**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, 2007




**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)**




**Vered
      Raviv-Schwarz, Tel. +972-3-7668666, E-mail: veredr@radware.com, 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,**
              **NIS
                0.1 par value per share**
            
            **NASDAQ
                Global Select Market**





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


**None**


**(Title
      of Class)**




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


**None**


**(Title
      of Class)**




Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual
      report:


**19,559,903** **Ordinary Shares, NIS 0.1 par value per share**




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


o Yes x No









If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of the Securities Exchange Act of 1934. o Yes x No




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


x Yes o No




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


Large
      Accelerated Filer o Accelerated
      Filer x Non-Accelerated
      Filer o




Indicate
      by check mark which 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








**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®” and
“SIPDirector®” and we have trademark applications pending for “AppDirectorTM”,
“AppXCelTM”, “SecureFlowTM”, “SOADirectorTM”, “APPXMLTM”, “On Demand SwitchTM” and
“APSolute VisionTM”. All other trademarks and tradenames 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




**TABLE
        OF CONTENTS**




**Page****PART
                I**
            
            
            
            **4**ITEM 1.
            Identity
              of Directors, Senior Management and Advisors
            
            
            4ITEM 2.
            Offer
                Statistics and Expected Timetable
            
            
            4ITEM 3.
            Key
              Information
            
            
            5*Selected
                Financial Data*
            
            *5**Risk
                Factors*
            
            *6*ITEM 4.
            Information
              on the Company
            
            
            18*History
                and Development of the Company*
            
            *18**Business
                Overview*
            
            *18**Organizational
                Structure*
            
            *28**Property,
                Plants and Equipment*
            
            *29*ITEM 4.A.
            Unresolved
              Staff Comments
            
            
            29ITEM 5.
            Opertating
              and Financial Review And Prospects
            
            
            30ITEM 6.
            Directors,
              Senior Management and Employees
            
            
            45*Directors
                and Senior Management*
            
            *45**Compensation*
            
            *48**Board
                Practices*
            
            *49**Employees*
            
            *54**Share
                Ownership*
            
            *55*ITEM 7.
            Major
              Shareholders and Related Party Transactions
            
            
            57*A.
                Major Shareholders*
            
            *57**B.
                Related Party Transactions*
            
            *58**C.
                Interests of Experts and Counsel*
            
            *59*ITEM 8.
            Financial
              Information
            
            
            59*A.
                Consolidated Statements and other Financial
                Information*
            
            *59**B.
                Significant Changes*
            
            *60*ITEM 9.
            The
              Listing
            
            
            61*A.
                Listing Details*
            
            *61**B.
                Plan of Distribution*
            
            *62**C.
                Markets*
            
            *62**D.
                Selling Shareholders*
            
            *62**E.
                Dilution*
            
            *62**F.
                Expenses of the Issue*
            
            *62*




2





ITEM 10.
            Additional
              information
            
            
            63*A.
                Share Capital*
            
            *63**B.
                Memorandum and Articles of Association*
            
            *63**C.
                Material Contracts*
            
            *67**D.
                Exchange Controls*
            
            *68**E.
                Taxation*
            
            *68**F.
                Dividends and Paying Agents*
            
            *79**G.
                Statement by Experts*
            
            *79**H.
                Documents on Display*
            
            *79**I.Subsidiary
                Information*
            
            
            *79*ITEM 11.
            Quantitative
              and Qualitative Disclosures about Market Risk
            
            
            80ITEM 12.
            Description
              of Securities other than Equity Securities
            
            
            80**PART
                II**
            
            
            
            
            
            **81**ITEM 13.
            Defaults,
              Dividend Averages and Delinquencies
            
            
            81ITEM 14.
            Material
              Modifications to the Rights of Security Holders and Use of
              Proceeds
            
            
            81ITEM 15.
            Controls
              and Procedures
            
            
            81ITEM 16.
            [Reserved]
            
            
            83**PART
                III**
            
            
            
            
            
            **86**ITEM 17.
            Financial
              Statements
            
            
            86ITEM 18.
            Financial
              Statements
            
            
            86ITEM 19.
            Exhibits
            
            
            87




3


**PART
      I**




**ITEM
                1.**
            **IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND
                  ADVISORS**




Not
      applicable.




**ITEM
                2.**
            **OFFER
                  STATISTICS AND EXPECTED
                  TIMETABLE**




Not
      applicable.




4




**ITEM
                3.**
            **KEY
              INFORMATION**




**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, 2005, 2006 and 2007 and the balance sheet
      data
      as at December 31, 2006 and 2007 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, 2003 and 2004 and the balance sheet data for the years
      ended December 31, 2003, 2004 and 2005 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 note 2u of the notes to our consolidated financial statements for an
      explanation regarding the computation of basic and diluted net earnings (loss)
      per ordinary share.


**Year ended**
              
              **Year ended**
              
              **Year ended**
              
              **Year ended**
              
              **Year ended****December**
                **31,**
              
              **December**
                **31,**
              
              **December**
                **31,**
              
              **December**
                **31,**
              
              **December**
                **31,****2003**
              
              **2004**
              
              **2005**
              
              **2006***
              
              **2007*****(US $ in thousands, except per share data)****Statement
                  of Operations Data:**Revenues:Products
              
              $
              39,482
              
              $
              52,206
              
              $
              55,902
              
              $
              57,335
              
              $
              59,422Services
              
              
              15,298
              
              
              16,233
              
              
              21,682
              
              
              24,075
              
              
              29,20954,780
              
              
              68,439
              
              
              77,584
              
              
              81,410
              
              
              88,631Cost
                  of revenues:Products
              
              
              7,018
              
              
              8,080
              
              
              9,325
              
              
              10,267
              
              
              13,133Services
              
              
              2,836
              
              
              4,104
              
              
              5,571
              
              
              5,524
              
              
              5,8959,854
              
              
              12,184
              
              
              14,896
              
              
              15,791
              
              
              19,028Gross
                  profit
              
              
              44,926
              
              
              56,255
              
              
              62,688
              
              
              65,619
              
              
              69,603Operating
                  expenses:Research
                  and development, net
              
              
              8,398
              
              
              10,342
              
              
              13,017
              
              
              17,659
              
              
              23,515Sales
                  and marketing
              
              
              29,753
              
              
              31,898
              
              
              40,002
              
              
              50,128
              
              
              57,977General
                  and administrative
              
              
              4,120
              
              
              4,493
              
              
              5,244
              
              
              6,178
              
              
              7,114Total
                  operating expenses
              
              
              42,271
              
              
              46,733
              
              
              58,263
              
              
              73,965
              
              
              88,606Operating
                  profit (loss)
              
              
              2,655
              
              
              9,522
              
              
              4,425
              
              
              (8,346
              )
              
              (19,003
              )Financial
                  income, net
              
              
              3,740
              
              
              4,565
              
              
              5,159
              
              
              7,422
              
              
              7,420Income
                  (loss) before income taxes
              
              
              6,395
              
              
              14,087
              
              
              9,584
              
              
              (924
              )
              
              (11,583
              )Income
                  taxes
              
              
              -
              
              
              (341
              )
              
              (240
              )
              
              (356
              )
              
              (428
              )Minority
                  interest in losses
                (earnings)
                  of a subsidiary
              
              
              (40
              )
              
              34
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              6,355
              
              $
              13,780
              
              $
              9,344
              
              $
              (1,280
              )
              $
              (12,011
              )Basic
                  net earnings (loss) per share
              
              $
              0.37
              
              $
              0.77
              
              $
              0.50
              
              $
              (0.07
              )
              $
              (0.62
              )Diluted
                  net earnings (loss) per share
              
              $
              0.34
              
              $
              0.70
              
              $
              0.47
              
              $
              (0.07
              )
              $
              (0.62
              )





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


5





**Year ended**
            
            **Year ended**
            
            **Year ended**
            
            **Year ended**
            
            **Year ended****December**
              **31,**
            
            **December**
              **31,**
            
            **December**
              **31,**
            
            **December**
              **31,**
            
            **December**
              **31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007****(in thousands)**Weighted
                average number of ordinary shares used in computing basic net earnings
                (loss) per share
            
            
            17,184
            
            
            17,995
            
            
            18,800
            
            
            19,325
            
            
            19,477Weighted
                average number of ordinary shares used in computing diluted net earnings
                (loss) per share
            
            
            18,666
            
            
            19,805
            
            
            20,072
            
            
            19,325
            
            
            19,477




**December
                31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007****(US
                $ in thousands)****Balance
                Sheet Data:**Cash
                and cash equivalents, short-termbank
                deposits and marketablesecurities
                and current maturities oflong-term
                bank deposits
            
            $
            62,882
            
            $
            109,020
            
            $
            126,901
            
            $
            140,375
            
            $
            152,110Long-term
                bank deposits, structured deposit and marketable
                securities
            
            
            76,139
            
            
            48,021
            
            
            37,592
            
            
            23,756
            
            
            2,735Working
                capital
            
            
            60,477
            
            
            107,687
            
            
            124,005
            
            
            137,406
            
            
            143,950Total
                assets
            
            
            158,114
            
            
            183,241
            
            
            204,347
            
            
            215,668
            
            
            216,067Shareholders’
                equity
            
            
            140,246
            
            
            160,917
            
            
            177,426
            
            
            182,414
            
            
            176,713




**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 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.*


6




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




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




While
      we
      were profitable in each of the years 2003-2005, we incurred losses in 2006
      and
      2007. We had a net loss of approximately $12.0 million in 2007 and a net loss
      of
      approximately $1.3 million in 2006. We will need to generate increased revenues
      as well as manage 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 2006 compared to 2005 was approximately 5% and the growth rate
      in
      2007 compared to 2006 was approximately 9%. Our gross margin is currently
      approximately 80% and, as a result, any decrease in sales may have a significant
      effect on our profitability. In addition, our operating expenses are expected
      to
      increase. Our decision to increase operating expenses and the scope of such
      increase will depend upon several factors, including the market situation and
      the results that our past expenditures produce. We may continue to make
      additional expenditures in anticipation of generating higher revenues, which
      we
      may not realize, if at all, until some time in the future. For example, during
      2007 we invested in new product developments, including our new OnDemand
      SwitchTM, AppXMLTM and SIP Director® as well as in the Business Smart Network
      strategy, including investment in the operations of the Inflight group. We
      completed the realignment of our sales force in the United States in the middle
      of 2007. Our efforts as well as our expenditures in these products and
      strategies may not result in increased revenues. If our revenues continue not
      to
      increase as anticipated, or if our expenses increase at a more rapid pace than
      revenues, we may continue to incur losses. In the first quarter of 2008 we
      incurred a loss of $8.3 million (un-audited) and we expect to incur losses
      in
      fiscal 2008.




Our
      results for 2007 were benefited by financial income in an amount of
      approximately $7.4 million. We cannot assure you that we will be able to
      generate financial income in the future or that such financial income will
      remain at the same level.




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




Our
      business is dependent on current and anticipated market demand for our products.
      According to our estimates, in 2003, the overall market’s IT spending remained
      substantially flat and in 2004 through 2007 there was an improvement in the
      market. In 2008, we believe the growth rate in the overall market’s IT spending
      may slow due to real estate and financial issues, which may lead to recession
      fears. More specifically, the level of growth in IT expenditures in the U.S.
      may
      decrease somewhat with estimates by IDC at 4% growth. Therefore, if global
      conditions deteriorate, and companies in our target markets reduce capital
      expenditures, we may experience a reduction in sales, as well as downward
      pressure on the price of our products. In addition, if the market is flat and
      customers experience low visibility we may not be able to increase our sales.
      Each of the above scenarios would have a material adverse effect on our
      business, operating results and financial condition.




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




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




·
            Our
                limited order backlog;




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




·
            The
                long sales cycles of our products.




As
      a
      result of the foregoing our results in any quarter may also fall below projected
      results. For example, in the first quarter of 2008 our revenues were slightly
      less than we projected at the beginning of the quarter. While the shipments
      for
      the quarter were within our expectations, certain decisions made by us with
      respect to revenue recognition after the end of the quarter caused our recorded
      revenues to fall slightly below expectations.


7


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 2008, since some of our customers are still
      planning their annual purchasing budget in the beginning of the year, and in
      the
      third quarter of 2008 because of the slowdown in business activities during
      the
      summer months in Europe. We further believe that our sales during the fourth
      quarter of 2008 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. For example, our
      revenues for the first quarter of 2008 were lower than our revenues in the
      fourth quarter of 2007.




**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 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), 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. For example, F5 acquired Acopia Networks
      and Citrix acquired XenSource to add virtualization capabilities to their
      respective portfolios. 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




8




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




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




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




·
            invest
                significantly in research and
                development;




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




·
            gain
                and consecutively increase market acceptance of our
                products.




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 2007, we invested in, and plan to
      continue to invest in 2008, 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.




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 two years
      we acquired the businesses of V-Secure and Covelight. We may assume liabilities
      or write-offs, incur amortization expenses related to intangible
      assets or realize large and immediate write-offs in connection with future
      acquisitions. In addition, the future valuation of these acquisitions may
      decrease from the market price paid by us, which may result in the writing-off,
      or impairment, of the relevant assets. In addition, our operation of any
      acquired or merged businesses, technologies or assets could involve numerous
      risks, including:





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




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




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




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




·
            Loss
                of key employees of the acquired
                operations.




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


9


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




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




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




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




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




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




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




As
      we
      grow we may need new or enhanced systems, procedures or controls. For example,
      at the beginning of 2007, we 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.


10


**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 2006 and 2007 our sales outside the Americas represented
      approximately 66% and 72%, 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.




**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 Euros. We have recently
                witnessed a significant strengthening of the NIS against the dollar,
                which
                has considerably increased the dollar value of our expenses in Israel.
                Should the NIS continue to maintain, or increase, its strength in
                comparison to the dollar, the dollar value of these expenses will
                continue
                to be high, and our results of operations will be adversely affected.




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




·
            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.
      The integration of these solutions into existing networks and ongoing support
      can be complex. Accordingly, we need highly-trained sales, marketing and
      customer support personnel. Competition for qualified sales personnel, as well
      as technical and customer support personnel is intense, and we may not be able
      to hire sufficient personnel to support our research and development and sales
      and marketing efforts. Our success depends upon our ability to attract, train
      and retain highly qualified personnel.




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




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


11


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




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




**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 2007 we entered into agreements with Nexcom and
      an
      additional supplier, and shifted approximately 10% of our purchases to a second
      supplier. We expect that in 2008 we will shift a more substantial share of
      our
      purchases to Nexcom, including the sole manufacturing of the circuit boards
      for
      our new OnDemand Switch platform. However, to date, since we have only purchased
      relatively small quantities from those suppliers, there is no assurance that
      our
      plan to purchase a substantial amount from these suppliers will be successful.
      If we must rely on the alternate suppliers, there is no assurance that we will
      be able to obtain the quantities we require at lead times and pricing
      competitive to USR 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.




12


**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®” and “SIPDirector®” and we have trademark
      applications pending for “AppDirectorTM”, “AppXCelTM”, “SecureFlowTM”,
“SOADirectorTM”, “APPXMLTM”, “On Demand SwitchTM” and “APSolute VisionTM”. In
      addition, we have registered patents in the United States for our triangle
      redirection method used for the global load balancing, for our mechanism for
      efficient management and optimization of multiple links used in our LinkProof
      product, for our method for load balancing by global proximity used in our
      WSD
      product and for our method for controlling traffic on links between autonomous
      BGP systems. We also have pending patent applications and provisional patents
      in
      connection with several features used in our products. The protective steps
      we
      have taken may be inadequate to deter misappropriation of our proprietary
      information. We may be unable to detect the unauthorized use of our proprietary
      technology or take appropriate steps to enforce our intellectual property
      rights. Effective trademark, patent and trade secret protection may not be
      available in every country in which we offer, or intend to offer, our products.
      Failure to adequately protect our intellectual property could devalue our
      proprietary content and impair our ability to compete effectively. Furthermore,
      defending our intellectual property rights could result in the expenditure
      of
      significant financial and managerial resources.




