |  |               |       |                         |   |                        |   |             |   |               |   |                       |  |                      |        |               |   |        |   |   |     |  |   |        | 

| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 unrealized gains (losses), net on available-for-sale debt securities included
 in other comprehensive income, as a separate component of shareholders
 equity, totaled to $150 and $(873) net as of December 31, 2007
 and 2008, respectively.
| |                                                                                                                                                                                                                                                     
| | Investments
 with continuous unrealized losses for less than 12 months and 12 months or
 greater and their related fair values were as follows:                                                                                                     

|                                               |  |                                                                        |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|---------------------------------------------- |  | ---------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------- | - | ---------------------------------------------------- | - | ------------------ | ----- | ----------- | - | ------------------ | - | - | ------ |  | - | ------ | -
|                                               |  | December
 31, 2008                                                     |       
|                                               |  |                                                                        |       
|                                               |  | Investments
 with continuous unrealized losses for less than 12 months |        | Investments
 with continuous unrealized losses for 12 months or greater |   | Total
 investments with continuous unrealized losses |  
|                                               |  |                                                                        |        |                                                                         |   |                                                      |  
|                                               |  | Fair
 value                                                            |        | Unrealized
 losses                                                      |   | Fair
 value                                          |   | unrealized
 losses |       | Fair
 value |   | unrealized
 losses |  
|                                               |  |                                                                        |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |  
|                                               |  |                                                                        |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |  
|Available-for-sale:                            |  |                                                                        |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|Foreign banks and government debentures        |  | $                                                                      | 40,337 |                                                                         | $ | (1,060                                               | ) | $                  | 2,197 |             | $ | (40                | ) | $ | 42,534 |  | $ | (1,100 | )
|Corporate debentures                           |  |                                                                        | 12,504 |                                                                         |   | (148                                                 | ) |                    |      |             |   |                   |   |   | 12,504 |  |   | (148   | )
|                                               |  |                                                                        |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|                                               |  |                                                                        |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|Total available-for-sale marketable securities |  | $                                                                      | 52,841 |                                                                         | $ | (1,208                                               | ) | $                  | 2,197 |             | $ | (40                | ) | $ | 55,038 |  | $ | (1,248 | )
|                                               |  |                                                                        |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |        |  

F - 24

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                             
|-------- | ----------------------------
|NOTE 3:- | MARKETABLE SECURITIES(Cont.)

|                                                |  |                                                                       |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |     |  
|----------------------------------------------- |  | --------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------- | - | ---------------------------------------------------- | - | ------------------ | ----- | ----------- | - | ------------------ | - | - | ------ |  | - | --- | -
|                                                |  | December
 31, 2007                                                    |       
|                                                |  |                                                                       |       
|                                                |  | Investments
 with continuous unrealized losses for less than12 months |        | Investments
 with continuous unrealized losses for 12 months or greater |   | Total
 investments with continuous unrealized losses |  
|                                                |  |                                                                       |        |                                                                         |   |                                                      |  
|                                                |  | Fair
 value                                                           |        | Unrealized
 losses                                                      |   | Fair
 value                                          |   | unrealized
 losses |       | Fair
 value |   | unrealized
 losses |  
|                                                |  |                                                                       |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |  
|                                                |  |                                                                       |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |  
|Available-for-sale:                             |  |                                                                       |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |     |  
|U.S. Government debentures                      |  | $                                                                     | 5,224  |                                                                         | $ | (3                                                   | ) | $                  |      |             | $ |                   |   | $ | 5,224  |  | $ | (3  | )
|Foreign banks and government debentures         |  |                                                                       | 4,602  |                                                                         |   | (2                                                   | ) |                    | 1,420 |             |   | (5                 | ) |   | 6,022  |  |   | (7  | )
|Corporate debentures                            |  |                                                                       | 4,964  |                                                                         |   | (1                                                   | ) |                    | 2,317 |             |   | (4                 | ) |   | 7,281  |  |   | (5  | )
|                                                |  |                                                                       |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |     |  
|                                                |  |                                                                       |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |     |  
|Total
 available-for-sale marketable securities |  | $                                                                     | 14,790 |                                                                         | $ | (6                                                   | ) | $                  | 3,737 |             | $ | (9                 | ) | $ | 18,527 |  | $ | (15 | )
|                                                |  |                                                                       |        |                                                                         |   |                                                      |   |                    |       |             |   |                    |   |   |        |  |   |     |  

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | The Company reviews various factors in
 determining whether it should recognize an impairment charge for its
 marketable securities, including its intent and ability to hold the
 investment for a period of time sufficient for any anticipated recovery in
 market value or until maturity, the length of time and extent to which the
 fair value has been less than its cost basis, the credit ratings of the
 securities, the nature of underlying collateral, as applicable and the
 financial condition and near-term prospects of the issuer. Based on the
 Companys consideration of these factors, during the years ended December 31,
 2006, 2007 and 2008, the Company did not recognize any other-than-temporary
 impairment losses.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | As of December 31, 2007 and 2008, accrued
 interest receivable amounted to $164 and $1,383, respectively, and is
 included within available for sale marketable securities in the balance
 sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|NOTE 4:- | FAIR VALUE MEASUREMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | In accordance with SFAS 157, the Company
 measures its cash equivalents and available for sale marketable securities at
 fair value on recurring basis. Cash equivalents and marketable securities are
 classified within Level 1 or Level 2. This is because these assets are valued
 using quoted market prices or alternative pricing sources and models
 utilizing market observable inputs.                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | The
 Companys financial assets measured at fair value on a recurring basis,
 including accrued interest components; consisted of the following types of
 instruments as of December 31, 2008:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                         |  |                                          |        |         |   |         |  |       |   |  |   |         | 
|---------------------------------------- |  | ---------------------------------------- | ------ | ------- | - | ------- |  | ----- | - |  | - | ------- | 
|                                         |  | Fair value measurements using input type |       
|                                         |  |                                          |       
|                                         |  | Level 1                                  |        | Level 2 |   | Level 3 |  | Total |  
|                                         |  |                                          |        |         |   |         |  |       |  
|                                         |  |                                          |        |         |   |         |  |       |   |  |   |         | 
|Cash
 equivalents:                       |  |                                          |        |         |   |         |  |       |   |  |   |         | 
|Money market funds                       |  | $                                        | 3,857  |         | $ |        |  | $     |  |  | $ | 3,857   | 
|                                         |  |                                          |        |         |   |         |  |       |   |  |   |         | 
|Available-for-sale:                      |  |                                          |        |         |   |         |  |       |   |  |   |         | 
|U.S. Government debentures               |  |                                          | 21,439 |         |   |        |  |       |  |  |   | 21,439  | 
|Foreign banks and government
 debentures |  |                                          | 2,692  |         |   | 52,922  |  |       |  |  |   | 55,614  | 
|Corporate debentures                     |  |                                          |       |         |   | 28,790  |  |       |  |  |   | 28,790  | 
|                                        
|                                         |  |                                          |        |         |   |         |  |       |   |  |   |         | 
|                                         |  |                                          |        |         |   |         |  |       |   |  |   |         | 
|Total financial assets                   |  | $                                        | 27,988 |         | $ | 81,712  |  | $     |  |  | $ | 109,700 | 
|                                         |  |                                          |        |         |   |         |  |       |   |  |   |         | 