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




Third
      parties may assert against us infringement claims or claims that we have
      violated a patent or infringed a copyright, trademark or other proprietary
      right
      belonging to them. As a result we may incur costs defending ourselves or
      settling lawsuits even if we believe we do not infringe third parties rights.




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




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




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




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


13


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




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




As
      of
      June 10, 2008, Mr. Yehuda Zisapel, a member of our Board of Directors,
      beneficially owned 15.33% of the ordinary shares outstanding and Roy Zisapel,
      our Chief Executive Officer, President and director, and Mr. Yehuda Zisapel’s
      son beneficially owns approximately 5.09% of our ordinary shares outstanding
      (See “Item 6 – Share Ownership.”) As a result, these shareholders may exert
      significant influence in the outcome of various actions that require shareholder
      approval, such as the election of our directors, and the approval or rejection
      of a merger and similar corporate transactions.




**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.




For
      our
      2007 taxable year, the average percentage of our passive assets to the fair
      market value of our total assets was slightly below 50%. Therefore, we believe
      that we should not be classified as a PFIC for 2007. However, there can be
      no
      assurance that the United States Internal Revenue Service will not challenge
      this treatment. 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 2008 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.




**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, since mid 2007, Hamas and other Palestinian
      movements have been launching, from time to time, missile strikes from the
      Gaza
      strip into southern Israel.


14


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




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




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




**The
      rate of inflation in Israel and the change in the exchange rate between the
      New
      Israeli Shekel against the U.S. dollar and/or the U.S. dollar against the Euro
      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 2007, we sold in
      Euros
      in most European countries. In this respect, we are exposed to the following
      risks: the rate of inflation in Israel may exceed the rate of devaluation of
      the
      NIS in relation to the dollar, the timing of this devaluation may lag behind
      inflation in Israel, or the NIS may increase in value relative to the dollar.
      In
      such events, the dollar cost of our operations in Israel will increase and
      our
      dollar-measured results of operations will be adversely affected. In addition,
      if the Euro increases in value relative to the dollar and sales in Euros do
      not
      exceed expenses incurred in Euros, the dollar cost of our operations in Europe
      will increase and our operating profit will be adversely affected. If the Euro
      decreases in value relative to the dollar and sales in Euros exceed expenses
      incurred in Euros, our operating profit will be negatively affected as a result
      of a decrease in the dollar value of our sales. 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. In 2007, the value of the dollar decreased in
      relation to the NIS by 9.0%, the inflation rate in Israel was 3.4%, and the
      value of the dollar decreased in relation to the Euro by 10.5%. As a result,
      during 2007, we had an increase in expenses (as a result of the increase in
      the
      Euro and the NIS exchange rates relative to the dollar), 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. During the period of January 1,
      2008
      through May 31, 2008 the value of the dollar continued its decrease in relation
      to the NIS by an additional 15.9% and in relation to the Euro by an additional
      4.9%. The inflation rate in Israel in the first four months of 2008 was 1.6%.
      This led to an additional increase in our expenses due to the fact that a large
      portion of our salaries are paid in NIS or 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.


15


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




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 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.




**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;




16


·
            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.




17




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




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




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




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




For
      a
      discussion of important events in the development of the Company’s business, see
“—Business Overview—General.”




B.Business
      Overview




**General**




We
      operate in two market segments: Application Delivery and Network Security.
      We
      refer to our solution aimed at those two markets as Business Smart
      Networking.





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





The
      Network Security market segment is more diffuse and consists of firewall/VPN,
      Unified Threat Management (UTM), intrusion detection systems, intrusion
      prevention systems, network behavioral analysis (NBA) systems and 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 Business Smart Networking solutions that allow
      our enterprise and carrier customers to align their network and application
      behavior to their business policies and needs. Our solutions provide end-to-end
      availability, performance and security of mission critical networked
      applications, thus enabling our customers to deliver their mission critical
      applications successfully between data centers and remote locations, over all
      critical points in the network.




Our
      Application Delivery and Network Security solutions enable customers to manage
      their network infrastructure, bypass systems failures, scale their application
      performance, and secure their Internet protocol (“IP”) traffic. 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 Business Smart Networking solutions help
      customers increase business agility, save CAPEX and OPEX, improve productivity
      and extract the greatest value from investments in network infrastructures.
      In
      April 2007 we acquired Covelight, a U.S.-based company providing web channel
      intelligence technology, which added enhanced capabilities to our Business
      Smart
      Networking portfolio.


18


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, Radware has received the following
      recognition and/or awards: *Info
      Security Products Guide* (2008
      Global Product Excellence), *Internet
      Telephony* (2007
      Product of the Year) *,* Miercom
      Labs (Performance Verified), *Network
      Products Guide* (2008
      Production Innovation), NSS Labs (Approved – Attack Mitigation), and *SC
      Magazine* (Finalist – 2008 Product Award). 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 -
      for
      example, Forrester Research, Frost & Sullivan, Gartner, IDC, and Yankee
      Group.




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




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




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




The
      APSoluteTM product suite consists of the following product families:




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




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




·  *Application
      Performance Monitoring (APM)TM* extends
      the capabilities of application delivery and security solutions providing
      real-time detailed visibility into application performance and accurately
      pinpointing the source of performance degradation.




·  *AppXMLTM* provides
      secure, high-performance XML and web services communications for
      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 6-Gigabit
      speeds, preventing attacks in real-time for intrusion prevention and multi-layer
      application defense.




· *CID
      -
      Content Inspection Director* ®
is
      a
      managed 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.


19


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




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




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




·  *SIP
      Director®* a
      comprehensive SIP-aware application delivery controller (ADC) for application
      vendors, telecom equipment manufacturers (TEMs) and system integrators
      (SIs).




***Application
      Switch Platforms***




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






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




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




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




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




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.


20


In
      2008,
      we introduced our next generation of hardware platforms, the OnDemand SwitchTM 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 ports of gigabit Ethernet; the OnDemand Switch 2 Series features
      nominal throughput from 1-4 Gbps and16 ports of gigabit Ethernet.




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*


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





·
            *APSolute
                OS Health Monitoring and Failure
                Bypassing*


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





·
            *APSolute
                OS Traffic Redirection*


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





·
            *APSolute
                OS Bandwidth Management*


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





·
            *APSolute
                OS Application Acceleration*


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


21







·
            *APSolute
                OS Intrusion Prevention*


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





·
            *APSolute
                OS DoS Protection*


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




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




In
      2007,
      approximately 28% of our sales were in the Americas (principally in the United
      States), 33% were in EMEA (Europe, Middle East and Africa) and 39% in
      Asia-Pacific, compared to 34%, 34% and 32%, respectively, in 2006, and 41%,
      31%
      and 28%, respectively, in 2005. Other than the United States and China, no
      single country accounted for more than 10% of our sales for 2007. **** *For
      additional details regarding the breakdown of our revenues by geographical
      distribution and by activity, see Item 5A.*




In
      2007,
      approximately 67% of our sales derived from product sales and 33% derived from
      service sales, compared to approximately 70% and 30%, respectively, in 2006
      and
      approximately 72% and 28%, respectively, in 2005. For the year ended December
      31, 2007, no single customer accounted for more than 10% of our sales. For
      the
      years ended December 31, 2006 and 2005, one single customer (a distributor)
      accounted for 12% and 16% of our sales, respectively. As of December 31, 2007
      and 2006, no single customer represented more than 10% of the trade receivables
      balance.




22




**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. 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, 2007, we employed a total of 47 sales managers
      and
      sales staff in the Americas with locations in various states. We also employed
      86 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 and providing support to our
      distributors/resellers to promote sales. We participate in major trade shows
      and
      offer support to our distributors who participate in regional trade shows and
      events. We also invest in online and search engine advertising campaigns as
      well
      as a global public relations campaign. In addition to our independent marketing
      efforts, we invest in joint marketing efforts with our distributors, value
      added
      resellers and other companies that have formed strategic alliances with us.




We
      have
      entered into co-marketing arrangements with companies in other complementary
      segments, 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 AppDirectorTM 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;-
              Avaya,
                  Inc.;-
              BEA
                  Systems, Inc.;-
              Comverse;-
              Hewlett
                  Packard Company;-
              IBM,
                  Inc.;-
              InfoSys
                  Technologies Ltd;-
              Microsoft
                  Corporation;-
              Oracle
                  Corporation;-
              Riverbed
                  Technology Inc.;-
              SAP
                  AG.; and-
              Juniper
                  Networks, Inc.




23




However,
      there is no assurance that the above co-marketing and strategic alliance
      agreements would result in a substantial increase in our revenues.




*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 software
      vendors, including Forum Systems, Inc. and Imperva, Inc, 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 139 employees worldwide as of December 31,
      2007, supports our sales force during the sales process, assists our customers
      and distributors with the initial installation, set-up and ongoing support
      of
      our products, trains distributors and customers to use our products and provides
      software updates and product upgrades for our products. In addition, our
      technical team trains and certifies our distributors to provide limited
      technical support in each of the geographical areas in which our products are
      sold, and is directly responsible for remote support. Our Certainty Support
      Program provides offerings which allow customers to automatically get new
      software versions of their products and obtain optimized performance by
      purchasing any of the following five optional offerings: extended warranty,
      software updates, 24x7 help-desk (directly to our customers and through our
      distributors), on-site support and unit replacement.




**Research
      and Development**




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




As
      of
      December 31, 2007, our research and development staff consisted of 216
      employees. Research and development activities take place at our facilities
      in
      Israel and in North Carolina.  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 the Radware
      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.




24




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




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. We entered into agreements with two additional
      suppliers, and in 2007 shifted approximately 10% of our purchases to a second
      supplier. The manufacturing process with these suppliers, who are also ISO
      9001
      certified, is similar to the process with USR. We expect that in 2008 we would
      shift an additional share of our purchases to the third supplier, Nexcom, that
      is the sole manufacturer of the circuit board for our new OnDemand Switch
      platform. To date, since we have only purchased relatively small quantities
      from
      those suppliers, we have no assurance that the our plan to purchase a
      substantial amount from these suppliers will be successful. Therefore, we
      continue to be dependant on USR and may become dependant on Nexcom.




**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®”
and “SIP Director®” and we have trademark applications pending for
“AppDirector”TM, “AppXCelTM”, “SecureFlowTM”, “SOADirectorTM”, “APPXMLTM”, “On Demand
      SwitchTM” and “APSolute VisionTM”. 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 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), 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. For example, F5 acquired Acopia Networks
      and Citrix acquired XenSource to add virtualization to their respective
      portfolios. 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, IBM Corporation became a competitor in the Network Security market
      by acquiring Internet Security Systems (ISS). Competition may result in lower
      prices or reduced demand for our products and a corresponding reduction in
      our
      ability to recover our costs, which may impair our ability to maintain and
      increase profitability. Furthermore, the dynamic market environment, which
      is
      demonstrated by the above acquisitions, poses a challenge in predicting market
      trends and expected growth.




25




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




26




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




27




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.




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




(*)
      Purchased during 2007




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




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




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




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




28




**D.** **Property,
      Plants and Equipment**




*Israel.* Our
      headquarters and principal administrative, finance, research and development
      and
      marketing operations are located in approximately 80,000 square feet of leased
      office space in Tel Aviv, Israel, in two buildings: one, consisting of
      approximately 48,000 square feet, with a lease expiring in November 2012, and
      the other of 32,000 square feet, with a lease expiring in May 2011. Both
      facilities are leased from affiliated companies owned by Messrs. Yehuda and
      Zohar Zisapel. For more information see – “Item 7 - Major Shareholders and
      Related Parties Transactions.” We also lease office space of approximately 5,920
      square feet in a nearby location in Israel from an unaffiliated party.




In
      addition, we lease approximately 6,324 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 2007 was approximately
      $989,000.




*Other
      locations.* In
      the
      United States, we lease approximately 12,382  square
      feet in Mahwah, New Jersey from a company owned by Yehuda and Zohar Zisapel,
      which lease will expire in April 2010. For more information see – “Item 7 -
      Major Shareholders and Related Parties Transactions.” We lease approximately
      6,881 square feet for our research and development facilities in North Carolina,
      which lease 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 the premises in locations outside Israel in 2007
      was
      approximately $1,849,000.




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




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




None.




29




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




**General**




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




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




We
      sell
      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. The
      web channel intelligence technology acquired from Covelight Systems in April
      2007 (“Inflight”) is marketed under the existing APSolute product portfolio
      through direct sales channels and through resellers and distributors in
      subsequent phases.




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




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




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




*Research
      and Development Expenses.* Research
      and development (“R&D”) expenses consist primarily of salaries and related
      personnel expenses, costs of subcontractors and prototype expenses related
      to
      the design, development, quality assurance and enhancement of our products,
      and
      depreciation of equipment purchased for the development and testing processes.
      All research and development costs are expensed as incurred. We believe that
      continued investment in research and development is critical to attaining our
      strategic product objectives and therefore we plan to invest additional
      resources in 2008 in expanding our R&D organization, including new hires and
      purchase of new and advanced testing and development equipment.




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




*General
      and Administrative Expenses.* General
      and administrative expenses consist primarily of salaries and related personnel
      expenses for executive, accounting and administrative personnel, professional
      fees (which include legal, audit, expenses related to the implementation of
      Section 404 of the Sarbanes-Oxley Act of 2002, and additional consulting fees),
      bad debt expenses and other general corporate expenses.




30




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




On
      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).





SFAS
      123(R) requires companies to estimate the fair value of equity-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as an
      expense over the requisite service periods in the Company's consolidated income
      statement. Prior to the adoption of SFAS 123(R), we accounted for equity-based
      awards to employees and directors using the intrinsic value method in accordance
      with APB 25 as allowed under SFAS 123, "Accounting for Stock-Based Compensation"
      ("SFAS 123").




Our
      adoption of SFAS No. 123(R) in 2006 and 2007 resulted in additional operating
      expenses of $4.5 million and contributed 23 cents loss per diluted share in
      each
      of these years. The impact of SFAS 123(R) on our results of operations in future
      period may be affected by our stock price as well as assumptions regarding
      a
      number of complex and subjective variables and the related tax impact. These
      variables include, but are not limited to, the volatility of our stock price,
      expected forfeiture rate and employee stock option exercise patterns.




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. The options expire seven years from the grant date. For details
      on the calculation of the fair market value of the options see note 9 to the
      financial statements.




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




*Taxes.* Israeli
      companies are generally subject to corporate tax on their taxable income at
      the
      rate of 29% for the 2007 tax year and 27% for the 2008 tax year. Following
      an
      amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax
      Ordinance”), which came into effect on January 1, 2006, the corporate tax rate
      is scheduled to decrease as follows: 26% for the 2009 tax year and 25% for
      the
      2010 tax year and thereafter. Israeli companies are generally subject to capital
      gains tax at a rate of 25% for capital gains (other than gains deriving from
      the
      sale of listed securities) derived after January 1, 2003. However, we have
      established an approved enterprise program, 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 to utilize these losses in 2008 and subsequent
      years. We have recorded a deferred tax asset in relation to these losses. Our
      U.S. subsidiary and two other subsidiaries have carry-forward tax losses to
      offset against future taxable profit. We have recorded a deferred tax asset
      in
      relation to these carry-forward tax losses and we anticipate that we will
      utilize part of these tax losses in 2008 and subsequent years. Accordingly,
      we
      have recorded a valuation allowance in connection with the portion of deferred
      tax assets not expected to be utilized. 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 2008 which we anticipate
      to
      be at a rate of up to 10% of our operating income, assuming we are profitable
      in
      2008.