F - 25

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                            
|-------- | -------------------------------------------
|NOTE 5:- | INVENTORIES                                
|         |                                            
|         | Inventories are comprised of the following:

|                              |  |              |       |      |   |       | 
|----------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                              |  | December 31, |      
|                              |  |              |      
|                              |  | 2007         |       | 2008 |  
|                              |  |              |       |      |  
|                              |  |              |       |      |  
|Raw
 materials and components |  | $            | 561   |      | $ | 564   | 
|Work-in-progress              |  |              | 1,262 |      |   | 1,550 | 
|Finished
 products            |  |              | 3,605 |      |   | 4,598 | 
|                              |  |              |       |      |   |       | 
|                              |  |              |       |      |   |       | 
|                              |  | $            | 5,428 |      | $ | 6,712 | 
|                              |  |              |       |      |   |       | 

|         |                            
|-------- | ---------------------------
|NOTE 6:- | PROPERTY AND EQUIPMENT, NET

|                                             |  |              |        |      |   |        | 
|-------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                             |  | December 31, |       
|                                             |  |              |       
|                                             |  | 2007         |        | 2008 |  
|                                             |  |              |        |      |  
|                                             |  |              |        |      |  
|Cost:                                        |  |              |        |      |   |        | 
|Computer, peripheral equipment and
 software |  | $            | 21,650 |      | $ | 25,794 | 
|Office furniture and equipment               |  |              | 2,896  |      |   | 3,161  | 
|Motor vehicles                               |  |              | 48     |      |   | 12     | 
|Leasehold improvements                       |  |              | 1,038  |      |   | 1,274  | 
|                                             |  |              |        |      |   |        | 
|                                             |  |              |        |      |   |        | 
|                                             |  |              | 25,632 |      |   | 30,241 | 
|                                             |  |              |        |      |   |        | 
|Accumulated depreciation:                    |  |              |        |      |   |        | 
|Computer, peripheral equipment and
 software |  |              | 11,367 |      |   | 16,102 | 
|Office furniture and equipment               |  |              | 1,475  |      |   | 1,774  | 
|Motor vehicles                               |  |              | 36     |      |   | 9      | 
|Leasehold improvements                       |  |              | 537    |      |   | 663    | 
|                                             |  |              |        |      |   |        | 
|                                             |  |              |        |      |   |        | 
|                                             |  |              | 13,415 |      |   | 18,548 | 
|                                             |  |              |        |      |   |        | 
|                                             |  |              |        |      |   |        | 
|Depreciated cost                             |  | $            | 12,217 |      | $ | 11,693 | 
|                                             |  |              |        |      |   |        | 

|          |                                                                                                                           
|--------- | --------------------------------------------------------------------------------------------------------------------------
|          | Depreciation
 expenses for the years ended December 31, 2006, 2007 and 2008 were $2,440,
 $3,811 and $5,167, respectively.
|          |                                                                                                                           
|NOTE 7 :- | GOODWILL AND INTANGIBLE ASSETS, NET                                                                                       

| |    |                                                                                    
| | -- | -----------------------------------------------------------------------------------
| | a. | Goodwill :                                                                         
| |    |                                                                                    
| |    | Changes in
 goodwill for the years ended December 31, 2007 and 2008 are as follows:

|                               |  |              |        |      |   |        | 
|------------------------------ |  | ------------ | ------ | ---- | - | ------ | 
|                               |  | December 31, |       
|                               |  |              |       
|                               |  | 2007         |        | 2008 |  
|                               |  |              |        |      |  
|                               |  |              |        |      |  
|Goodwill at
 beginning of year |  | $            | 9,454  |      | $ | 13,474 | 
|Acquisition
 of Covelight      |  |              | 4,020  |      |   |       | 
|                               |  |              |        |      |   |        | 
|                               |  |              |        |      |   |        | 
|Goodwill, at
 end of year      |  | $            | 13,474 |      | $ | 13,474 | 
|                               |  |              |        |      |   |        | 

F - 26

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                               
|--------- | ------------------------------
|NOTE 7 :- | INTANGIBLE ASSETS, NET (Cont.)

| |    |                    
| | -- | -------------------
| | b. | Intangible assets :

|                          |  |                                                 |              |  |      |       |  |   |       | 
|------------------------- |  | ----------------------------------------------- | ------------ |  | ---- | ----- |  | - | ----- | 
|                          |  | Weighted
 average
 Amortization 
 period(years) |              |  |      |       | 
|                          |  |                                                 |              |  |      |      
|                          |  |                                                 | December 31, | 
|                          |  |                                                 |              | 
|                          |  |                                                 | 2007         |  | 2008 |      
|                          |  |                                                 |              |  |      |       | 
|                          |  |                                                 |              |  |      |       | 
|Cost:                     |  |                                                 |              |  |      |       |  |   |       | 
|Acquired technology       |  |                                                 | 6  7        |  | $    | 4,963 |  | $ | 4,963 | 
|Customers relationships   |  |                                                 | Mainly 6     |  |      | 1,364 |  |   | 1,364 | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|                          |  |                                                 |              |  |      | 6,327 |  |   | 6,327 | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|Accumulated amortization: |  |                                                 |              |  |      |       |  |   |       | 
|Acquired technology       |  |                                                 |              |  |      | 897   |  |   | 1,648 | 
|Customers relationships   |  |                                                 |              |  |      | 632   |  |   | 787   | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|                          |  |                                                 |              |  |      | 1,529 |  |   | 2,435 | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|Impairment *)             |  |                                                 |              |  |      |      |  |   | 2,036 | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|                          |  |                                                 |              |  |      | 1,529 |  |   | 4,471 | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|                          |  |                                                 |              |  |      |       |  |   |       | 
|Amortized cost            |  |                                                 |              |  | $    | 4,798 |  | $ | 1,856 | 
|                          |  |                                                 |              |  |      |       |  |   |       | 

| |    |                                                                                                                       |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Amortization
 expenses for the years ended December 31, 2006, 2007 and 2008, were $450,
 $931 and $906, respectively.
| |    |                                                                                                                       |                                                                                                                                                               
| |    | *)                                                                                                                    | The Company
 recorded in 2008 an impairment loss of $2,036 with respect to acquired
 technology derived from the acquisition of Covelight  see also Note 2(i)
| |    |                                                                                                                       |                                                                                                                                                               
| | c. | Future
 estimated amortization expenses for the years ending:                                                        

|                     |  |   |       | 
|-------------------- |  | - | ----- | 
|December
 31,        |  |   |       | 
|                     |  |   |       | 
|                     |  |   |       | 
|2009                 |  | $ | 524   | 
|2010                 |  |   | 524   | 
|2011                 |  |   | 524   | 
|2012                 |  |   | 139   | 
|2013
 and thereafter |  |   | 145   | 
|                     |  |   |       | 
|                     |  |   |       | 
|Total                |  | $ | 1,856 | 
|                     |  |   |       | 

|         |                                    
|-------- | -----------------------------------
|NOTE 8:- | OTHER PAYABLES AND ACCRUED EXPENSES

|                                |  |              |       |      |   |       | 
|------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                |  | December 31, |      
|                                |  |              |      
|                                |  | 2007         |       | 2008 |  
|                                |  |              |       |      |  
|                                |  |              |       |      |  
|Employees
 and payroll accruals |  | $            | 4,263 |      | $ | 4,974 | 
|Accrued
 expenses               |  |              | 2,124 |      |   | 2,216 | 
|Governmental
 authorities       |  |              | 1,288 |      |   | 2,489 | 
|Warranty
 provision             |  |              | 200   |      |   | 181   | 
|Other                           |  |              | 168   |      |   | 8     | 
|                                |  |              |       |      |   |       | 
|                                |  |              |       |      |   |       | 
|                                |  | $            | 8,043 |      | $ | 9,868 | 
|                                |  |              |       |      |   |       | 

F - 27

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                       
|-------- | --------------------------------------
|NOTE 9:- | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Lease
 commitments:                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                          
| |    | The
 facilities of the Company and its subsidiaries are leased under various
 operating lease agreements, which expire on various dates, the latest of
 which is on September 30, 2015. Aggregate minimum rental payments under non-cancelable
 operating leases as of December 31, 2008, are as follows:

|              |  |   |       | 
|------------- |  | - | ----- | 
|December
 31, |  |   |       | 
|2009          |  | $ | 2,975 | 
|2010          |  |   | 2,203 | 
|2011          |  |   | 1,004 | 
|2012          |  |   | 728   | 
|2013          |  |   | 48    | 
|              |  |   |       | 
|              |  |   |       | 
|              |  | $ | 6,958 | 
|              |  |   |       | 

| |    |                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Total rent
 expenses for the years ended December 31, 2006, 2007 and 2008, were
 approximately $1,948, $2,838 and $3,571, respectively (see also Note 15b).
| |    |                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.          
| |    |                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                             | On October
 9, 2002, the Court dismissed the Individual Defendants from the case without
 prejudice. 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.                                                                                                                                                                                                                                                                                                                                                                                                                   

F - 28

---

---



|                                          
|------------------------------------------
|RADWARE LTD. AND ITS SUBSIDIARIES         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|         |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------- | ---------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|         |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                |  | On December
 5, 2006, the Second Circuit vacated a decision by the district court granting
 class certification in six focus cases, which are intended to serve as test
 cases. Plaintiffs selected these six cases, which do not include the Company.
 On April 6, 2007, the Second Circuit denied a petition for rehearing filed by
 the plaintiffs, but noted that the plaintiffs could ask the district court to
 certify more narrow classes than those that were rejected.                                                                                                                                                                   
|         |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                |  | Prior to the Second
 Circuits decision, the majority of issuers, including the Company, had
 submitted a settlement to the district court for approval. In light of
 the Second Circuit opinion, the parties agreed that the settlement could not
 be approved. On June 25, 2007 the district court approved a stipulation filed
 by the plaintiffs and the issuers that terminated the proposed settlement                                                                                                                                                                                                                                         
|         |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                |  | On August 14, 2007, the
 plaintiffs filed amended complaints in the six focus cases. The amended
 complaints include a number of changes, such as changes to the definition of
 the purported class of investors, and the elimination of the individual
 defendants as defendants. The six focus case issuers and the underwriters
 named as defendants in the focus cases filed motions to dismiss the amended
 complaints against them on November 14, 2007. On September 27, 2007, the
 plaintiffs filed a motion for class certification in the six focus cases.                                                                                 
|         |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                |  | On March 26,
 2008, the district court dismissed the Section 11 claims of those members of
 the putative classes in the focus cases who sold their securities for a price
 in excess of the initial offering price and those who purchased outside the
 previously certified class period. With respect to all the other claims, the
 motions to dismiss were denied. On October 10, 2008, at the request of
 Plaintiffs, Plaintiffs motion for class certification was withdrawn, without
 prejudice.                                                                                                                                              
|         |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                |  | The parties
 in the approximately 300 coordinated class actions, including the Company,
 the underwriter defendants in the Company class action, and the plaintiffs in
 the Company class action, have reached an agreement in principle under which
 the insurers for the issuer defendants in the coordinated cases will make the
 settlement payment on behalf of the issuers, including Radware. The
 settlement is subject to approval by the parties, termination by the parties
 under certain circumstances, and Court approval. There is no assurance that
 the settlement will be concluded or that the Court will approve the
 settlement.
|         |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                |  | Due to the inherent
 uncertainties of litigation, the Companys management and its legal counsel
 cannot predict the ultimate outcome of the matter. Should the settlement not
 be concluded or approved and the Company is found liable, it is unable, at
 this time 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.                                                                                

F - 29

---

---



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

|          |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------- | ---------------------------------------------- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9:-  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|          |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                | 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 in a total amount of approximately 387 thousand Euros.
 The hearings with respect to two of these matters are scheduled for March 26,
 2009 and April 30, 2009, respectively. At this stage, the Companys
 management cannot assess the outcome or the risks associated with these three
 matters but in any event the Companys management does not expect them to
 have a material affect on its financial results and operations.
|          |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                |    | The Companys Canadian
 subsidiary, Radware Canada Inc., is a party to a litigation proceeding before
 the Ontario Superior Court of Justice, brought against the subsidiary by its
 former employee claiming damages in connection with its dismissal for
 approximately 150 thousand Canadian Dollars. At this stage the Company management cannot asses the outcome or the
 risks associated with this matter but in any event the Companys management
 does not expect it to have a material affect on the financial results and
 operations.                                                                                                                                                                 
|          |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                |    | The Company
 has conducted some other legal proceeding or arbitration which it does not
 believe to have significant effects on its financial condition or
 profitability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|NOTE 10:- | SHAREHOLDERS EQUITY                          

| |                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys
 shares are listed for trade on the NASDAQ National Market under the symbol
 RDWR.
| |                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | a.                                                                                                 | Rights of
 shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                    | Ordinary
 shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                    | The Ordinary
 shares confer upon the holders the right to receive notice to participate and
 vote in shareholders meetings of the Company and to receive dividend, if
 declared.                                                                                                                                                                                                                                                                                                                                
| |                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | b.                                                                                                 | Treasury
 stock:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                    | In July
 2006, the Companys Board of Directors authorized the repurchase of up to
 $25,000 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. During 2008, the Company purchased 880,315 of its
 Ordinary shares for total consideration of $6,594. Total consideration for
 the purchase of these Ordinary shares was recorded as Treasury shares, at
 cost, as part of shareholders equity.
| |                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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.                                                                                                                                                                                                                             