31




*Market
      Trends.* According to IT analyst estimations, the IT market in 2007 continued to grow
      slightly but at a lesser rate than 2006. Thus far in
      2008,
      growth has been slow due to real-estate and financial issues leading to
      recession fears. More specifically, the growth rate of IT expenditure in the
      US
      may decrease somewhat on a year-to-year comparison with estimates by IDC at
      4%
      growth .
      As a
      result of current economic environment, some analysts believe that IT growth
      may
      currently be the lowest since 2004. 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 continue to reduce capital expenditures,
      we
      may experience a reduction in sales, as well as downward pressure on the price
      of our products. In addition, if the market continues to be flat and customers
      continue to experience low visibility we may not be able to increase our sales.
      Each of the above scenarios would have a material adverse effect on our
      business, operating results and financial condition




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
      Acopia Networks and Citrix acquired XenSource to add virtualization to their
      respective portfolios. 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 trade shows and regional industry events; testing
      of
      our products by leading firms in the industry; investment in brand awareness
      and
      online advertising; co-marketing with distributors, resellers and alliances
      and
      similarly 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, customers relationship and
      goodwill. The initial consideration for the acquisition was $9,168,000, out
      of
      which an amount of $9,011,000 was paid in cash; and $148,000 was paid by
      issuance of fully vested warrants to V-Secure to purchase 45,454 ordinary shares
      of the Company. The remaining balance was related to acquisition costs payable.
      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 2007, 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 (earn-out) 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 valuated by management using a third-party
      valuation specialist) based upon their estimated fair values. During 2007,
      no
      impairment loss was recorded in connection with the acquired intangible assets.
      See also note 1f to our Consolidated Financial Statements included in this
      annual report.





32




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




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




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




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




·
            Revenue
                recognition;




·
            Accounting
                for doubtful accounts;




·
            Marketable
                securities;




·
            Inventory
                valuation;




·
            Goodwill
                and intangible assets valuation;




·
            Stock-based
                compensation;




·
            Income
                taxes; and




·
            Legal
                contingencies.




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




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




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




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




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




33




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, 2007, 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,
      2006 and December 31, 2007, no impairment losses have been
      identified.




Debt
      securities are classified as held-to-maturity when we have the intent and
      ability to hold the securities to maturity and are stated at amortized cost.
      The
      amortized cost of held-to-maturity securities is adjusted for amortization
      of
      premiums and accretion of discounts to maturity. Such amortization and decline
      in value judged to be other than temporary and interest are included in
      financial income, net. As of December 31, 2006 no impairment losses have been
      identified. As of December 31, 2007, we did not classify any of our securities
      as held-to-maturity.




*Inventory
      Valuation.* At each
      balance sheet date, we evaluate our inventory balance for excess quantities
      and
      obsolescence. This evaluation includes an analysis of sales levels by product
      and projections of future demand. In addition, we write off inventories that
      are
      considered obsolete. Remaining inventory balances are adjusted to the lower
      of
      cost or market value. If future demand for our old or new products, or market
      conditions are less favorable than our projections, additional inventory
      write-downs may be required and would be reflected in cost of sales for such
      period. During 2006 we did not perform any inventory write-offs. During 2007
      we
      performed inventory write-offs in a total amount of $2.1 million, mainly in
      connection with the anticipated release of our new generation
      platforms.




*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,
      rather than being amortized as previous accounting standards required. Goodwill
      is tested for impairment by comparing the fair value with its carrying value.
      Fair value is determined using discounted cash flows and market multiples.
      During the years ended December 31, 2006 and December 31, 2007 no such
      impairment losses were recorded.




Intangible
      assets are amortized over their useful life using a method of amortization
      that
      reflects the pattern in which the economic benefits of the intangible assets
      are
      consumed or otherwise used up, in accordance with SFAS 142. Acquired technology
      and customer relationships are amortized using the straight-line method over
      an
      estimated period between one to ten years during which benefits are expected
      to
      be received. During 2007, an amount of $929,000 was recorded as amortization
      expenses, included in cost of revenues and sales and marketing expenses. As
      of
      December 31, 2006 and as of December 31, 2007, no impairment losses have been
      identified.





34




*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 and note 9 to the financial statements.





*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, that 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 10 to the 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.




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




*Impact
      of recently issued Accounting Standards*




In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
      157”) which defines fair value, establishes a framework for measuring fair
      value, and expands disclosures about fair value measurements. SFAS 157 applies
      to other accounting pronouncements that require or permit fair value
      measurements and, accordingly, does not require any new fair value measurements.
      SFAS 157 is effective for fiscal years beginning after November 15, 2007 for
      financial assets and liabilities, as well as for any other assets and
      liabilities that are carried at fair value on a recurring basis, and should
      be
      applied prospectively. The adoption of the provisions of SFAS 157 related to
      financial assets and liabilities and other assets and liabilities that are
      carried at fair value on a recurring basis is not anticipated to materially
      impact our consolidated financial position and results of operations.
      Subsequently, the FASB provided for a one-year deferral of the provisions of
      SFAS 157 for non-financial assets and liabilities that are recognized or
      disclosed at fair value in the consolidated financial statements on a
      non-recurring basis. As such, the adoption of SFAS 157 is not expected to have
      any effect on our consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" (“SFAS 159”). Under this Standard,
      we may elect to report financial instruments and certain other items at fair
      value on a contract-by-contract basis with changes in value reported in
      earnings. This election is irrevocable. SFAS 159 provides an opportunity to
      mitigate volatility in reported earnings that is caused by measuring hedged
      assets and liabilities that were previously required to use a different
      accounting method than the related hedging contracts when the complex provisions
      of SFAS 133 hedge accounting are not met. SFAS 159 is effective for years
      beginning after November 15, 2007. Our management has determined that the
      adoption of SFAS 159 will not have a significant impact on our consolidated
      financial statements since it has not elected the fair value option for any
      of
      our existing assets or liabilities as of SFAS 159 effective date.




35




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”),
      Business Combinations. SFAS 141R will change the accounting for business
      combinations. Under SFAS 141R, an acquiring entity will be required to recognize
      all the assets acquired and liabilities assumed in a transaction at the
      acquisition-date fair value with limited exceptions. SFAS 141R will change
      the
      accounting treatment and disclosure for certain specific items in a business
      combination. SFAS 141R applies prospectively to business combinations for which
      the acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. As such, the adoption of SFAS
      141R is not expected to have any effect on our consolidated financial statements
      at this time.




In
      December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
      Consolidated Financial Statements" ("SFAS 160"). SFAS 160 establishes accounting
      and reporting standards for ownership interests in subsidiaries held by parties
      other than the parent, the amount of consolidated net income attributable to
      the
      parent and to the noncontrolling interest, changes in a parent’s ownership
      interest and the valuation of retained noncontrolling equity investments when
      a
      subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements
      that provide sufficient disclosures that clearly identify and distinguish
      between the interests of the parent and the interests of the noncontrolling
      owners. SFAS 160 is effective for fiscal years beginning after December 15,
      2008
      and should be applied prospectively. However, the presentation and disclosure
      requirements of SFAS 160 shall be applied retrospectively for all periods
      presented. As such, the adoption of SFAS 160 is not expected to have any effect
      on our consolidated financial statements.




On
      December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB
      110), which, effective January 1, 2008, amends and replaces SAB 107, Share-Based
      Payment. SAB 110 expresses the views of the SEC staff regarding the use of
      a
      "simplified" method in developing an estimate of expected term of "plain
      vanilla" share options in accordance with FASB Statement No. 123(R), Share-Based
      Payment. Under the "simplified" method, the expected term is calculated as
      the
      midpoint between the vesting date and the end of the contractual term of the
      option. We are currently evaluating the impact of adopting SAB 110.




36




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




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


Year
                  ended
              
              Year
                  ended
              
              Year
                  ended
              
              Year
                  ended
              
              Year
                  endedDecember
                  31,
              
              December
                  31,
              
              December
                  31,
              
              December
                  31,
              
              December
                  31,2003
              
              2004
              
              2005
              
              2006
              
              2007Revenues:Products
              
              
              72.1
              %
              
              76.3
              %
              
              72.1
              %
              
              70.4
              %
              
              67.0
              %Services
              
              
              27.9
              
              
              23.7
              
              
              27.9
              
              
              29.6
              
              
              33.0100.0
              
              
              100.0
              
              
              100.0
              
              
              100.0
              
              
              100.0Cost
                  of Revenues:Products
              
              
              12.8
              
              
              11.8
              
              
              12.0
              
              
              12.6
              
              
              14.8Services
              
              
              5.2
              
              
              6.0
              
              
              7.2
              
              
              6.8
              
              
              6.718.0
              
              
              17.8
              
              
              19.2
              
              
              19.4
              
              
              21.5Gross
                  profit
              
              
              82.0
              
              
              82.2
              
              
              80.8
              
              
              80.6
              
              
              78.5Operating
                  expenses:Research
                  and development, net
              
              
              15.3
              
              
              15.1
              
              
              16.8
              
              
              21.7
              
              
              26.5Sales
                  and marketing
              
              
              54.3
              
              
              46.6
              
              
              51.5
              
              
              61.6
              
              
              65.4General
                  and administrative
              
              
              7.6
              
              
              6.6
              
              
              6.8
              
              
              7.6
              
              
              8.0Total
                  operating expenses
              
              
              77.2
              
              
              68.3
              
              
              75.1
              
              
              90.9
              
              
              100.0Operating
                  profit (loss)
              
              
              4.8
              
              
              13.9
              
              
              5.7
              
              
              (10.3
              )
              
              (21.5
              )Financial
                  income, net
              
              
              6.9
              
              
              6.7
              
              
              6.6
              
              
              9.1
              
              
              8.4Income
                  (loss) before incometaxes
              
              
              11.7
              
              
              20.6
              
              
              12.3
              
              
              (1.2
              )
              
              (13.1
              )Income
                  taxes
              
              
              -
              
              
              (0.5
              )
              
              (0.3
              )
              
              (0.4
              )
              
              (0.5
              )Minority
                  interest in earningsof
                  a subsidiary
              
              
              (0.1
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              
              11.6
              %
              
              20.1
              %
              
              12.0
              %
              
              (1.6
              )%
              
              (13.6
              )%




*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.




37




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, 2005, 2006 and 2007:




**Year Ended**
              **December 31,**
              **2005**
            
            **Year Ended**
              **December 31,**
              **2006**
            
            **Year Ended**
              **December 31,**
              **2007****(in**
              **thousands**
              **of U.S. $)**
            
            **(by**
              **percentage)**
            
            **(in**
              **thousands**
              **of U.S. $)**
            
            **(by**
              **percentage)**
            
            **(in**
              **thousands**
              **of U.S. $)**
            
            **(by**
              **percentage)****North, Central and
                South Americas (principally the United States)**
            
            
            31,900
            
            
            41.1
            %
            
            27,646
            
            
            34.0
            %
            
            24,368
            
            
            27.5
            %**EMEA
                (Europe, the Middle East and Africa)**
            
            
            24,074
            
            
            31.0
            %
            
            27,529
            
            
            33.8
            %
            
            29,412
            
            
            33.2
            %**Asia-Pacific**
            
            
            21,610
            
            
            27.9
            %
            
            26,235
            
            
            32.2
            %
            
            34,851
            
            
            39.3
            %**Total**
            
            
            77,584
            
            
            100
            %
            
            81,410
            
            
            100
            %
            
            88,631
            
            
            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, 2005, 2006 and 2007:





**Year Ended**
              **December 31,**
              **2005**
            
            **Year Ended**
              **December 31,**
              **2006**
            
            **Year Ended**
              **December 31,**
              **2007****(in**
              **thousands**
              **of U.S. $)**
            
            **(by**
              **percentage)**
            
            **(in**
              **thousands**
              **of U.S. $)**
            
            **(by**
              **percentage)**
            
            **(in**
              **thousands**
              **of U.S. $)**
            
            **(by**
              **percentage)****Products**
            
            
            55,902
            
            
            72.1
            %
            
            57,335
            
            
            70.4
            %
            
            59,422
            
            
            67.0
            %**Services**
            
            
            21,682
            
            
            27.9
            %
            
            24,075
            
            
            29.6
            %
            
            29,209
            
            
            33.0
            %**Total**
            
            
            77,584
            
            
            100
            %
            
            81,410
            
            
            100
            %
            
            88,631
            
            
            100
            %





**Executive
      Summary – Year Ended December 31, 2007**





Sales
      in
      2007 were approximately $88.6 million, an increase of 9% compared with sales
      of
      $81.4 million in 2006. In 2007 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 2006, mainly due to a one-time inventory
      write-off in the beginning of 2007. In order to continue to strengthen and
      broaden our product lines we have increased our investments in research and
      development during 2007, 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 sales increased at a lower rate than the increase
      of
      our operating expenses. As a result of the aforementioned, our operating results
      in 2007 reflected a loss of $19.0 million, compared to an operating loss of
      $8.3
      million in 2006. The financial income remained the same as in 2006.




38




In
      2008
      we intend to continue and increase investment in the development of new products
      and directions as well as in the improvement of existing products, to support
      continued growth in our sales and enhancement of market acceptance for our
      offerings, including in the branding and market penetration of the Covelight
      technology which become a part of our product suite starting May 2007. As a
      result our cost of sales, research and development and sales and marketing
      expenses are expected to increase compared to 2007. There is no assurance that
      our investment in new products and market penetration will increase our revenues
      and justify the additional expense.




**Year
      Ended December 31, 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 attribute the
      moderate increase mainly to the restructuring of our American sales team which
      we began implementing in the fourth quarter of 2006 and continued through the
      first half of 2007 due to the need to train new employees, and the time required
      to build customer relationships and sales pipelines. This restructuring
      negatively affected our sales in North America in 2007, 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.




*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. We expect our R&D expenses to increase in
      2008, mainly due to the increase in our R&D personnel in 2007 which affected
      2007 only partially (relatively to the employment period of these new employees
      in 2007) and will affect 2008 fully, due to the continuing devaluation of the
      U.S. dollar against the NIS from the beginning of 2008, due to the recruitment
      of additional personnel and due to salary increases of existing personnel.




*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. We anticipate increasing sales and marketing expenses
      also in 2008 primarily for the purposes of increasing brand awareness and market
      acceptance of our products (by participation in trade shows and seminars,
      testing and certification of our products by leading firms in the industry
      and
      receiving top analysts coverage for our products and strategy).




39




*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.




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




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




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




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




*Sales
      and Marketing Expenses.* Sales
      and marketing expenses were approximately $50.1 million in 2006, an increase
      of
      25% compared with sales and marketing expenses of approximately $40.0 million
      in
      2005. Percentage-wise, the share of sales and marketing expenses of total
      revenues increased from 51.5% in 2005 to 61.6% in 2006. The increase of our
      sales and marketing expenses in 2006 is related to the continued investment
      in
      market acceptance of new products and our next generation APSolute product
      family, and investment in strengthening the sales teams in some of our offices
      in the U.S., Asia-Pacific and EMEA. The increase is also related to the adoption
      for the first time of SFAS No. 123(R) in 2006, which resulted in an additional
      expense of $2.5 million.




40




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




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




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




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




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




Capital
      expenditures for the years ended December 31, 2005, 2006 and 2007 were
      approximately $3.6 million , $5.8 million and $6.7 million, respectively. These
      expenditures were mainly comprised of machinery and equipment, computers, lab
      equipment and testing tools and an ERP system. During 2007 we continued our
      investment in purchasing and implementing a new ERP system which became
      partially operational during 2007. Additional investments related to the
      implementation of the ERP system and to the purchase and implementation of
      additional modules are expected to take place during 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, 2007 was
      approximately $1.1 million compared to net cash provided by operating activities
      of approximately $7.3 million and $13.9 million for the years ended December
      31,
      2006 and 2005, respectively. Net cash provided by operating activities for
      the
      years 2007, 2006 and 2005 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 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 provided by
      operating activities for the year 2005 consisted primarily of net income,
      adjusted for non-cash activity, plus an increase in deferred revenues and other
      payables and accrued expenses, offset by an increase in trade receivables and
      inventories.




Net
      cash
      provided by investing activities was approximately $35.8 million for 2007,
      compared to net cash used in investing activities of approximately $39.8 million
      for 2006, and to net cash provided by investing activities of approximately
      $26.3 million for 2005. 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
      Inc. Cash was used in 2006 mainly for the purchase of marketable securities
      and
      also for purchase of property and equipment, and for the completion of the
      acquisition of V-Secure Technologies Inc., partially offset by the sale and
      redemption of marketable securities and bank deposits. Cash was provided in
      2005
      mainly from redemption of long-term bank deposits which was partially offset
      by
      the purchase of marketable securities and by the acquisition of the business
      of
      V-Secure Technologies Inc. and other property and equipment.




41




Net
      cash
      provided by financing activities was $1.4, $1.6 and $7.3 million for the years
      ended December 31, 2007, 2006 and 2005, respectively, generated from options
      exercised by our employees under the Key Employee Share Option Plans and
      Employee Stock Purchase Plans (see “Item 6 – Directors Senior Management
      and Employees – Key Employee Share Incentive Plan and Employee Stock
      Purchase Plan” *).* In
      2006
      the amount generated from options exercises was nearly fully offset by the
      repurchase of our shares. **




As
      of
      December 31, 2007, we had cash and cash equivalents, including short-term and
      long-term bank deposits and marketable securities of approximately $154.8
      million, as compared to approximately $164.1 million as of December 31, 2006.
      Our capital requirements depend on numerous factors, including market acceptance
      of our products and the resources we allocate to our operating expenses. Since
      our inception, we have experienced substantial increases in our expenditures
      consistent with growth in our operations and personnel, and we may increase
      our
      expenditures in the foreseeable future in order to execute our strategy. We
      anticipate that operating activities as well as capital expenditures will demand
      the use of our cash resources. We believe that cash balances will provide
      sufficient cash resources to finance our operations and the projected expansion
      of our marketing and sales activities and research and development efforts
      for a
      period of no less than the next twelve months.




**Related
      Parties**




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




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




**Impact
      of Inflation and Currency Fluctuations**




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




42


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




**Year ended December 31,**
            
            **Israeli inflation**
              **rate**
            
            **U.S. dollar against**
              **NIS**2003
            
            
            (1.9
            )%
            
            (7.6
            )%2004
            
            
            1.2
            %
            
            (1.6
            )%2005
            
            
            2.4
            %
            
            6.8
            %2006
            
            
            (0.1
            )%
            
            (8.2
            )%2007
            
            
            3.4
            %
            
            (9.0
            )%2008(1)
            
            
            1.6
            %
            
            (15.9
            )%




(1)
      January 1, 2008 through May 31, 2008




We
      cannot
      assure you that we will not be materially and adversely affected in the future
      if inflation in Israel exceeds the devaluation of the NIS against the dollar
      or
      if the timing of the devaluation lags behind inflation in Israel, or if there
      will be a revaluation of the NIS or a revaluation or devaluation of the Euro
      against the U.S. dollar. Because exchange rates between the NIS and the dollar
      and between the Euro, 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.




**Market
      Risk**




We
      do not
      invest in, or otherwise hold, for trading or other purposes, any financial
      instruments subject to market risk, with the exception of the following:




Approximately
      7% of our investment portfolio is invested in a structured deposit with
      guaranteed principal and changing interest. An increase in short-term interest
      rates will negatively affect the income received from this deposit. In April
      2008 the deposit was redeemed by its issuer. This redemption had no material
      effect on our financial income.




Approximately
      48% of our investment portfolio is invested in high-rated marketable securities,
      mainly U.S. government and agency bonds and corporate bonds. Since these
      investments carry fixed interest rates, interest income over the holding period
      is not sensitive to changes in interest rates.




As
      of
      December 31, 2007 we had approximately $9.2 million (approximately 6% of our
      investment portfolio) invested in high-rated Auction Rate Securities. The
      sub-prime and credit market crisis in the United States at the end of 2007
      caused a liquidity problem in connection with such securities. During the first
      few months of 2008 we succeeded in selling the majority of these securities
      and
      as of June 2008, we hold approximately $1.5 million (less than 1% of our
      investment portfolio) in high-rated Auction Rate Securities. We are monitoring
      closely the liquidity of such securities.




We
      currently have no debt.




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




In
      order
      to accommodate the rapidly changing needs of our markets, we place considerable
      emphasis on research and development projects designed to improve our existing
      product lines, develop new product lines and customize our products to meet
      our
      customers’ needs. As of December 31, 2007, we had 216 employees engaged
      primarily in research and development activities, compared to 163 employees
      at
      the end of 2006.




43




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




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




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




**E.**
            **Off-Balance
                Sheet Arrangements**




None.




**F.**
            **Tabular
                Disclosure of Contractual
                Obligations**




The
      following table summarizes our contractual obligations as of December 31, 2007
      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)
              
              
              8,250
              
              
              2,853
              
              
              3,985
              
              
              1,412
              
              
              -Uncertain
                  tax positions(2)
              
              
              287Total
                  contractual cash obligations
              
              
              8,537
              
              
              2,853
              
              
              3,985
              
              
              1,412
              
              
              -




(1)
      Consist of outstanding operating leases for the Company’s facilities. The lease
      agreements expire in the years 2008 to 2012 (some with renewal options). The
      data in this row details our future minimum payments under non-cancelable
      operating lease agreements at December 31, 2007.




(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
      10a 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 for
      our
      subsidiaries’, representative offices’ and branches’ activities, in several
      locations in the United States, Europe and Asia-Pacific. Our aggregate annual
      rent expenses under these leases were approximately $2,838,000 for 2007.




44


**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**Christopher
                McCleary(1)
            
            55
            
            Executive
                Chairman of the Board of DirectorsRoy
                Zisapel(2)
            
            37
            
            Chief
                Executive Officer, President and DirectorMeir
                Moshe
            
            54
            
            Chief
                Financial OfficerVered
                Raviv-Schwarz
            
            39
            
            General
                Counsel and SecretaryChristine
                Aruza
            
            40
            
            VP
                Corporate MarketingAmir
                Peles
            
            36
            
            Chief
                Technology OfficerIlan
                Kinreich
            
            
            
            Chief
                Operating OfficerYuval
                Pemper
            
            37
            
            Vice
                President, Research and DevelopmentYehuda
                Zisapel (3)
            
            65
            
            DirectorZohar
                Gilon (3)(4)(5)(6)
            
            60
            
            DirectorOrna
                Berry(3)(4)(5)(6)(7)
            
            59
            
            DirectorHagen
                Hultzsch (1)(5)(7)
            
            67
            
            DirectorHerbert
                Anderson (2)(5)(6)
            
            69
            
            Director





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


(2)
      Term
      as director expires at the annual meeting of shareholders to be held in
      2010.


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


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


(5)
      Qualified as an independent director, as determined under the Nasdaq
      rules.


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


(7)
      Serves on the Compensation Committee of the Board of Directors.





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


45


**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.




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




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




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




**Ilan
      Kinreich** has
      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.




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




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


46





**Dr.
      Hagen Hultzsch** has
      served as a director since January, 2005. Dr. Hultzsch served on the Board
      of
      Management of Deutsche Telekom AG from 1993 until 2001. Since 2001, Dr.
      Hultzsch has served on the Boards or Advisory Boards of
      several companies and academic institutions. Dr. Hultzsch serves as a
      Board Member of the following companies: TranSwitch Corporation Inc.,
      SCM-Microsystems Inc., Living-e AG 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., Syncho Ltd.,
      PayoneerInc. and RADVentures, an investment fund for RAD Data Communications
      employees. Mr. Gilon holds a B.Sc. degree in electrical engineering from the
      Technion, Israel Institute of Technology, and an M.B.A. degree from Tel Aviv
      University.




**Dr.
      Orna Berry** has
      served as a director since October 2006. Dr Berry has been a Venture
      Partner in Gemini Israel funds since August 2000. Since
      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.




**Herbert
      Anderson** has served as a director since January 2007. Mr. Anderson
      served as Corporate Vice President of Northrop Grumman Corporation and President
      of Northrop Grumman Information Technology until his retirement in 2004. Mr.
      Anderson first joined Northrop in 1984 as Vice President of Information
      Resources Management for the company's former B-2 division, after holding senior
      management positions with the Western Gear, McGraw-Edison and Eaton
      corporations. Mr. Anderson is a former member of the President's National
      Security Telecommunications Advisory Committee and of the Secretary of the
      Air
      Force Advisory Group, and a former board member of the Professional Services
      Council and the United Services Organization. Mr. Andersen holds a B.S. degree
      in business management from the University of Wisconsin.




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




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




**Family
      Relationships**




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.


47


**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, 2007. 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*
            
            $
            1,974,000
            
            $
            164,000




*
      In
      addition to including the costs incurred for the 13 directors and officers
      includes fees and benefits incurred in relation to a former director (Professor
      Liora Katzenstein) and an officer (Mr. Larry Marino) who left the Company during
      2007.




As
      of
      June 10, 2008 our directors and officers as a group, consisting of 13 persons,
      held options to purchase an aggregate of 1,919,000 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
      2007, we granted to our directors and officers options to purchase 1,027,500
      ordinary shares, in the aggregate, at a weighted average exercise price of
      $15.01. The options expire between sixty-two months to eighty-four months after
      grant.




*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 Office’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 will be based on
      achievement of target revenue, and 25% of the bonus will be based on improving
      profitability by at least 10% compared to the 2008 annual
      budget.


48


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
      seven 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
                III
            
            2008
            
            Christopher
                McCleary, Hagen HultzschClass
                I
            
            2009
            
            Yehuda
                ZisapelClass
                II
            
            2010
            
            Roy
                Zisapel, Herbert Andersen




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.


49


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.




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.


50


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




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




**Board
      Meetings**




Our
      Board
      of Directors met 7 times during 2007 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 Herbert Anderson
      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 is an “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 7 times during fiscal year 2007 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;


51


·
            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 6 times
      during fiscal year 2007 and all members attended at least 75% of the meetings.
      On March 8, 2005, our compensation committee adopted a charter, which sets
      forth
      the committee’s responsibilities. Pursuant to the charter, the compensation
      committee is authorized to make decisions regarding executive compensation
      and
      terms and conditions of employment, to follow
      market trends and provide recommendations to the Board of Directors in
      connection with the Company’s general compensation philosophy and policies, as
      well
      as to recommend that the Board of Directors issue options under our stock option
      plans . The
      Compensation Committee specifically approves and reviews, on behalf of the
      Board
      of Directors, the amounts and types of compensation to be paid to the Company’s
      executive officers and non-employee directors.




**Nomination
      of Directors**




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




**Internal
      Auditor**




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


52


**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.


53




*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 generally, including our executive officers, sign standard
      written employment agreements, which include confidentiality and non-compete
      provisions. The employees in our subsidiaries sign employment agreements which
      differ according to the country in which they are located.




As
      of
      December 31, 2007, we had 593 employees worldwide, of whom 276 ** were
      based in Israel, 138 were based in the United States and 179 were based in
      our
      other subsidiaries and offices. Of these 593 employees, 216 were employed in
      research and development, 297 were employed in sales, technical support,
      business development and marketing, and 80 were employed in management,
      operations and administration. As of December 31, 2006, we had 475 employees
      worldwide, of whom 229 ** were
      based in Israel, 96 were based in the United States and 150 were based in our
      other subsidiaries and offices, and as of December 31, 2005, we had 432
      employees worldwide, of whom 191 ** were
      based in Israel, 118 were based in the United States and 123 were based in
      our
      other subsidiaries and offices.




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.


54


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




**Share
      Ownership**




The
      following table sets forth certain information regarding the beneficial
      ownership of our ordinary shares by our directors and officers as of June 10,
      2008. The percentage of outstanding ordinary shares is based on 19,803,244
      ordinary shares outstanding as of June 10, 2008.




**Name**
            
            **Number of ordinary**
              **shares**
            
            **Percentage of outstanding**
              **ordinary shares**Yehuda Zisapel
            
            
            3,045,218
            (1)
            
            15.33
            %Roy
                Zisapel
            
            
            1,028,841
            (2)
            
            5.09
            %All
                directors and executive officers as a group (13 persons)
                (3)(4)
            
            
            4,469,763
            
            
            21.81
            %




(1)  Consists
      of 2,985,218 shares, of which 295,000 are held by Carm-AD Ltd., and 239,491
      are
      held by Radbit, Inc., both companies are owned and controlled by Yehuda Zisapel,
      and 60,000 options which are fully vested at the date of this Annual
      Report.




(2) Consists
      of 628,841 shares and 400,000 options which are fully vested or will be vested
      in the 60 days following the date of this Annual Report. In addition to the
      position stated in the table, Mr. Roy Zisapel is the beneficiary of a trust
      that, as of May 2006, the date on which the trust was established by him, held
      229,142 ordinary shares. The trust is irrevocable and is scheduled to expire
      in
      May 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) Consists
      of 3,780,388 shares and 689,375 options which are fully vested or which will
      be
      fully vested within the next 60 days.




(4)
      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.




**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 Nasdaq and
      applicable to listed companies. Rule 4350 of the NASDAQ Marketplace Rules
      imposes various corporate governance requirements on listed securities. Section
      (a)(1) of Rule 4350 provides that foreign private issuers are required to comply
      with certain specific requirements of Rule 4350, but, as to the balance of
      Rule
      4350, foreign private issuers may comply with the laws of their home
      jurisdiction in lieu of the requirements of such sections of Rule 4350.




We
      have
      chosen to follow the rules of our home jurisdiction, the Israeli Companies
      Law,
      in lieu of the requirements of (i) Rule 4350 (i)(1) ( b) regarding the
      requirement to distribute an annual report to our shareholders prior to our
      annual meeting of shareholders ;
      (ii)
      Rule 4350 **(** i)(1) **** ( A) relating
      to the solicitation of shareholder approval prior to the issuance of designated
      securities when a stock option or purchase plan is to be established or
      materially amended; and (iii) Rule 4350(l) relating to the direct
      registration program. These requirements of Rule 4350 are not required under
      the
      Israeli Companies Law.




**Key
      Employee Share Incentive Plan**




In
      June
      1997, we adopted our Key Employee Share Incentive Plan. Options granted pursuant
      to our share option plan are for a term of sixty-two months from the date of
      the
      grant of the option. As of December 31, 2007, 9,937,236 ordinary shares have
      been reserved for option grants under the plan, of which we have granted options
      to purchase 8,959,432 ordinary shares, at a weighted average exercise price
      of
      $11.43 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.


55


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.


56


**Directors
      and Consultants Option Plan**




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




**ITEM
                7.**
            **MAJOR
                  SHAREHOLDERS AND RELATED PARTY
                  TRANSACTIONS**




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




The
      following table sets forth certain information regarding the beneficial
      ownership of our ordinary shares as of June 10, 2008, 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)
            
            
            3,045,218
            
            
            15.33
            %Roy
                Zisapel (2)
            
            
            1,028,841
            
            
            5.09
            %FMR
                Corp. (3)
            
            
            1,936,865
            
            
            9.78
            %P.A.W.
                Capital Corp. (4)
            
            
            1,006,400
            
            
            5.08
            %Rima
                Management, LLC (5)
            
            
            1,068,413
            
            
            5.39
            %Ergates
                Capital Management, LLC (6)
            
            
            1,003,270
            
            
            5.07
            %




(1)
      Includes 295,000  ordinary
      shares owned of record by Carm-AD Ltd., an Israeli company, which is controlled
      by Yehuda Zisapel, 239,491 ordinary shares owned of record by Radbit, Inc.,
      a
      company organized under the laws of New-York, which is controlled by Yehuda
      Zisapel and 60,000 options which are fully vested at the date of this Annual
      Report. This information is based on Mr. Zisapel’s notification to our Corporate
      Secretary dated June 10, 2008.




(2)
      Includes 628, 841 shares and 400,000 options which are fully vested or will
      be
      vested in the 60 days following the date of this Annual Report. In addition
      to
      the position stated in the table, Mr. Roy Zisapel is the beneficiary of a trust
      that, as of May 2006, the date on which the trust was established by him, held
      229,142 ordinary shares. The trust is irrevocable and is scheduled to expire
      in
      May 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. This information is based
      on Mr. Zisapel’s notification to our Corporate Secretary dated June 10,
      2008.