F - 30

---

---



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

|          |                              |  | 
|--------- | ---------------------------- |  | 
|NOTE 10:- | SHAREHOLDERS EQUITY (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Stock Option
 Plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | 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
 exercise price per share under the Stock Option Plans was generally, not less
 than the market price of an Ordinary share at the date of grant. The options
 expire between 5.2 years to 7 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 9,937,236 Ordinary
 shares. This amount includes an increase of 3% of issued and outstanding
 Ordinary shares reserved for option grants under the Stock Option Plans, as
 approved by the Company in January 2008. As of December 31, 2008, an
 aggregate of 1,130,511 Ordinary shares of the Company were still available
 for future grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 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 of time that options granted are expected
 to be outstanding. Prior to December 31, 2007 expected term of options was
 determined based on simplified method permitted by SAB No. 107 as the average
 of the vesting period and the contractual term. Starting January 1, 2008
 expected term of options granted is based upon historical experience
 complying with SAB 110. Option granted to management, the expected term is
 4.3 years and for options granted to employees, the exercise period is 3.6
 years. 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 Company
 uses other models, such as lattice model, only in case of grants having
 complex vesting terms such as market condition.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The fair
 value of the Companys stock options granted to employees and directors for
 the years ended December 31, 2006, 2007 and 2008 was estimated using the
 following weighted average assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                             |  |                         |   |      |      |      |  |      |   | 
|------------------------------------------------------------ |  | ----------------------- | - | ---- | ---- | ---- |  | ---- | - | 
|                                                             |  | Year ended December 31, |  
|                                                             |  |                         |  
|                                                             |  | 2006                    |   | 2007 |      | 2008 | 
|                                                             |  |                         |   |      |      |      | 
|                                                             |  |                         |   |      |      |      | 
|Risk free interest rate                                      |  | 4.88                    | % |      | 4.46 | %    |  | 2.69 | % | 
|Dividend yields                                              |  | 0                       | % |      | 0    | %    |  | 0    | % | 
|Expected volatility                                          |  | 50                      | % |      | 47   | %    |  | 43   | % | 
|Weighted average expected term from vesting
 date (in years) |  | 3.89                    |   |      | 4.10 |      |  | 3.83 |   | 

F - 31

---

---



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

|          |                                                                                                                      
|--------- | ---------------------------------------------------------------------------------------------------------------------
|NOTE 10:- | SHAREHOLDERS EQUITY (Cont.)                                                                                         
|          |                                                                                                                      
|          | A summary of
 employee option activity under the Companys Stock Option Plans as of
 December 31, 2008 is as follows:

|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 
|------------------------------------------------ |  | ----------------- | --------- | ------------------------------- | - | ------------------------------------------------------- |  | ------------------------- | ---- |  |  | - | 
|                                                 |  | Number of options |           | Weighted-average exercise price |   | Weighted- average remaining contractual term (in years) |  | Aggregate intrinsic value |     
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |     
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |     
|Outstanding at January 1, 2008                   |  |                   | 4,704,129 |                                 | $ | 14.94                                                   |  |                           |      |  |  |   | 
|Granted                                          |  |                   | 1,099,300 |                                 | $ | 10.33                                                   |  |                           |      |  |  |   | 
|Exercised                                        |  |                   | (238,850  | )                               | $ | 8.01                                                    |  |                           |      |  |  |   | 
|Expired                                          |  |                   | (555,821  | )                               | $ | 14.58                                                   |  |                           |      |  |  |   | 
|Forfeited                                        |  |                   | (695,686  | )                               | $ | 14.39                                                   |  |                           |      |  |  |   | 
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 
|Outstanding at December 31, 2008                 |  |                   | 4,313,072 |                                 | $ | 14.28                                                   |  |                           | 3.20 |  |  |  | 
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 
|Exercisable at December 31, 2008                 |  |                   | 1,734,845 |                                 | $ | 16.22                                                   |  |                           | 1.49 |  |  |  | 
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 
|Vested and expected to vest at December 31, 2008 |  |                   | 3,978,778 |                                 | $ | 14.50                                                   |  |                           | 3.15 |  |  |  | 
|                                                 |  |                   |           |                                 |   |                                                         |  |                           |      |  |  |   | 

|                                                 |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 
|------------------------------------------------ |  | ----------------- | ---------- | ------------------------------- | - | ---------------- |  | --------------------------------- | --------- | - | - | ----- | 
|                                                 |  | December 31, 2006 |            | December 31, 2007               |  
|                                                 |  |                   |            |                                 |  
|                                                 |  | Numberof options  |            | Weightedaverage 
 exerciseprice |   | Numberof options |  | Weighted
 average 
 exerciseprice |          
|                                                 |  |                   |            |                                 |   |                  |  |                                   |          
|                                                 |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 
|Options outstanding at the beginning of the year |  |                   | 4,054,380  |                                 | $ | 14.31            |  |                                   | 3,284,999 |   | $ | 15.13 | 
|Changes during the year:                         |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 
|Granted                                          |  |                   | 1,122,400  |                                 | $ | 14.69            |  |                                   | 2,414,900 |   | $ | 14.30 | 
|Exercised                                        |  |                   | (1,196,998 | )                               | $ | 10.55            |  |                                   | (148,000  | ) | $ | 9.24  | 
|Expired                                          |  |                   |           |                                 | $ |                 |  |                                   | (771      | ) | $ | 8.05  | 
|Forfeited                                        |  |                   | (694,783   | )                               | $ | 17.48            |  |                                   | (846,999  | ) | $ | 16.35 | 
|                                                 |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 
|                                                 |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 
|Options outstanding at the end of the year       |  |                   | 3,284,999  |                                 | $ | 15.13            |  |                                   | 4,704,129 |   | $ | 14.94 | 
|                                                 |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 
|                                                 |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 
|Options exercisable at the end of the year       |  |                   | 1,034,230  |                                 | $ | 13.18            |  |                                   | 1,509,396 |   | $ | 14.94 | 
|                                                 |  |                   |            |                                 |   |                  |  |                                   |           |   |   |       | 

F - 32

---

---



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

|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:- | SHAREHOLDERS EQUITY (Cont.)
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                              | The
 weighted-average grant-date fair value of options granted during the years
 ended December 31, 2006, 2007 and 2008 was $5.04, $4.96 and $3.29,
 respectively. As of December 31, 2008, there was approximately $5,769 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 0.87
 years. Total grant-date fair value of vested options for the year ended
 December 31, 2008 was approximately $11,353
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                              | The options
 outstanding under the Companys Stock Option Plans as of December 31, 2008,
 have been separated into ranges of exercise price as follows:                                                                                                                                                                                                                                                                                                                                                                                                                               

|                           |             |                                                 |  |                                                         |  |                                    |      |                                                  |   |                                                             |  |  |           |  |   |       | 
|-------------------------- | ----------- | ----------------------------------------------- |  | ------------------------------------------------------- |  | ---------------------------------- | ---- | ------------------------------------------------ | - | ----------------------------------------------------------- |  |  | --------- |  | - | ----- | 
|Ranges of
 exercise
 price |             | Options
 outstanding
 as of
 December 31,
 2008 |  | Weighted
 average
 remaining
 contractual
 life (years) |  | Weighted
 average
 exercise
 price |      | Options
 exercisable
 as of
 December 31, 
 2008 |   | Weighted 
 average exercise
 price of
 exercisable
 options | 
|                           |             |                                                 |  |                                                         |  |                                    |      |                                                  |   |                                                             | 
|                           |             |                                                 |  |                                                         |  |                                    |      |                                                  |   |                                                             | 
|$                          | 6.31-11.00  |                                                 |  | 755,200                                                 |  |                                    | 4.54 |                                                  | $ | 8.95                                                        |  |  | 30,500    |  | $ | 8.20  | 
|$                          | 12.50-15.00 |                                                 |  | 2,025,225                                               |  |                                    | 2.66 |                                                  | $ | 13.97                                                       |  |  | 969,300   |  | $ | 14.33 | 
|$                          | 15.22-17.00 |                                                 |  | 1,109,567                                               |  |                                    | 3.98 |                                                  | $ | 15.94                                                       |  |  | 378,801   |  | $ | 16.95 | 
|$                          | 18.00-20.08 |                                                 |  | 220,367                                                 |  |                                    | 1.87 |                                                  | $ | 18.40                                                       |  |  | 165,568   |  | $ | 18.37 | 
|$                          | 23.13-25.30 |                                                 |  | 202,713                                                 |  |                                    | 0.88 |                                                  | $ | 23.81                                                       |  |  | 190,676   |  | $ | 23.83 | 
|                           |             |                                                 |  |                                                         |  |                                    |      |                                                  |   |                                                             |  |  |           |  |   |       | 
|                           |             |                                                 |  |                                                         |  |                                    |      |                                                  |   |                                                             |  |  |           |  |   |       | 
|                           |             |                                                 |  | 4,313,072                                               |  |                                    |      |                                                  |   |                                                             |  |  | 1,734,845 |  |   |       | 
|                           |             |                                                 |  |                                                         |  |                                    |      |                                                  |   |                                                             |  |  |           |  |   |       | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December
 31, 2007, the Company granted 500,000 stock options to its Chief Executive
 Officer (CEO) with an exercise price of $15.22 per share. The exercise of these
 options is contingent upon the increase in the market price of the Companys
 Ordinary shares. The options granted are divided into four equal tranches
 (125,000 options each). Each tranche shall be vested one year after the
 Companys closing share price reaches its performance target or more for 22
 consecutive trading days. The closing share price shall be $19, $21, $23 and $25
 for the first, second, third and the forth tranches respectively. The options
 expire seven years from the grant date. The fair value of these options was
 estimated using the lattice method with the following assumptions: risk-free
 interest rate of 3.7%, volatility factor of the expected market price of the
 Companys Ordinary shares of 50.64%. Termination rate was based on the Companys
 expectation that there will be no termination during the vesting period, and
 was determined to be 0%. Early exercise multiple (suboptimal factor) was
 estimated to be 3.09. The Company has historically not paid dividends and has
 no foreseeable plans to pay dividends and as such, a dividend yield of 0% was
 applied.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Total
 compensation expenses amount to $3,176 which is recognized over the estimated
 requisite service period. During the year ended December 31, 2008, the
 Company recorded an amount of $1,508 as compensation expenses included in
 general and administrative expenses with respect to the grant to the CEO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In October,
 2007, the Company granted 100,000 stock options to employees with an exercise
 price of $15.61 per share. The options will vest based on the Companys attaining certain
 performance conditions such as sales target. The options expire seven
 years from the grant date. The fair value of these options was estimated
 using the Black-Scholes-Merton option-pricing model with the following assumptions:
 expected volatility of 45%, risk free interest rate of 4.11%, dividend yield
 of 0% and expected life of 3.79 years. Total compensation expenses amount to $595
 which is recognized over the vesting period of 4 years. During the year ended
 December 31, 2007 and 2008, the Company recorded an amount of $43 and $226 as
 compensation expenses, respectively;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 33

---

---



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

|          |                                                                                                     
|--------- | ----------------------------------------------------------------------------------------------------
|NOTE 11:- | LOSS PER SHARE                                                                                      
|          |                                                                                                     
|          | The
 following table sets forth the computation of basic and diluted net earnings
 (loss) per share:

|                                                             |  |                         |            |      |   |            |   |   |            |  
|------------------------------------------------------------ |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                             |  | Year ended December 31, |           
|                                                             |  |                         |           
|                                                             |  | 2006                    |            | 2007 |   | 2008       |  
|                                                             |  |                         |            |      |   |            |  
|                                                             |  |                         |            |      |   |            |  
|Numerator for basic and diluted loss:                        |  |                         |            |      |   |            |   |   |            |  
|Per share - net loss available to
 shareholders              |  | $                       | (1,280     | )    | $ | (12,011    | ) | $ | (31,022    | )
|                                                             |  |                         |            |      |   |            |  
|                                                            
|                                                             |  |                         |            |      |   |            |   |   |            |  
|Weighted average shares outstanding,
 net of treasury stock: |  |                         |            |      |   |            |   |   |            |  
|Denominator for basic loss per share                         |  |                         | 19,325,055 |      |   | 19,477,222 |   |   | 19,439,776 |  
|Effect of dilutive securities:                               |  |                         |            |      |   |            |   |   |            |  
|Employee stock options                                       |  |                         | *)
 -      |      |   | *)
 -      |   |   | *)
 -      |  
|                                                             |  |                         |            |      |   |            |   |   |            |  
|                                                             |  |                         |            |      |   |            |   |   |            |  
|Denominator for diluted net loss per
 share                  |  |                         | 19,325,055 |      |   | 19,477,222 |   |   | 19,439,776 |  
|                                                             |  |                         |            |      |   |            |   |   |            |  
|                                                             |  |                         |            |      |   |            |   |   |            |  
|Basic net loss per share                                     |  | $                       | (0.07      | )    | $ | (0.62      | ) | $ | (1.60      | )
|                                                             |  |                         |            |      |   |            |   |   |            |  

| |    |              
| | -- | -------------
| | *) | Antidilutive.