(3)
      Includes shares beneficially owned by Fidelity Management & Research
      Company, a wholly owned subsidiary of FMR Corp., as a result of acting as an
      investment advisor to various investment companies registered under Section
      203
      of the Investment Company Act of 1940, shares beneficially owned by Pyramis
      Global Advisors, LLC, an indirect wholly owned subsidiary of FMR Corp., and
      a an
      investment advisor registered under Section 203 of the Investment Company Act
      of
      1940, as a result of its serving as an investment manager of institutional
      accounts, non-U.S. mutual funds or investment companies registered under Section
      8 of the Investment Company Act of 1940 owning such shares, and 2,700 shares
      are
      held by Fidelity International Limited, an investment advisor to various
      investment companies, and various foreign-based subsidiaries. Edward C. Johnson
      3d and FMR LLC, through their control of Fidelity Management & Research
      Company and Pyramis Global Advisors, LLC, have sole power to vote their shares
      of Pyramis Global Advisors and to dispose of the shares owned by Fidelity
      Management & Research Company. This information is based on FMR’s last filed
      form 13G/A dated February 14, 2008 and FMR’s notification to our Corporate
      Secretary dated May 22, 2008.




(4)
      Shares are beneficially owned by P.A.W., Capital Corp., a Delaware corporation,
      and Peter W. Write, President of P.A.W. Capital Corp. This information is based
      on the PAW’s Schedule 13G filed with the SEC on March 3, 2008.




(5)
      This
      information is based on Rima’s Schedule 13G filed with the SEC on February 14,
      2008.




(6)
      This
      information is based on Ergate’s Schedule 13G filed with the SEC on January 10,
      2008.


57




**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 May
      22,
      2008, there were 41 holders of record of our ordinary shares, of which 22 record
      holders, holding approximately 13.89% of our ordinary shares, had registered
      addresses in Israel **,** and of
      which 17 record holders, holding approximately 86.11% 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
      86.10% 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 $800,000 in 2007.
      During 2007 we purchased from members of the RAD-Bynet Group computer and
      testing equipment in the amount of $948,000.




**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 48,000 square feet, plus storage and parking space. The monthly
      rent amounts to approximately $51,000. The lease expires in November 2012.
      The
      second location consists of two floors in the Or Tower in Tel Aviv, Israel
      with
      approximately 32,000 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 approximately 6,324 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
      $2,000. We entered into an agreement with RAD Data Communications, Inc., a
      company controlled by Yehuda and Zohar Zisapel, pursuant to which we will lease
      approximately 12,382  square
      feet in Mahwah, New Jersey, consisting of 8,121 square feet of office space
      and
      4,261  square
      feet of warehouse space, in consideration for monthly rent of approximately
      $17,000 (including taxes, electricity and management fees). The lease expires
      on
      April 20, 2010.


58


**Distribution
      Agreement**




Bynet
      Data Communications Ltd., a member of the RAD-Bynet Group, distributes our
      products in Israel on a non-exclusive basis. We have a written distributor
      agreement with Bynet Data Communications Ltd., according to which we provide
      them with discounts similar to the discounts provided to third-party
      distributors in the region in the ordinary course of business. The total sales
      to Bynet Data Communications amounted to $4,184,000 during 2007.




**Compensation
      of Chief Executive Officer**




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




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




Not
      applicable.




**ITEM
                8.**
            **FINANCIAL
                  INFORMATION**




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




See
“Item
      18 - Financial Statements”.




**A.7. 
      Legal Proceedings**




In
      December 2001, we, our Chairman Yehuda Zisapel, our President, Chief Executive
      Officer and Director Roy Zisapel and our Chief Financial Officer Meir Moshe
      (the
“Individual Defendants”) and several underwriters in the syndicates for our
      September 30, 1999 initial public offering and January 24, 2000 secondary
      offering, were named as defendants in a class action complaint alleging
      violations of the federal securities laws in the United States District Court
      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.


59


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 amended complaints included 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. We are awaiting a decision
      from the district court on the class certification motion. Due to the inherent
      uncertainties of litigation, we cannot accurately predict the ultimate outcome
      of the matter. Should we be 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 three separate
      litigation proceedings before the Boulogne-Billancourt Employment Tribunal,
      brought against the subsidiary by three of its former employees claiming damages
      in connection with their dismissal. The hearings with respect to two of these
      matters are scheduled for October 23, 2008 and April 30, 2009. With respect
      to
      the third employee, there is no date scheduled for the hearing. At this stage
      we
      cannot asses the outcome or the risks associated with these three matters but
      in
      any event we do not expect them to have a material affect on our financial
      results and operations.




**Dividend
      Distribution Policy**




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




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




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


60




**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”.




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:




**Annual
                  High and**
                **Low**
              
              **Nasdaq Global Select Market**
              
              **Tel Aviv Stock Exchange****High**
              
              **Low**
              
              **High**
              
              **Low****2003**
              
              $
              28.54
              
              $
              7.97
              
              
              —
              
              
              —**2004**
              
              $
              32.42
              
              $
              14.94
              
              
              NIS118.00
              
              
              NIS
                  69.60**2005**
              
              $
              26.56
              
              
              ִ$
                  15.19
              
              
              NIS
                  115.00
              
              
              NIS
                  67.93**2006**First
                  Quarter
              
              $
              21.49
              
              $
              17.63
              
              
              NIS
                  101.10
              
              
              NIS
                  84.49Second
                  Quarter
              
              $
              16.60
              
              $
              12.84
              
              
              NIS
                  82.22
              
              
              NIS
                  58.21Third
                  Quarter
              
              $
              14.40
              
              $
              11.44
              
              
              NIS
                  63.00
              
              
              NIS
                  50.43Fourth
                  Quarter
              
              $
              16.14
              
              $
              13.60
              
              
              NIS
                  67.13
              
              
              NIS
                  59.13ANNUAL
              
              $
              21.49
              
              $
              11.44
              
              
              NIS
                  101.10
              
              
              NIS
                  50.43**2007**First
                  Quarter
              
              $
              15.62
              
              $
              12.84
              
              
              NIS
                  67.97
              
              
              NIS
                  55.24Second
                  Quarter
              
              $
              14.60
              
              $
              12.31
              
              
              NIS
                  61.97
              
              
              NIS
                  49.73Third
                  Quarter
              
              $
              16.05
              
              $
              12.94
              
              
              NIS
                  64.62
              
              
              NIS
                  53.68Fourth
                  Quarter
              
              $
              16.92
              
              $
              12.72
              
              
              NIS
                  67.33
              
              
              NIS
                  49.64ANNUAL
              
              $
              16.92
              
              $
              12.31
              
              
              NIS
                  67.97
              
              
              NIS
                  49.64


61


**Most
                  recent six months****2008**June*
              
              $
              9.90
              
              $
              9.76
              
              
              NIS
                  32.90
              
              
              NIS
                  32.39May
              
              $
              10.05
              
              $
              9.44
              
              
              NIS
                  34.23
              
              
              NIS
                  31.82April
              
              $
              10.93
              
              $
              9.50
              
              
              NIS
                  39.72
              
              
              NIS
                  31.72March
              
              $
              11.98
              
              $
              10.19
              
              
              NIS
                  43.74
              
              
              NIS
                  34.51February
              
              $
              13.95
              
              $
              12.23
              
              
              NIS
                  51.15
              
              
              NIS
                  44.10January
              
              $
              14.84
              
              $
              12.90
              
              
              NIS
                  59.40
              
              
              NIS
                  48.01**2007**December
              
              $
              15.40
              
              $
              12.72
              
              
              NIS
                  59.50
              
              
              NIS
                  49.64




*Through
      June 10, 2008




**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” and on the Tel Aviv Stock Exchange.




**D.  
       Selling** **Shareholders**




Not
      applicable.




**E.    
      Dilution**




Not
      applicable.




**F.    
      Expenses** **of
      the Issue**




Not
      applicable.


62




**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.


63


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




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




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




**Restrictions
      on Non-Israeli Residents**




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


64


**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.


65




**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.
  66
  *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.
  67
  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.
  *General
        Corporate Tax Structure*
  Generally,
        Israeli companies are subject to “Corporate Tax” on their taxable income at the
        rate of 29% for the 2007 tax year and 27% for the 2008 tax year **.** Following
        an amendment to the Tax Ordinance), which came into effect on January 1,
        2006,
        the Corporate Tax rate is scheduled to decrease as follows: in 2009 - 26%
        and in
        2010 and thereafter - 25%. Israeli companies are generally subject to Capital
        Gains Tax at a rate of 25% for capital gains (other than gains deriving from
        the
        sale of listed securities) derived after January 1, 2003. However, the effective
        tax rate payable by a company which derives income from an approved enterprise
        (as further discussed below) may be considerably less.
  *Tax
        Benefits Under the Law for the Encouragement of Capital Investments,
        1959* ****
  ***The
        law before the amendment of 2005***
  The
        Law
        for the Encouragement of Capital Investments, 1959, as in effect prior to
        April
        1, 2005 (the “Investments Law”), provided that a proposed capital investment in
        eligible facilities may, upon application to the Investment Center of the
        Ministry of Industry and Commerce of the State of Israel, be designated as
        an
        approved enterprise. The Investment Center based its decision as to whether
        or
        not to approve an application, among other things, on the criteria set forth
        in
        the Investments Law and regulations, the then prevailing policy of the
        Investment Center, and the specific objectives and financial criteria of
        the
        applicant. Each certificate of approval for an approved enterprise relates
        to a
        specific investment program delineated both by its financial scope, including
        its capital sources, and by its physical characteristics, e.g *.* ,
        the
        equipment to be purchased and utilized pursuant to the program.
  The
        Investments Law provides that an approved enterprise is eligible for tax
        benefits on taxable income derived from its approved enterprise programs.
        The
        tax benefits under the Investments Law also apply to income generated by
        a
        company from the grant of a usage right with respect to know-how developed
        by
        the approved enterprise, income generated from royalties, and income derived
        from a service which is auxiliary to such usage right or royalties, provided
        that such income is generated within the approved enterprise’s ordinary course
        of business. If a company has more than one approval or only a portion of
        its
        capital investments are approved, its effective tax rate is the result of
        a
        weighted average of the applicable rates. The tax benefits under the Investments
        Law are not, generally, available with respect to income derived from products
        manufactured outside of Israel. In addition, the tax benefits available to
        an
        approved enterprise are contingent upon the fulfillment of conditions stipulated
        in the Investments Law and regulations and the criteria set forth in the
        specific certificate of approval, as described above. In the event that a
        company does not meet these conditions, it would be required to refund the
        amount of tax benefits, plus a consumer price index linkage adjustment and
        interest.
  68
  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.
  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.
  69
  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.” ****
  In
        2004,
        the Company began to utilize the above mentioned tax benefits, and they are
        scheduled to gradually expire through 2013. As of December 31, 2007, retained
        earnings included approximately $25,000,000 in tax-exempt income earned by
        the
        Company’s ”Approved Enterprise”. The Company has decided not to declare
        dividends out of such tax-exempt income. Accordingly, no deferred income
        taxes
        have been provided on income attributable to the Company’s ”Approved
        Enterprise”.
  If
        the
        retained tax-exempt income is distributed, it would be taxed at the corporate
        tax rate applicable to such profits as if the Company had not elected the
        alternative tax benefits (currently between 10% - 25%) and an income tax
        liability of up to $6,250,000 would be incurred.
  Income
        from sources other than the “Approved Enterprise” will be subject to the tax at
        the regular rate.
  During
        2004, the Company's production facilities in Israel (Tel Aviv and Jerusalem)
        were granted an expansion program to its Approved Enterprise status by the
        Investment Center. The Company applied for an amendment to this expansion
        program, according to which it requested an enlargement to this expansion
        program, neutralization of certain assets and an approval that the benefits
        period from such expansion program will commence in 2006. The Investment
        Center
        granted temporary approval for the year 2006.
  **The
        2005 Amendment to the Investments Law**
  An
        amendment to the Investments Law, which was published on April 1, 2005 (the
        “Amendment”), has changed certain provisions of the Law. As a result of the
        Amendment, a company is no longer obliged to acquire Approved Enterprise
        status
        in order to receive the tax benefits previously available under the Alternative
        Benefits provisions, and therefore generally there is no need to apply to
        the
        Investment Center for this purpose. (Approved Enterprise status remains
        mandatory for companies seeking grants.) Rather, the Company may claim the
        tax
        benefits offered by the Investments Law directly in its tax returns, provided
        that its facilities meet the criteria for tax benefits set out by the Amendment.
        A company is also granted a right to approach the Israeli Tax Authority for
        a
        pre-ruling regarding their eligibility for benefits under the
        Amendment.
  70
 
 Tax
        benefits are available under the Amendment to production facilities (or other
        eligible facilities), which are generally required to derive more than 25%
        of
        their business income from export (referred to as a “Benefited Enterprise”). In
        order to receive the tax benefits, the Amendment states that the company
        must
        make an investment in the Benefited Enterprise exceeding a certain percentage
        or
        a minimum amount specified in the Investments Law. Such investment may be
        made
        over a period of no more than three years ending at the end of the year in
        which
        the company requested to have the tax benefits apply to the Benefited Enterprise
        (the ”Year of Election”). Where the company requests to have the tax benefits
        apply to an expansion of existing facilities, then only the expansion will
        be
        considered a Benefited Enterprise and the company’s effective tax rate will be
        the result of a weighted combination of the applicable rates. In this case,
        the
        minimum investment required in order to qualify as a Benefited Enterprise
        is
        required to exceed a certain percentage or a minimum amount of the company’s
        production assets before the expansion.
 