|          |                
|--------- | ---------------
|NOTE 12:- | TAXES ON INCOME

| |    |                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | General:                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                              
| |    | The Company
 adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN
 48 did not result in a change to the Company retained earning (accumulated
 deficit). A reconciliation of the beginning and ending amount of unrecognized
 tax benefits is as follows:

|                                                                                   |  |   |       | 
|---------------------------------------------------------------------------------- |  | - | ----- | 
|Balance at January 1, 2008                                                         |  | $ | 1,205 | 
|                                                                                   |  |   |       | 
|                                                                                   |  |   |       | 
|Additions based on tax positions during the
 year                                  |  |   | 287   | 
|Additions of interest related to
 unrecognized tax liabilities from previous years |  |   | 67    | 
|                                                                                   |  |   |       | 
|                                                                                   |  |   |       | 
|Balance at December 31, 2008                                                       |  | $ | 1,559 | 
|                                                                                   |  |   |       | 

| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Domestically,
 the Israeli Tax Authorities (ITA) are currently auditing income tax returns
 of the Company for years 2003 and 2006.                                                                                                                     
| |                                                                                                                                                                                                                                                           
| | In addition,
 the Companys Israeli tax returns have been examined for all years prior to
 fiscal 2002, and the Company is no longer subject to audit for these periods.                                                                                  
| |                                                                                                                                                                                                                                                           
| | The
 Companys subsidiaries files income tax return in the U.S. federal and other
 jurisdictions. The Companys main subsidiaries tax return are subject to
 examination by the U.S. federal and other local tax authorities from
 inception through 2008.

F - 34

---

---



|                                          
|------------------------------------------
|RADWARE
 LTD. AND ITS SUBSIDIARIES        
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--------- | ----------------------- | ----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          | b.                      | Israeli Taxation:
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | 1.                | Foreign
 Exchange Regulations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         |                   | 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), 198,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | 2.                | Tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         |                   | Taxable
 income of Israeli companies is subject to tax at the rate of 31% in 2006, 29%
 in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | 3.                | Net
 operating losses carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         |                   | The Company
 has estimated total available carryforward operating and capital tax losses
 of approximately $26,000, which can be carried forward and offset against
 future taxable income in the future for an indefinite period. Due to the recent
 operating results and recurring losses, as of December 31, 2008 the Company
 provided a full valuation allowance in respect of all the deferred tax assets
 resulting from the carryforward operating tax losses 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.                                                                                                                                                                                                                                                                                                                                                   
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | 4.                | 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 Track, under which the main benefits are a tax
 exemption and reduced tax rate. Therefore, the Companys income derived from
 the 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 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 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. The time limitation does not
 apply to the exemption period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         |                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         |                   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F - 35

---

---



|                                          
|------------------------------------------
|RADWARE
 LTD. AND ITS SUBSIDIARIES        
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)
|          |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                         |  | As of
 December 31, 2008, accumulated deficit 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 taxable deferred income has 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 with respect to the gross amount as if
 the Company had not elected the alternative tax benefits (currently between
 10% - 25%, based on percentage of foreign ownership at the date of
 declaration).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                         |  | 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 for 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                         |  | 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 be eligible for the tax
 benefits, the Amendment states that a company must make an investment in the
 Beneficiary 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 Beneficiary 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 Beneficiary
 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 Beneficiary 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, 2008, the Company did
 not generate income under the provisions of the new law.

F - 36

---

---



|                                          
|------------------------------------------
|RADWARE
 LTD. AND ITS SUBSIDIARIES        
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                         |                                           
|--------- | ----------------------- | ------------------------------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)
|          |                         |                                           
|          | c.                      | Taxes on
 income are comprised as follows:

|              |  |                          |       |      |   |      |   |   |       | 
|------------- |  | ------------------------ | ----- | ---- | - | ---- | - | - | ----- | 
|              |  | Year ended December
 31, |      
|              |  |                          |      
|              |  | 2006                     |       | 2007 |   | 2008 |  
|              |  |                          |       |      |   |      |  
|              |  |                          |       |      |   |      |   |   |       | 
|Current taxes |  | $                        | 1,313 |      | $ | 580  |   | $ | 1,042 | 
|Deferred      |  |                          | (957  | )    |   | (152 | ) |   | 2,585 | 
|              |  |                          |       |      |   |      |   |   |       | 
|              |  |                          |       |      |   |      |   |   |       | 
|              |  | $                        | 356   |      | $ | 428  |   | $ | 3,627 | 
|              |  |                          |       |      |   |      |   |   |       | 
|              |  |                          |       |      |   |      |   |   |       | 
|Domestic      |  | $                        | (170  | )    | $ | (40  | ) | $ | 2,074 | 
|Foreign       |  |                          | 526   |      |   | 468  |   |   | 1,553 | 
|              |  |                          |       |      |   |      |   |   |       | 
|              |  |                          |       |      |   |      |   |   |       | 
|              |  | $                        | 356   |      | $ | 428  |   | $ | 3,627 | 
|              |  |                          |       |      |   |      |   |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | 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, |       
|                                                        |  |              |       
|                                                        |  | 2007         |        | 2008 |  
|                                                        |  |              |        |      |  
|                                                        |  |              |        |      |   |        |  
|Deferred tax assets:                                    |  |              |        |      |   |        |  
|Carryforward tax losses                                 |  | $            | 4,483  |      | $ | 7,444  |  
|Tax benefit related to employee stock
 option exercises |  |              | 935    |      |   | 935    |  
|                                                        |  |              |        |      |   |        |  
|                                                        |  |              |        |      |   |        |  
|Gross deferred tax assets                               |  |              | 5,418  |      |   | 8,379  |  
|Valuation allowance                                     |  |              | (2,621 | )    |   | (7,939 | )
|                                                        |  |              |        |      |   |        |  
|                                                        |  |              |        |      |   |        |  
|Net deferred tax asset                                  |  |              | 2,797  |      |   | 440    |  
|                                                        |  |              |        |      |   |        |  
|Gross deferred tax liabilities                          |  |              |        |      |   |        |  
|Temporary differences relating to
 intangible assets    |  |              | (193   | )    |   | (354   | )
|                                                        |  |              |        |      |   |        |  
|                                                        |  |              |        |      |   |        |  
|Net deferred tax assets                                 |  | $            | 2,604  |      | $ | 86     |  
|                                                        |  |              |        |      |   |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | e. | Foreign:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The
 Companys U.S. subsidiary has estimated total available carryforward tax
 losses of approximately $1,600 which can be carried forward and offset
 against future taxable income until 2023. As of December 31, 2008, the
 Company provided a full valuation allowance in respect of all the deferred
 tax assets resulting from the carryforward operating tax losses 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | 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.                                                                                                                                                                                                                                                         

F - 37

---

---



|                                          
|------------------------------------------
|RADWARE
 LTD. AND ITS SUBSIDIARIES        
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |                         | The Company
 has provided valuation allowances in respect of deferred tax assets resulting
 from tax benefits related to employee stock option exercises which will be
 credited to additional paid-in capital when realized and from losses 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.
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |                         | Two other
 subsidiaries have estimated total available carryforward tax losses of
 approximately $900 to offset against future taxable profit. As of December
 31, 2008, the Company recorded a deferred tax asset of $86 relating to these
 available net carryforward losses.                                                                                                                                                      
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | f.                      | 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, |       
|                                                                               |  |                         |       
|                                                                               |  | 2006                    |        | 2007 |   | 2008    |  
|                                                                               |  |                         |        |      |   |         |  
|                                                                               |  |                         |        |      |   |         |   |   |         |  
|Loss before taxes, as reported in the
 consolidated statements of income       |  | $                       | (924   | )    | $ | (11,583 | ) | $ | (27,395 | )
|                                                                               |  |                         |        |      |   |         |   |   |         |  
|                                                                               |  |                         |        |      |   |         |   |   |         |  
|Statutory tax rate                                                             |  |                         | 31     | %    |   | 29      | % |   | 27      | %
|                                                                               |  |                         |        |      |   |         |   |   |         |  
|                                                                               |  |                         |        |      |   |         |   |   |         |  
|Theoretical tax benefit on the above amount
 at the Israeli statutory tax rate |  | $                       | 286    |      | $ | 3,359   |   | $ | 7,397   |  
|Tax adjustment in respect of different tax
 rate                               |  |                         | (55    | )    |   | (263    | ) |   | (563    | )
|Non-deductible expenses                                                        |  |                         | 1,318  |      |   | (1,213  | ) |   | (2,575  | )
|Deferred taxes on losses for which
 valuation allowance was provided, net      |  |                         | (920   | )    |   | (995    | ) |   | (5,318  | )
|Stock compensation relating to stock
 options per SFAS 123(R)                  |  |                         | (1,400 | )    |   | (1,316  | ) |   | (2,180  | )
|Income taxes in respect of prior years                                         |  |                         | 473    |      |   |        |   |   |        |  
|Other                                                                          |  |                         | (58    | )    |   |        |   |   | (388    | )
|                                                                               |  |                         |        |      |   |         |   |   |         |  
|                                                                               |  |                         |        |      |   |         |   |   |         |  
|Actual tax expense                                                             |  | $                       | (356   | )    | $ | (428    | ) | $ | (3,627  | )
|                                                                               |  |                         |        |      |   |         |   |   |         |  

| |    |                                                            
| | -- | -----------------------------------------------------------
| | g. | Income
 (loss) before income taxes is comprised as follows:

|                          |  |                          |        |      |   |         |   |   |         |  
|------------------------- |  | ------------------------ | ------ | ---- | - | ------- | - | - | ------- | -
|                          |  | Year ended December
 31, |       
|                          |  |                          |       
|                          |  | 2006                     |        | 2007 |   | 2008    |  
|                          |  |                          |        |      |   |         |  
|                          |  |                          |        |      |   |         |   |   |         |  
|Domestic                  |  | $                        | (2,129 | )    | $ | (13,015 | ) | $ | (26,395 | )
|Foreign                   |  |                          | 1,205  |      |   | 1,432   |   |   | (1,000  | )
|                          |  |                          |        |      |   |         |   |   |         |  
|                          |  |                          |        |      |   |         |   |   |         |  
|loss
 before income taxes |  | $                        | (924   | )    | $ | (11,583 | ) | $ | (27,395 | )
|                          |  |                          |        |      |   |         |   |   |         |  

F - 38

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|                                          
|------------------------------------------
|RADWARE
 LTD. AND ITS SUBSIDIARIES        
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                                                                 |                                                                                                                                                                                                                
|--------- | --------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:- | GEOGRAPHIC INFOROMATION AND SELECTED
 STATEMENTS OF INCOME DATA
|          |                                                                 |                                                                                                                                                                                                                
|          | a.                                                              | 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 table presents total revenues for the years ended December 31,
 2006, 2007 and 2008 and long-lived assets as of December 31, 2007 and 2008:                                                     

|                                              |  |                         |        |      |   |        |  |   |        | 
|--------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                              |  | Year ended December 31, |       
|                                              |  |                         |       
|                                              |  | 2006                    |        | 2007 |   | 2008   | 
|                                              |  |                         |       
|                                              |  |                         |        |      |   |        |  |   |        | 
|Revenues from sales to customers
 located at: |  |                         |        |      |   |        |  |   |        | 
|America (principally the United States)       |  | $                       | 27,646 |      | $ | 24,368 |  | $ | 23,715 | 
|EMEA *)                                       |  |                         | 27,529 |      |   | 29,412 |  |   | 29,836 | 
|Asia Pacific                                  |  |                         | 26,235 |      |   | 34,851 |  |   | 41,030 | 
|                                              |  |                         |        |      |   |        |  |   |        | 
|                                              |  |                         |        |      |   |        |  |   |        | 
|                                              |  | $                       | 81,410 |      | $ | 88,631 |  | $ | 94,581 | 
|                                              |  |                         |        |      |   |        |  |   |        | 

| |  |    |                                     
| |  | -- | ------------------------------------
| |  | *) | Europe, the
 Middle East and Africa.

|                                          |  |              |        |      |   |        | 
|----------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                          |  | December 31, |       
|                                          |  |              |       
|                                          |  | 2007         |        | 2008 |  
|                                          |  |              |        |      |  
|                                          |  |              |        |      |   |        | 
|Long-lived assets, by geographic
 region: |  |              |        |      |   |        | 
|America                                   |  | $            | 1,751  |      | $ | 1,290  | 
|EMEA                                      |  |              | 9,011  |      |   | 9,012  | 
|Asia Pacific                              |  |              | 1,454  |      |   | 1,391  | 
|                                          |  |              |        |      |   |        | 
|                                          |  |              |        |      |   |        | 
|                                          |  | $            | 12,216 |      | $ | 11,693 | 
|                                          |  |              |        |      |   |        | 

| |    |                                                        
| | -- | -------------------------------------------------------
| | b. | Major
 customer data as a percentage of total revenues:

|            |  |                         |    |      |  |      |   |  |   |  
|----------- |  | ----------------------- | -- | ---- |  | ---- | - |  | - | -
|            |  | Year ended December 31, |   
|            |  |                         |   
|            |  | 2006                    |    | 2007 |  | 2008 |  
|            |  |                         |    |      |  |      |  
|            |  |                         |    |      |  |      |   |  |   |  
|Customer
 A |  |                         | 12 | %    |  | 5    | % |  | 6 | %
|            |  |                         |    |      |  |      |  