 The
        duration of tax benefits is subject to a limitation of the earlier of 7 to
        10
        years from the commencement year, or 12 years from the first day of the Year
        of
        Election. The tax benefits granted to a Benefited Enterprise are determined,
        as
        applicable to its geographic location within Israel, according to one of
        the
        following new tax routes, which may be applicable to us:
  ·
              Similar
                  to the currently available alternative route, exemption from corporate
                  tax
                  on undistributed income for a period of two to ten years, depending
                  on the
                  geographic location of the Benefited Enterprise within Israel,
                  and a
                  reduced corporate tax rate of 10% to 25% for the remainder of the
                  benefits
                  period, depending on the level of foreign investment in each year.
                  Benefits may be granted for a term of seven to ten years, depending
                  on the
                  level of foreign investment in the company. If the company pays
                  a dividend
                  out of income derived from the Benefited Enterprise during the
                  tax
                  exemption period, such income will be subject to corporate tax
                  at the
                  applicable rate (10%-25%). The company is required to withhold
                  tax at the
                  source at a rate of 15% from any dividends distributed from income
                  derived
                  from the Benefited Enterprise; and
  ·
              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.
  71
  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.
  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
        2008.
  On
        March
        6, 2008, an amendment to the Inflationary Adjustments Law came into force
        (“ **the
        Amendment** ”).
        Pursuant to the 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.
  72
  *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).
  The
        tax
        basis of our 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.
  73
  *Taxation
        of Dividends paid to Non-Resident Holders of Shares*
  Non-residents
        of Israel are subject to income tax on income accrued or derived from sources
        in
        Israel. Such sources of income include passive income such as dividends.
        On
        distributions of dividends other than bonus shares, or stock dividends, income
        tax is withheld at the source at the rate of 20%, or 25% for a shareholder
        that
        is considered a “significant shareholder” at any time during the 12-month period
        preceding such distribution, unless a different rate is provided in a treaty
        between Israel and the shareholder’s country of residence. However, under the
        Investments Law, dividends generated by an Approved Enterprise (or Benefited
        Enterprise) are taxed at the rate of 15%.
  Under
        the
        U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of
        ordinary shares who is a Treaty U.S. Resident is 25%. However, 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.”
  **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:
  ·
              A
                  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 shareholders that are subject to special treatment, including
        holders that:
  ·
              Are
                  broker-dealers or insurance companies;
  ·
              Have
                  elected mark-to-market accounting;
  74
  ·
              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.
  **Each
        holder of our ordinary shares is advised to consult such person’s own tax
        advisor with respect to the specific tax consequences to such person of
        purchasing, holding or disposing of our ordinary shares, including the
        applicability and effect of federal, state, local and foreign income tax
        and
        other tax laws in such person’s particular circumstances.**
  *Taxation
        of Ordinary Shares*
  *Taxation
        of Dividends Paid On Ordinary Shares.* Subject
        to the discussion below under “Passive Foreign Investment Company Status”, a
        U.S. Holder will be required to include in gross income as dividend income
        the
        amount of any distribution paid on our ordinary shares, including any 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.
  75
  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.
  *Taxation
        of the Disposition of Ordinary Shares.* Subject
        to the discussion below under “Passive Foreign Investment Company Status,” upon
        the sale, exchange or other disposition of our ordinary shares, a U.S. Holder
        will recognize capital gain or loss in an amount equal to the difference
        between
        such U.S. Holder’s basis in such ordinary shares, which is usually the cost of
        such shares, and the amount realized on the disposition. A U.S. Holder that
        uses
        the cash method of accounting calculates the U.S. dollar value of the proceeds
        received on the sale as of the date that the sale settles, while a U.S. Holder
        that uses the accrual method of accounting is required to calculate the value
        of
        the proceeds of the sale as of the “trade date,” unless such U.S. Holder has
        elected to use the settlement date to determine its proceeds of sale. Capital
        gain from the sale, exchange or other disposition of our ordinary shares
        held
        more than one year is long-term capital gain, and is eligible for a reduced
        rate
        of taxation for individuals. Gains recognized by a U.S. Holder on a sale,
        exchange or other disposition of our ordinary shares will be treated as 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 nonresident aliens) would be denied the
        normally-available step-up in basis for such shares to fair market value
        at the
        date of death and, instead, would have a tax basis in such shares equal to
        the
        decedent’s basis, if lower.
  76
  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 with respect to the entire
        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 IRS.
  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, would be treated as ordinary income.
        Any
        loss under this computation, and any loss on an actual disposition of the
        ordinary shares, 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 United States Internal Revenue Service (“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 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.  The IRS and the courts, however, have accepted other
        valuation methods in certain valuation contexts.  For our 2007 taxable
        year, the average percentage of our passive assets to the fair market value
        of
        our total assets was slightly below 50% under the market capitalization
        approach. Therefore, we believe that under the market capitalization approach
        we
        should not be classified as a PFIC for 2007. However, there can be no assurance
        that the IRS will not challenge this treatment. It is possible that the IRS
        will attempt to treat us as a PFIC for 2007 or possibly prior taxable years.
        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 2008 or in subsequent taxable years.
  77
  Although
        a U.S. Holder normally is not permitted to make a retroactive QEF election
        for a
        foreign corporation, a retroactive election may be made for a taxable year
        of
        the U.S. Holder (the “retroactive election year”) if the U.S. Holder (i)
        reasonably believed that, as of the date the QEF election was due, the foreign
        corporation was not a PFIC for its taxable year that ended during the
        retroactive election year and (ii) filed a protective statement with respect
        to
        the foreign corporation, applicable to the retroactive election year, in
        which
        the U.S. Holder described the basis for its reasonable belief and extended
        the
        period of limitation on the assessment of taxes determined under Sections
        1291
        through 1298 of the Code with respect to the foreign corporation (PFIC related
        taxes) for all taxable years of the shareholder to which the protective
        statement applies.
  **U.S.
        Holders are urged to consult their tax advisors about the PFIC rules, including
        eligibility for and the manner and advisability of making, the QEF election
        (or
        a “protective” QEF election) or the mark-to market
        election.**
  *Tax
        Consequences for Non-U.S. Holders of Ordinary Shares*
  Except
        as
        described in “Information Reporting and Back-up Withholding” below, a Non-U.S.
        Holder of ordinary shares will not be subject to U.S. federal income or
        withholding tax on the payment of dividends on, and the proceeds from the
        disposition of, ordinary shares, unless, 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 Back-up 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.
  78
  Non-U.S.
        Holders generally are not subject to information reporting or back-up
        withholding with respect to dividends paid on, or the proceeds from the
        disposition of, ordinary shares, provided that such Non-U.S. Holder provides
        a
        taxpayer identification number, certifies to its foreign status, or otherwise
        establishes an exemption.
  **F.
        Dividends and Paying Agents**
  Not
        applicable.
  **G.
        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.
  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.
        SubsidiaryInformation
  Not
        applicable.
  79
  **ITEM
                  11.**
              **QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET
                    RISK**
  We
        are
        exposed to market risk, including movements in interest rates and foreign
        currency exchange rates. Our primary market risk exposure occurs because
        we
        generate most of our revenues in U.S. dollars and incur a portion of our
        expenses in NIS and in Euro. In 2004 we began selling to some European countries
        in Euro.
  We
        do not
        presently engage in any hedging or other transactions intended to manage
        risks
        relating to foreign currency exchange rate or interest rate fluctuations.
        As of
        December 31, 2007, we did not own any market risk sensitive instruments,
        except
        for the following:
  As
        of
        December 31, 2007, approximately 7% of our investment portfolio is invested
        in a
        structured deposit with guaranteed principal and changing interest. An increase
        in short-term interest rates will negatively affect the income received from
        this deposit. In April 2008 the deposit was redeemed by its issuer. This
        redemption had no material effect on our financial income. We may in the
        future
        undertake hedging or other similar transactions or invest in market risk
        sensitive instruments if our management determines that it is necessary to
        offset these risks. As of the date of this report no such transactions or
        investments were taken.
  Approximately
        48% of our investment portfolio is invested in high-rated marketable securities,
        mainly U.S. government and agency bonds and corporate bonds. Since these
        investments carry fixed interest rates, interest income over the holding
        period
        is not sensitive to changes in interest rates.
  As
        of
        December 31, 2007 we had approximately $9.2 million (approximately 6% of
        our
        investment portfolio) invested in high-rated Auction Rate Securities. The
        sub-prime and credit market crisis in the United States at the end of 2007
        caused a liquidity problem in connection with such securities. During the
        first
        few months of 2008 we succeeded in selling the majority of these securities
        and
        as of June 2008, we hold approximately $1.5 million (less than 1% of our
        investment portfolio) in high-rated Auction Rate Securities. We cannot assess
        the liquidity of such securities in the short term.
  **ITEM
                  12.**
              ********DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY
                  SECURITIES****
  Not
        applicable.
  80
  **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, 2007. Based on this evaluation, our Chief
        Executive Officer and Chief Financial Officer concluded that, as of December
        31,
        2007, 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.
  81
  **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, 2007. 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, 2007 based on these
        criteria.
 
 The
        effectiveness of our internal control over financial reporting as of December
        31, 2007, 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, 2007.
  82
  **c.**  **Attestation
        Report of the Registered Public Accounting Firm**
  This
        Annual Report on Form 20F 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 on Form 20-F, 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.
  **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.
  83
  **ITEM
                16C.**
              **PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES**
  In
        the
        annual meeting held on July 10, 2007 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
                
                2006(US$
                    in thousands)Audit
                    Fees
                
                
                144
                
                
                53
                %
                
                108
                
                
                80
                %Audit-Related
                    Fees
                
                
                -
                
                
                -
                
                
                20
                
                
                15
                %Tax
                    Fees
                
                
                129
                
                
                47
                %
                
                7
                
                
                5
                %All
                    Other Fees
                
                
                -
                
                
                -
                
                
                -
                
                
                -**Total**
                ****
                ****
                **273**
                ****
                ****
                **100**
                **%**
                ****
                **135**
                ****
                ****
                **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 2007 fiscal year for non-audit services
        in
        certain categories, unless pre- approved. Our Director of Legal Affairs and
        Director of Finance review all individual management requests to engage our
        independent auditors as a service provider in accordance with this catalog
        and,
        if the requested services are permitted pursuant to the catalog, approve
        the
        request accordingly. We inform the Audit Committee about these approvals
        on a
        quarterly basis. Services that are not included in the catalog require
        pre-approval by the Audit Committee on a case-by-case basis. Our Audit Committee
        is not permitted to approve any engagement of our auditors if the services
        to be
        performed either fall into a category of services that are not permitted
        by
        applicable law or the services would be inconsistent with maintaining the
        auditors' independence.
  84
  **ITEM
        16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
        COMMITTEES**
 None.
  **ITEM
        16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS**
 
 None.
  85
  **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.
  86
  **ITEM
        19.** **EXHIBITS**
  The
        exhibits filed with or incorporated into this annual report are listed on
        the
        index of exhibits below.
  Exhibit
                  No.
              
              Exhibit1.1
              
              Memorandum
                  of Association(A)1.2
              
              Articles
                  of Association(B)1.3
              
              Amendment
                  to the Articles of Association (C)4.1
              
              Lease
                  Agreement for the Company’s Headquarters (B)4.2
              
              Lease
                  Agreement for the Company’s Mahwah office (D)4.3
              
              Distributor
                  Agreement with Bynet Data Communications Ltd. (D)4.4
              
              Form
                  of Directors and Officers Indemnity Deed (D)4.5
              
              Asset
                  Purchase Agreement with V-Secure Technologies (U.S.) Inc.
                  (E)4.6
              
              Agreement
                  and Plan of Merger by and Between the Company, its subsidiary,
                  Covelight
                  and its stockholders and note-holders (F)8.1
              
              List
                  of Subsidiaries10.1
              
              Consent
                  of Independent Auditors12.1
              
              Certification
                  of the Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200212.2
              
              Certification
                  of the Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200213.1
              
              Certification
                  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.13.2
              
              Certification
                  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
  (A)
        Incorporated by reference to the Company’s Registration
        Statement on Form F-1 (File No. 333-10752) ,
        filed
        with the SEC on September 1, 1999.
 (B)
        Incorporated by reference to the Company’s Annual Report on Form 20-F for the
        year ended December 31, 2000, filed with the SEC on May 18, 2001.
 (C)
        Incorporated by reference to the Company’s Annual Report on Form 20-F for the
        year ended December 31, 2005, filed with the SEC on April 5, 2002.
 (D)
        Incorporated by reference to the Annual Report on Form 20-F for the year
        ended
        December 31, 2001, filed with the SEC on April 5, 2002.
 (E)
        Incorporated by reference to the Annual Report on Form 20-F/A for the year
        ended
        December 31, 2005, filed with the SEC on July 6, 2006.
 (F)
        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.
  87
  SIGNATURE
  The
        registrant hereby certifies that it meets all of the requirements for filing
        on
        Form 20-F and that it has duly caused and authorized the undersigned to sign
        this annual report on its behalf.
  RADWARE
                  LTD.By:
              /s/  Roy
                  ZisapelRoy
                  ZisapelChief
                  Executive OfficerDate:
                  June 11, 2008
  88




**RADWARE
      LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**AS
      OF DECEMBER 31, 2007**





**U.S.
      DOLLARS IN THOUSANDS**





**INDEX**





**Page****Management's
                Report on Internal Control Over Financial
                Reporting**
            
            **F2****Reports
                of Independent Registered Public Accounting Firm**
            
            **F3
                - F4****Consolidated
                Balance Sheets**
            
            **F5
                - F6****Consolidated
                Statements of Operations**
            
            **F7****Statements
                of Changes in Shareholders' Equity**
            
            **F8****Consolidated
                Statements of Cash Flows**
            
            **F9****Notes
                to Consolidated Financial Statements**
            
            **F10
                - F39**














**MANAGEMENT'S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**




Radware's
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting for Radware. Radware's 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. Radware's 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 Radware's 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 receipts and expenditures of Radware
                are
                being made only in accordance with authorizations of management and
                directors of Radware, and


·
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of Radware'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, 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.





Radware's
      management assessed the effectiveness of its internal control over financial
      reporting as of December 31, 2007. In conducting its assessment of internal
      control over financial reporting, management based its evaluation on the
      framework in "Internal Control - Integrated Framework" issued by the Committee
      of Sponsoring Organizations of the Treadway Commission (COSO). Radware's
      management has concluded based on its assessment, that its internal control
      over
      financial reporting was effective as of December 31, 2007 based on these
      criteria.





The
      effectiveness of Radware's internal control over financial reporting as of
      December 31, 2007, 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, 2007.


2




Radware





**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, 2007, 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, in 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, 2007, 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, 2006 and 2007, 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, 2007 and
      our report dated June 11, 2008 expressed an unqualified opinion
      thereon.





Tel-Aviv,
                Israel
            KOST
                FORER GABBAY & KASIERERJune
                11, 2008
            A
                Member of Ernst & Young
                Global


3


Radware





**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, 2006 and 2007, 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, 2007. 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, 2006 and 2007, and the consolidated results
      of
      their operations and their cash flows for each of the three years in the period
      ended December 31, 2007, in conformity with U.S. generally accepted accounting
      principles.





As
      discussed in Note 2p and Note 9 to the consolidated financial statements, the
      Company adopted Statement of Financial Accounting Standard Board No. 123
      (revised 2004) "Share-based Payments", effective January 1, 2006.





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, 2007, based on criteria established in Internal
      Control- Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission and our report dated June 11, 2008
      expressed an unqualified opinion thereon.





Tel-Aviv,
                Israel
            KOST
                FORER GABBAY & KASIERERJune
                11, 2008
            A
                Member of Ernst & Young
                Global


4


**RADWARE
      LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**U.S.
      dollars in thousands**





**December
                31,****2006**
            
            **2007**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            25,324
            
            $
            61,376Available-for-sale
                marketable securities
            
            
            92,133
            
            
            80,498Held-to-maturity
                marketable securities
            
            
            22,918
            
            
            -Structured
                deposit
            
            
            -
            
            
            10,236Trade
                receivables (net of allowance for doubtful accounts of $ 1,106 and
                $ 1,200 in 2006 and 2007, respectively) *)
            
            
            17,453
            
            
            17,192Other
                receivables and prepaid expenses
            
            
            1,996
            
            
            3,195Inventories
            
            
            6,892
            
            
            5,428Totalcurrent assets
            
            
            166,716
            
            
            177,925LONG-TERM
                INVESTMENTS:Available-for-sale
                marketable securities
            
            
            14,154
            
            
            2,735Structured
                deposit
            
            
            9,602
            
            
            -Severance
                pay fund
            
            
            2,907
            
            
            3,940Totallong-term investments
            
            
            26,663
            
            
            6,675PROPERTY
                AND EQUIPMENT, NET
            
            
            9,253
            
            
            12,217LONG-TERM
                DEFERRED TAXES AND OTHER LONG-TERM ASSETS
            
            
            1,219
            
            
            978INTANGIBLE
                ASSETS, NET
            
            
            2,363
            
            
            4,798GOODWILL
            
            
            9,454
            
            
            13,474Totalassets
            
            $
            215,668
            
            $
            216,067





*)
            Includes
                balances in the amount of $ 1,452 and $ 1,320 with related parties as
                of December 31, 2006 and 2007, respectively (see also Note
                13a).





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


5


**RADWARE
      LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





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





**December
                31,****2006**
            
            **2007**LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                payables *)
            
            $
            6,956
            
            $
            7,537Deferred
                revenues
            
            
            15,712
            
            
            18,395Other
                payables and accrued expenses
            
            
            6,642
            
            
            8,043Totalcurrent liabilities
            
            
            29,310
            
            
            33,975ACCRUED
                SEVERANCE PAY
            
            
            3,944
            
            
            5,379COMMITMENTS
                AND CONTINGENT LIABILITIESSHAREHOLDERS'
                EQUITY:Share
                capital -Ordinary
                shares of NIS 0.1 par value -
              Authorized:
                30,000,000 as of December 31, 2006 and 2007; Issued: 20,258,758 shares
                and
                20,406,758 shares as of December 31, 2006 and 2007, respectively;
                Outstanding 19,411,903 shares and 19,559,903 shares as of December
                31,
                2006 and 2007, respectively
            
            
            478
            
            
            482Additional
                paid-in capital
            
            
            170,090
            
            
            176,004Treasury
                stock, at cost
            
            
            (11,049
            )
            
            (11,049
            )Accumulated
                other comprehensive income (loss)
            
            
            (242
            )
            
            150Retained
                earnings
            
            
            23,137
            
            
            11,126Totalshareholders' equity
            
            
            182,414
            
            
            176,713Totalliabilities and shareholders' equity
            
            $
            215,668
            
            $
            216,067





*)
            Includes
                balances in the amount of $ 68 and $ 175 with related parties as
                of
                December 31, 2006 and 2007, respectively (see also Note
                13a).





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


6


**RADWARE
      LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





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





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Revenues:
                *)Products
            
            $
            55,902
            
            $
            57,335
            
            $
            59,422Services
            
            
            21,682
            
            
            24,075
            
            
            29,209Totalrevenues
            
            
            77,584
            
            
            81,410
            
            
            88,631Cost
                of revenues: *)Products
            
            
            9,325
            
            
            10,267
            
            
            13,133Services
            
            
            5,571
            
            
            5,524
            
            
            5,895Totalcost of revenues
            
            
            14,896
            
            
            15,791
            
            
            19,028Gross
                profit
            
            
            62,688
            
            
            65,619
            
            
            69,603Operating
                expenses: *)Research
                and development, net
            
            
            13,017
            
            
            17,659
            
            
            23,515Sales
                and marketing
            
            
            40,002
            
            
            50,128
            
            
            57,977General
                and administrative
            
            
            5,244
            
            
            6,178
            
            
            7,114Totaloperating expenses
            
            
            58,263
            
            
            73,965
            
            
            88,606Operating
                income (loss)
            
            
            4,425
            
            
            (8,346
            )
            
            (19,003
            )Financial
                income, net
            
            
            5,159
            
            
            7,422
            
            
            7,420Income
                (loss) before income taxes
            
            
            9,584
            
            
            (924
            )
            
            (11,583
            )Income
                taxes
            
            
            (240
            )
            
            (356
            )
            
            (428
            )Net
                income (loss)
            
            $
            9,344
            
            $
            (1,280
            )
            $
            (12,011
            )Basic
                net earnings (loss) per share
            
            $
            0.50
            
            $
            (0.07
            )
            $
            (0.62
            )Diluted
                net earnings (loss) per share
            
            $
            0.47
            
            $
            (0.07
            )
            $
            (0.62
            )





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





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


7


**RADWARE
      LTD. AND ITS SUBSIDIARIES**


**STATEMENTS
      OF CHANGES IN SHAREHOLDERS' EQUITY**





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


**Number of**
                **outstanding**
                **Ordinary**
                **shares**
              
              **Share**
                **capital**
              
              **Additional**
                **paid-in**
                **capital**
              
              **Deferred**
                **stock based**
                **compensation**
              
              **Treasury**
                **shares, at cost**
              
              **Accumulated**
                **other**
                **comprehensive**
                **income (loss)**
              
              **Retained**
                **earnings**
              
              **Total**
                **comprehensive**
                **income (loss)**
              
              **Total**Balance
                  as of January 1, 2005
              
              
              18,488,530
              
              $
              457
              
              $
              145,439
              
              $
              -
              
              $
              -
              
              $
              (52
              )
              $
              15,073
              
              
              
              
              $
              160,917Issuance
                  of shares upon exercise of stock options and upon purchase of shares
                  under
                  ESPP
              
              
              573,230
              
              
              13
              
              
              7,298
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              7,311Deferred
                  stock based compensation
              
              
              -
              
              
              -
              
              
              125
              
              
              (125
              )
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              -Amortization
                  of deferred stock based compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              58
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              58Warrants
                  issued in respect of business combination
              
              
              -
              
              
              -
              
              
              148
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              148Comprehensive
                  income:Unrealized
                  losses from available-for-sale securities, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (352
              )
              
              -
              
              $
              (352
              )
              
              (352
              )Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,344
              
              
              9,344
              
              
              9,344Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              8,992Balance
                  as of December 31, 2005
              
              
              19,061,760
              
              
              470
              
              
              153,010
              
              
              (67
              )
              
              -
              
              
              (404
              )
              
              24,417
              
              
              
              
              
              177,426Repurchase
                  of shares
              
              
              (846,855
              )
              
              (20
              )
              
              -
              
              
              -
              
              
              (11,049
              )
              
              -
              
              
              -
              
              
              
              
              
              (11,069
              )Issuance
                  of shares upon exercise of stock options
              
              
              1,196,998
              
              
              28
              
              
              12,607
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              12,635Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              4,540
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              4,540Reclassification
                  of deferred stock compensation into additional paid-in capital
                  upon
                  adoption of SFAS 123(R)
              
              
              -
              
              
              -
              
              
              (67
              )
              
              67
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              -Comprehensive
                  income:Unrealized
                  income from available-for-sale securities, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              162
              
              
              -
              
              $
              162
              
              
              162Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,280
              )
              
              (1,280
              )
              
              (1,280
              )Total
                  comprehensive income (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (1,118
              )Balance
                  as of December 31, 2006
              
              
              19,411,903
              
              
              478
              
              
              170,090
              
              
              -
              
              
              (11,049
              )
              
              (242
              )
              
              23,137
              
              
              
              
              
              182,414Issuance
                  of shares upon exercise of stock options
              
              
              148,000
              
              
              4
              
              
              1,377
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              1,381Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              4,537
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              4,537Comprehensive
                  income:Unrealized
                  income from available-for-sale securities, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              392
              
              
              -
              
              $
              392
              
              
              392Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (12,011
              )
              
              (12,011
              )
              
              (12,011
              )Total
                  comprehensive income (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (11,619
              )Balance
                  as of December 31, 2007
              
              
              19,559,903
              
              $
              482
              
              $
              176,004
              
              $
              -
              
              $
              (11,049
              )
              $
              150
              
              $
              11,126
              
              
              
              
              $
              176,713





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


8


**RADWARE
      LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**U.S.
      dollars in thousands**





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            9,344
            
            $
            (1,280
            )
            $
            (12,011
            )Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            1,921
            
            
            2,976
            
            
            5,056Stock
                based compensation
            
            
            58
            
            
            4,540
            
            
            4,537Amortization
                of premiums, accretion of discounts and accrued interest on
                available-for-sale and held-to-maturity marketable debt securities,
                net
            
            
            (475
            )
            
            458
            
            
            (3,485
            )Accrued
                interest on bank deposits and structured note
            
            
            1,468
            
            
            51
            
            
            (634
            )Accrued
                severance pay, net
            
            
            3
            
            
            556
            
            
            402Decrease
                (increase) in long-term deferred tax assets
            
            
            20
            
            
            (241
            )
            
            (60
            )Decrease
                (increase) in trade receivables, net
            
            
            (1,495
            )
            
            (2,792
            )
            
            323Increase
                in other receivables and prepaid expenses
            
            
            (119
            )
            
            (545
            )
            
            (1,192
            )Decrease
                (increase) in inventories
            
            
            (1,160
            )
            
            (1,520
            )
            
            1,493Increase
                in trade payables
            
            
            245
            
            
            1,627
            
            
            581Increase
                in deferred revenues
            
            
            2,536
            
            
            3,288
            
            
            2,683Increase
                in other payables and accrued expenses
            
            
            1,547
            
            
            133
            
            
            1,182Other
            
            
            (43
            )
            
            -
            
            
            -Net
                cash provided by (used in) operating activities
            
            
            13,850
            
            
            7,251
            
            
            (1,125
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (3,626
            )
            
            (5,843
            )
            
            (6,747
            )Proceeds
                from sale of property and equipment
            
            
            297
            
            
            -
            
            
            -Investment
                in other long-term assets, net
            
            
            (24
            )
            
            11
            
            
            (15
            )Purchase
                of available-for-sale marketable debt securities
            
            
            (86
            )
            
            (109,336
            )
            
            (67,121
            )Purchase
                of held-to-maturity marketable debt securities
            
            
            (31,962
            )
            
            (6,000
            )
            
            -Proceeds
                from sale and redemption of available-for-sale marketable debt
                securities
            
            
            16,265
            
            
            29,327
            
            
            94,237Proceeds
                from redemption of held-to-maturity marketable debt
                securities
            
            
            1,462
            
            
            45,085
            
            
            22,735Proceeds
                from maturity of long-term bank deposit
            
            
            62,995
            
            
            -
            
            
            -Investment
                in bank deposit
            
            
            (10,000
            )
            
            -
            
            
            -Proceeds
                from bank deposits
            
            
            -
            
            
            10,000
            
            
            -Payment
                for the acquisition of V-Secure (1)
            
            
            (9,011
            )
            
            (3,000
            )
            
            -Payment
                for the acquisition of Covelight (2)
            
            
            -
            
            
            -
            
            
            (7,293
            )Net
                cash provided by (used in) investing activities
            
            
            26,310
            
            
            (39,756
            )
            
            35,796Cash
                flows from financing activities:Proceeds
                from exercise of stock options
            
            
            7,311
            
            
            12,635
            
            
            1,381Repurchase
                of shares
            
            
            -
            
            
            (11,069
            )
            
            -Net
                cash provided by financing activities
            
            
            7,311
            
            
            1,566
            
            
            1,381Increase
                (decrease) in cash and cash equivalents
            
            
            47,471
            
            
            (30,939
            )
            
            36,052Cash
                and cash equivalents at the beginning of the year
            
            
            8,792
            
            
            56,263
            
            
            25,324Cash
                and cash equivalents at the end of the year
            
            $
            56,263
            
            $
            25,324
            
            $
            61,376(1)Payment
                for the acquisition of V-Secure:Estimated
                fair value of assets acquired at the date of acquisition:Acquired
                technology
            
            $
            1,772
            
            $
            -
            
            $
            -Customer
                relationships
            
            
            542
            
            
            -
            
            
            -Deferred
                compensation cost
            
            
            400
            
            
            -
            
            
            -Goodwill
            
            
            6,297
            
            
            3,000
            
            
            -$
            9,011
            
            $
            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
            
            
            -
            
            
            -
            
            
            28Acquired
                technology
            
            
            -
            
            
            -
            
            
            3,191Customer
                relationships
            
            
            -
            
            
            -
            
            
            175Goodwill
            
            
            -
            
            
            -
            
            
            4,020$
            -
            
            $
            -
            
            $
            7,293Cash
                paid during the year for:Taxes
            
            $
            265
            
            $
            438
            
            $
            731




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


9


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




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





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





b.
            The
                Company established wholly-owned subsidiaries in the United States,
                France, Germany, Singapore, the United Kingdom, Japan, Korea, Canada,
                Switzerland, 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 a major supplier to supply certain components
                for the
                production of its products. If this supplier fails to deliver or
                delays
                the delivery of the necessary components, the Company will be required
                to
                seek alternative sources of supply. A change in suppliers could result
                in
                manufacturing delays, which could cause a possible loss of sales
                and,
                consequently, could adversely affect the Company's results of operations
                and financial position.





d.
            The
                Company relies upon independent distributors (which are considered
                to be
                end-users) to market and sell its products to customers. A loss of
                a major
                distributor, or any event negatively affecting such distributor's
                financial condition, could cause a material adverse effect on the
                Company's results of operations and financial position (see also
                Note
                11b). For the years ended of December 31, 2005 2006 and 2007, one
                single
                customer (a distributor) represented 16%, 12% and 5%, respectively;
                of the
                Company's total revenues. For the year ended December 31, 2007, no
                single
                customer represented more than 10% of 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 believes that the complementary
                solution of V-Secure will provide the Company advantage over the
                competitors in this market and the purpose of the acquisition is
                to
                integrate V-Secure solution into the Company’s product offering. The total
                consideration for the acquisition was $ 9,168, out of which an amount
                of
                $ 9,011 was paid in cash; amount valuated as $ 148 was paid by
                issuance of fully vested warrants to V-Secure to purchase 45,454
                Ordinary
                shares of the Company, at an exercise price of $ 22 per share. The
                remaining balance was related to acquisition
                costs.





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


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 using a third party valuation
      specialist) based upon their estimated fair values as follows:





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





The
      deferred compensation cost was carved-out of the goodwill and represents
      incentive to former employees of V-Secure that will remain with the Company
      for
      periods of no less than 12 to 24 months. Such deferred compensation cost is
      amortized over the employment period, and is recorded as compensation costs.
      Any
      amount not used for bonuses is returned to V-Secure, and will increase the
      goodwill. During 2006 and 2007, amounts of $ 84 and $ 316, respectively, were
      recorded as compensation costs, included in research and development expenses.
      As of December 31, 2007, all deferred compensation costs were 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 will not be amortized. In lieu of amortization, the Company is
      required to perform an annual impairment review. If the Company determines,
      through the impairment review process, that goodwill has been impaired, it
      will
      record the impairment charge in its statement of income. During the year ended
      December 31 2007, no such impairment losses were recorded.





Unaudited
      pro-forma results:





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





**Year ended**
              **December 31,****2005****Unaudited****Total consolidated**Revenues
            
            $
            78,145Income
                before income taxes
            
            $
            5,273Net
                income
            
            $
            5,033Diluted
                net earning per share
            
            $
            0.25


11


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**


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





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
                believes that the complementary solution of Covelight will provide
                the
                Company advantage over the competitors in this market and the purpose
                of
                the acquisition is to integrate Covelight solution into the Company’s
                product offering. The total consideration for 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 consideration for the acquisition
                amounted
                to $ 7,660. (See also Note
                14c).





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





Working
                capital
            
            $
            246Property
                and equipment
            
            
            28Totaltangible assets
            
            
            274Acquired
                technology
            
            
            3,191Customer
                relationships
            
            
            175Goodwill
            
            
            4,020Totalintangible assets
            
            
            7,386Totalconsideration
            
            $
            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 year ended December 31, 2007, no such impairment loss
                was
                recorded.


12


**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
            
            $
            88,710Loss
                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 financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Actual results could differ from those estimates.





b.
            Financial
                statements in U.S. dollars:





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





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


13


**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.





e.
            Marketablesecurities:





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





As
      of
      December 31, 2007, the Company classifies all of its debt securities 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, the Company did not classify any of its securities as held to
      maturity.





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, the Company
      has no debt securities classified as held-to-maturity.





FASB
      Staff Position ("FSP") No. 115-1, "The Meaning of Other-Than-Temporary
      Impairment and Its Application to Certain Investment" ("FSP 115-1") and SAB
      Topic 5M "Other Than Temporary Impairment Of Certain Investments In Debt And
      Equity Securities" provides guidance for determining when an investment is
      considered impaired, whether impairment is other-than temporary, and measurement
      of an impairment loss. An investment is considered impaired if the fair value
      of
      the investment decreased below its cost in an other-than temporary manner.
      If,
      after consideration of all available evidence to evaluate the realizable value
      of its investment, impairment is determined to be other than - temporary, then
      an impairment loss should be recognized equal to the difference between the
      investment’s cost and its fair value.


14


**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-offs are
      provided to cover risks arising from slow-moving items, technological
      obsolescence, excess inventories and discontinued products. Inventory write-offs
      totaled $ 418, $ 0 and $ 2,091 in 2005, 2006 and 2007, respectively. During
      2007, the Company recorded a one time inventory write-off in the amount of
      $
      1,400 in connection with the anticipated release of the new generation platform.
      Any write-off is recognized in the consolidated statements of operations as
      cost
      of revenues.





Cost
      is
      determined as follows:





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


Work-in-progress
      and finished products:


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, consists of a callable structured
                deposit
                ("Structured deposit ") with a maturity of six years. The Structured
                deposit bears 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. 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 Company's Structured deposit was
      redeemed in the amount of $ 10,069 (see also Note 14a).




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


15


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**


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





i.
            Intangible
                assets:





Intangible
      assets subject to amortization are initially recognized based on fair value
      allocated to them, and subsequently stated at amortized cost.