F - 39

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|                                          
|------------------------------------------
|RADWARE
 LTD. AND ITS SUBSIDIARIES        
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                                   
|--------- | ----------------------------------
|NOTE 14:- | SELECTED STATEMENTS OF INCOME DATA
|          |                                   
|          | Financial income,
 net:           

|                                                                                                  |  |                         |       |      |   |       |   |   |       |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                                  |  | Year ended December 31, |      
|                                                                                                  |  |                         |      
|                                                                                                  |  | 2006                    |       | 2007 |   | 2008  |  
|                                                                                                  |  |                         |       |      |   |       |  
|                                                                                                  |  |                         |       |      |   |       |   |   |       |  
|Financial income:                                                                                 |  |                         |       |      |   |       |   |   |       |  
|Interest on bank deposits                                                                         |  | $                       | 1,048 |      | $ | 2,917 |   | $ | 1,186 |  
|Foreign currency translation
 differences, net                                                    |  |                         | 892   |      |   | 70    |   |   |      |  
|Amortization of premiums, accretion of
 discounts and interest on marketable debt securities, net |  |                         | 5,620 |      |   | 4,569 |   |   | 3,073 |  
|                                                                                                  |  |                         |       |      |   |       |   |   |       |  
|                                                                                                  |  |                         |       |      |   |       |   |   |       |  
|                                                                                                  |  |                         | 7,560 |      |   | 7,556 |   |   | 4,259 |  
|Financial expenses:                                                                               |  |                         |       |      |   |       |   |   |       |  
|Interest and other bank charges                                                                   |  |                         | (138  | )    |   | (136  | ) |   | (222  | )
|Foreign currency translation
 differences, net                                                    |  |                         |      |      |   |      |   |   | (425  | )
|                                                                                                  |  |                         |       |      |   |       |   |   |       |  
|                                                                                                  |  |                         |       |      |   |       |   |   |       |  
|                                                                                                  |  | $                       | 7,422 |      | $ | 7,420 |   | $ | 3,612 |  
|                                                                                                  |  |                         |       |      |   |       |   |   |       |  

|          |                                                                                                                                                             |                                                                          
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------
|NOTE 15:- | BALANCES AND TRANSACTIONS WITH RELATED
 PARTIES                                                                                                            
|          |                                                                                                                                                            
|          | Represents
 transactions and balances with other entities in which certain of the
 Companys Board of Directors, management and shareholders have interest:
|          |                                                                                                                                                             |                                                                          
|          | a.                                                                                                                                                          | The
 following related party balances are included in the balance sheets:

|                   |  |              |       |      |   |       | 
|------------------ |  | ------------ | ----- | ---- | - | ----- | 
|                   |  | December 31, |      
|                   |  |              |      
|                   |  | 2007         |       | 2008 |  
|                   |  |              |       |      |  
|                   |  |              |       |      |   |       | 
|Trade
 receivables |  | $            | 1,320 |      | $ | 1,358 | 
|                   |  |              |       |      |  
|                   |  |              |       |      |   |       | 
|Trade
 payables    |  | $            | 175   |      | $ | 305   | 
|                   |  |              |       |      |  

| |    |                                                                                         
| | -- | ----------------------------------------------------------------------------------------
| | b. | The
 following related party transactions are included in the statements of
 operations:

|                                                                                   |  |                         |       |      |   |       |  |   |       | 
|---------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                                                   |  | Year ended December 31, |      
|                                                                                   |  |                         |      
|                                                                                   |  | 2006                    |       | 2007 |   | 2008  | 
|                                                                                   |  |                         |       |      |   |       | 
|                                                                                   |  |                         |       |      |   |       |  |   |       | 
|Revenues (1)                                                                       |  | $                       | 3,656 |      | $ | 4,184 |  | $ | 3,821 | 
|                                                                                   |  |                         |       |      |   |       |  |   |       | 
|                                                                                   |  |                         |       |      |   |       |  |   |       | 
|Operating expenses, net - primarily
 lease, sub-contractors and communications (2) |  | $                       | 917   |      | $ | 1,374 |  | $ | 1,944 | 
|                                                                                   |  |                         |       |      |   |       |  |   |       | 
|                                                                                   |  |                         |       |      |   |       |  |   |       | 
|Purchase of property and equipment                                                 |  | $                       | 939   |      | $ | 948   |  | $ | 859   | 
|                                                                                   |  |                         |       |      |   |       |  |   |       | 

| |  |     |                                                                                                                                                                                                                                                                                    
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | Distribute
 the Companys products on a non-exclusive basis.                                                                                                                                                                                                                       
| |  |     |                                                                                                                                                                                                                                                                                    
| |  | (2) | 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.

F - 40

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---



|                                          
|------------------------------------------
|RADWARE
 LTD. AND ITS SUBSIDIARIES        
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:- | SUBSEQUENT EVENTS (UNAUDITED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          | On February
 19, 2009, the Company entered into an asset purchase agreement (APA) with
 Nortel Networks Ltd., Nortel Networks Inc. and other Nortel entities
 (Nortel), to purchase for $17,650 in cash certain assets related to
 Nortels Layer 4-7 Application Delivery Business acquired by Nortel in 2000,
 by way of its corporate acquisition of Alteon WebSystems, Inc. Nortel has
 filed the APA with the United States Bankruptcy Court for the District of
 Delaware, along with a motion seeking the establishment of bidding procedures
 for an auction that allow other qualified bidders to submit higher or
 otherwise better offers, as required under Section 363 of the U.S. Bankruptcy
 Code. A similar motion for the approval of the bidding procedures was filed
 with the Ontario Superior court of Justice. Consummation of the transaction
 was subject to higher or otherwise better offers, none of which were received
 by the bidding deadline, and approval by the United States Bankruptcy Court
 for the District of Delaware, the Ontario Superior court of Justice and the
 satisfaction of other conditions. The APA contains very limited ongoing
 representations and undertakings by Nortel with respect to the purchased
 assets and assumed liabilities. If the deal is consummated, The Company plans
 to offer the Nortels application delivery products under a merged brand,
 Radware Alteon, and to hire certain Nortel employees who will be dedicated to
 the Radware Alteon brand.

F - 41

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---