The
      assets are amortized over their estimated 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
      Statement of Financing Accounting Standards No. 142 "Goodwill and Other
      Intangible Assets". Acquired technology and customer relationships are amortized
      using the straight-line method over an estimated period between one to ten
      years
      during which benefits are expected to be received. During 2007, an amount of
      $
      931 was recorded as amortization expenses, included in cost of revenues and
      sales and marketing expenses. As of December 31, 2006 and 2007, no impairment
      losses have been identified.





j.
            Impairment
                of long-lived assets:





The
      Company's and its subsidiaries' long-lived assets and certain identifiable
      intangibles are reviewed for impairment in accordance with SFAS No. 144,
      "Accounting for the Impairment or Disposal of Long-Lived Assets" whenever events
      or changes in circumstances indicate that the carrying amount of an asset,
      may
      not be recoverable. Recoverability of assets to be held and used is measured
      by
      a comparison of the carrying amount of an asset to the future undiscounted
      cash
      flows expected to be generated by the assets. Such measurement includes
      significant estimates. 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 and 2007, no impairment losses have been
      identified.





k.
            Goodwill:





Goodwill
      represents excess of the costs over the fair value of net assets of businesses
      acquired. Under SFAS No. 142, goodwill is not amortized. SFAS No. 142 requires
      goodwill to be tested for impairment at least annually or between annual tests
      in certain circumstances, and written down when impaired, rather than being
      amortized as previous accounting standards required. Goodwill is tested for
      impairment by comparing the fair value with its carrying value. Fair value
      is
      determined using discounted cash flows and market multiples. During the years
      ended December 31, 2005, 2006 and 2007, no such impairment losses were
      recorded.





l.
            Revenue
                recognition:





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





Revenues
      from product sales are recognized 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.


16


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**


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





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, is recognized ratably over the contract
      period, which is typically one year.





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





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.





m.
            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, 2005, 2006 and 2007 were immaterial.





n.
            Research
                and development expenses:





Research
      and development expenses, net of grants received are charged to the statement
      of
      operations, as incurred.





o.
            Advertising
                expenses:





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


17


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**


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





p.
            Accounting
                for stock-based compensation:





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





SFAS
      No.
      123(R) requires companies to estimate the fair value of equity-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as an
      expense over the requisite service periods in the Company's consolidated income
      statement. Prior to the adoption of SFAS 123(R), the Company accounted for
      equity-based awards to employees and directors using the intrinsic value method
      in accordance with APB 25 as allowed under Statement of Financial Accounting
      Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
      See Note 9 for a further discussion on stock-based compensation.




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.




In
      July
      2006, 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-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, that is more-likely-than-not to be realized upon ultimate
      settlement.


18


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**


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





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 10).





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 material effect on the Company's retained earnings and financial
      position.





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, trade receivables and structured
      deposit.





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





The
      Company's marketable securities include investments in U.S. government
      debentures; foreign banks and government debentures, corporate debentures and
      auction rate securities. Management believes that those securities are
      financially sound and that the portfolios are well-diversified, and accordingly,
      minimal credit risk exists with respect to these marketable securities.
      Moreover, the Company’s investment policy, limits the amount the Company may
      invest in any one type of investment, thereby reducing credit risk concentration
      (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. Such measures included among others: reducing
      credit exposure to financial sector securities and increasing the overall credit
      quality of the portfolio.





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





As
      of
      December 31, 2006 and 2007, the Company and its subsidiaries had no
      off-balance-sheet concentration of credit risk.


19


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**


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





s.
            Severance
                pay:





The
      Company's liability for severance pay for its Israeli employees is calculated
      pursuant to the Israeli Severance Pay Law based on the most recent salary of
      the
      employees multiplied by the number of years of employment, as of the balance
      sheet date. Employees whose employment is terminated by the Company are entitled
      to severance pay in accordance with Israeli law or labor agreements are entitle
      to one month's salary for each year of employment or a portion thereof. The
      Company's liability for all of its Israeli employees is partly provided by
      monthly deposits for insurance policies.. The value of these policies is
      recorded as an asset in the Company's consolidated balance sheet.





The
      deposited funds for the Company's employees include profits accumulated up
      to
      the balance sheet date. The deposited funds may be withdrawn only upon the
      fulfillment of the obligation pursuant to the Israeli Severance Pay Law or
      labor
      agreements. The value of the deposited funds is based on the cash surrendered
      value of these policies, and includes immaterial profits.





Severance
      pay accrual expenses for the years ended December 31, 2005, 2006, and 2007,
      amounted to approximately $ 405, $ 1,015 and $ 965,
      respectively.





t.
            Fair
                value of financial instruments:





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





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





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





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


20




**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





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





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





Basic
      net
      earnings (loss) per share are computed based on the weighted average number
      of
      Ordinary shares outstanding during each period. Diluted net earnings (loss)
      per
      share are 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 earnings (loss) per share as they
      would
      have been anti dilutive was 709,972, 3,284,999 and 4,704,129 for the years
      ended
      December 31, 2005, 2006 and 2007, respectively.





The
      following table sets forth the calculation of basic and diluted net earnings
      (loss) per share:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Numerator:Net
                income (loss) available to holders of Ordinary shares
            
            $
            9,344
            
            $
            (1,280
            )
            $
            (12,011
            )Denominator:Denominator
                for basic earnings (loss) per share - weighted average number of
                shares,
                net of treasury stock
            
            
            18,800,474
            
            
            19,325,055
            
            
            19,477,222Effect
                of dilutive securities:Employee
                stock options and ESPP
            
            
            1,271,718
            
            
            -
            
            
            -Denominator
                for diluted net earnings (loss) per share - adjusted weighted average
                number of Ordinary shares
            
            
            20,072,192
            
            
            19,325,055
            
            
            19,477,222





v.
            Impact
                of recently issued Accounting
                Pronouncements:





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, "Fair Value Measurements" (SFAS 157) which defines fair value, establishes
      a framework for measuring fair value, and expands disclosures about fair value
      measurements. SFAS 157 applies to other accounting pronouncements that require
      or permit fair value measurements and, accordingly, does not require any new
      fair value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 for financial assets and liabilities, as well as for any
      other
      assets and liabilities that are carried at fair value on a recurring basis,
      and
      should be applied prospectively. The adoption of the provisions of SFAS 157
      related to financial assets and liabilities and other assets and liabilities
      that are carried at fair value on a recurring basis is not anticipated to
      materially impact the Company’s consolidated financial position and results of
      operations. Subsequently, the FASB provided for a one-year deferral of the
      provisions of SFAS 157 for non-financial assets and liabilities that are
      recognized or disclosed at fair value in the consolidated financial statements
      on a non-recurring basis. The Company does not expect that the adoption of
      SFAS
      157 will have any effect on non-financial assets and liabilities that are
      recognized or disclosed on a non-recurring basis.


21


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





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





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, "The Fair Value Option for Financial Assets and Financial Liabilities"
      (SFAS 159). Under this Standard, the Company may elect to report financial
      instruments and certain other items at fair value on a contract-by-contract
      basis with changes in value reported in earnings. This election is irrevocable.
      SFAS 159 provides an opportunity to mitigate volatility in reported earnings
      that is caused by measuring hedged assets and liabilities that were previously
      required to use a different accounting method than the related hedging contracts
      when the complex provisions of SFAS 133 hedge accounting are not met. SFAS
      159
      is effective for years beginning after November 15, 2007. The Company’s
      management has determined that the adoption of SFAS 159 will not have a
      significant impact on its consolidated financial statements since it has not
      elected the fair value option for any of its existing assets or liabilities
      as
      of FAS 159 effective date.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      141 (Revised 2007) (SFAS 141R), "Business Combinations". SFAS 141R will change
      the accounting for business combinations. Under SFAS 141R, an acquiring entity
      will be required to recognize all the assets acquired and liabilities assumed
      in
      a transaction at the acquisition-date fair value with limited exceptions. SFAS
      141R will change the accounting treatment and disclosure for certain specific
      items in a business combination. SFAS 141(R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. As such,
      the adoption of SFAS 141R is not expected to have any effect on the Company's
      existing consolidated financial statements.





In
      December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
      Consolidated Financial Statements" ("SFAS 160"). SFAS 160 establishes accounting
      and reporting standards for ownership interests in subsidiaries held by parties
      other than the parent, the amount of consolidated net income attributable to
      the
      parent and to the noncontrolling interest, changes in a parent’s ownership
      interest and the valuation of retained noncontrolling equity investments when
      a
      subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements
      that provide sufficient disclosures that clearly identify and distinguish
      between the interests of the parent and the interests of the noncontrolling
      owners. This standard is effective for fiscal years beginning after December
      15,
      2008 and should be applied prospectively. However, the presentation and
      disclosure requirements of the statement shall be applied retrospectively for
      all periods presented. The adoption of SFAS 160 is not expected to have any
      effect on the Company's existing consolidated financial statements.





On
      December 21, 2007, the SEC staff issued Staff Accounting Bulletin No. 110 (SAB
      110), which, effective January 1, 2008, amends and replaces a section of SAB
      107, "Share-Based Payment". SAB 110 expresses the views of the SEC staff
      regarding the use of a "simplified" method in developing an estimate of expected
      term of "plain vanilla" share options in accordance with FASB Statement No.
      123(R), "Share-Based Payment". Under the "simplified" method, the expected
      term
      is calculated as the midpoint between the vesting date and the end of the
      contractual term of the option. The Company is currently evaluating the impact
      of adopting SAB 110 for share-based payment.


22


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





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





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





**December 31,****2006**
            
            **2007****Amortized**
            
            **Unrealized**
            
            **Market**
            
            **Amortized**
            
            **Unrealized**
              **gain**
            
            **Market****cost**
            
            **losses**
            
            **value**
            
            **cost**
            
            **(losses) *)**
            
            **value**Available-for-sale:U.S.
                Government debentures
            
            $
            97,151
            
            $
            (177
            )
            $
            96,974
            
            $
            57,616
            
            $
            156
            
            $
            57,772Foreign
                banks andgovernment
                debentures
            
            
            2,774
            
            
            (35
            )
            
            2,739
            
            
            5,970
            
            
            (1
            )
            
            5,969Corporate
                debentures
            
            
            6,604
            
            
            (30
            )
            
            6,574
            
            
            10,326
            
            
            (5
            )
            
            10,321Auction
                rate securities **
            
            
            -
            
            
            -
            
            
            -
            
            
            9,171
            
            
            -
            
            
            9,171Totalavailable-for-sale
              marketable
                securities
            
            $
            106,529
            
            $
            (242
            )
            $
            106,287
            
            $
            83,083
            
            $
            150
            
            $
            83,233Held-to-maturity:U.S.
                Government debentures
            
            $
            22,918
            
            $
            (183
            )
            $
            22,735
            
            $
            -
            
            $
            -
            
            $
            -




*)
      Unrealized losses have been outstanding for less than one year.


**)
      During the first quarter of 2008 the Company sold auction rate securities in
      the
      amount of $ 7,650 which approximated their carrying amount as of December 31,
      2007. The remaining balance in the amount of $ 1,500 was recorded at market
      value at year end. Since February 15, 2008, after successful auctions, the
      Company had a failed auctions on those remaining securities. Management is
      monitoring closely the liquidity of such securities.





The
      unrealized income (losses) on available-for-sale debt securities included in
      other comprehensive income, as a separate component of shareholders' equity,
      totaled to $ (242) and $ 150 as of December 31, 2006 and 2007,
      respectively.





The
      unrealized losses on the Company's investments in held-to-maturity securities
      are a result of interest rate changes. The Company does not consider these
      investments to be other-than-temporarily impaired as of December 31,
      2006.





The
      amortized cost and estimated fair value of available-for-sale and
      held-to-maturity investments as of December 31, 2006 and 2007, by contractual
      maturity, are as follows:





**December
                31,****2006**
            
            **2007****Amortized**
              **cost**
            
            **Market**
              **value**
            
            **Amortized**
              **cost**
            
            **Market**
              **value**Available-for-sale:Matures
                in one year
            
            $
            92,291
            
            $
            92,133
            
            $
            80,348
            
            $
            80,498Matures
                in one to three years
            
            
            14,238
            
            
            14,154
            
            
            2,735
            
            
            2,735$
            106,529
            
            $
            106,287
            
            $
            83,083
            
            $
            83,233Held-to-maturity:Matures
                in one year
            
            $
            22,918
            
            $
            22,735
            
            $
            -
            
            $
            -Matures
                in one to three years
            
            
            -
            
            
            -
            
            
            -
            
            
            -$
            22,918
            
            $
            22,735
            
            $
            -
            
            $
            -


23


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





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





Inventories
      are comprised of the following:





**December
                31,****2006**
            
            **2007**Raw
                materials and components
            
            $
            562
            
            $
            561Work-in-progress
            
            
            2,702
            
            
            1,262Finished
                products
            
            
            3,628
            
            
            3,605$
            6,892
            
            $
            5,428








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





**December
                31,****2006**
            
            **2007**Cost:Computer,
                software and peripheral equipment
            
            $
            17,249
            
            $
            21,650Office
                furniture and equipment
            
            
            1,358
            
            
            2,896Motor
                vehicles
            
            
            97
            
            
            48Leasehold
                improvements
            
            
            771
            
            
            1,03819,475
            
            
            25,632Accumulated
                depreciation:Computer,
                software and peripheral equipment
            
            
            9,046
            
            
            11,367Office
                furniture and equipment
            
            
            644
            
            
            1,475Motor
                vehicles
            
            
            81
            
            
            36Leasehold
                improvements
            
            
            451
            
            
            53710,222
            
            
            13,415Depreciated
                cost
            
            $
            9,253
            
            $
            12,217





Depreciation
      expenses for the years ended December 31, 2005, 2006 and 2007 were $ 1,856,
      $ 2,440 and $ 3,811, respectively.


24


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





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





a.
            Intangible
                assets:





**Weighted****average**
            
            **December
                31,****amortization**
            
            **2006**
            
            **2007****Years**Cost:Acquired
                technology
            
            
            6
                - 7
            
            $
            1,772
            
            $
            4,963Customers
                relationships
            
            
            1-10
            
            
            1,189
            
            
            1,3642,961
            
            
            6,327Accumulated
                amortization:Acquired
                technology
            
            
            
            
            
            296
            
            
            897Customers
                relationships
            
            
            
            
            
            302
            
            
            632598
            
            
            1,529Amortized
                cost
            
            
            
            
            $
            2,363
            
            $
            4,798





Amortization
      expenses for the years ended December 31, 2005, 2006 and 2007, were $ 65,
      $ 450 and $ 931 respectively.





b.
            Estimated
                amortization expenses for the years
                ended:





**December
                31,**2008
            
            $
            9062009
            
            
            9062010
            
            
            9062011
            
            
            9062012
            
            
            5212013
                and thereafter
            
            
            653Total
            
            $
            4,798





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





**December
                31,****2006**
            
            **2007**Employees
                and payroll accruals
            
            $
            2,283
            
            $
            4,263Accrued
                expenses
            
            
            2,305
            
            
            2,124Government
                authorities
            
            
            1,854
            
            
            1,288Provision
                for warranty costs
            
            
            200
            
            
            200Other
            
            
            -
            
            
            168$
            6,642
            
            $
            8,043




25


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





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





a.
            Operating
                leases:





The
      Company and its subsidiaries rent their facilities under various operating
      lease
      agreements, which expire on various dates, the latest of which is in 2012.
      Aggregate minimum rental payments under non-cancelable operating leases as
      of
      December 31, 2007, are as follows:





2008
            
            $
            2,8532009
            
            
            2,2762010
            
            
            1,7092011
            
            
            9032012
            
            
            509$
            8,250





Total
      rent expenses for the years ended December 31, 2005, 2006 and 2007, were
      approximately $ 1,768, $ 1,948 and $ 2,838, respectively (see also
      Note 13b).





b.
            Litigation:





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





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





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





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.


26


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                8:-**
            **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 (see
      also Note 14b).





Due
      to
      the inherent uncertainties of litigation, the Company's management and its
      legal
      counsel cannot accurately predict the ultimate outcome of the matter. If the
      Company is found liable, it is unable to estimate or predict the potential
      damages that might be awarded, whether such damages would be greater than the
      Company’s insurance coverage, and whether such damages would have a material
      impact on its results of operations, cash flows or financial condition in any
      future period.





2.
            The
                Company’s French subsidiary, Radware France, is a party to three separate
                litigation proceedings before the Boulogne-Billancourt Employment
                Tribunal, brought against the subsidiary by three of its former employees
                claiming damages in connection with their dismissal total amounted
                to
                approximately € 490 (approximately $ 795 as of December 31, 2007). The
                hearings with respect to two of these matters are scheduled for October
                23, 2008 and April 30, 2009, respectively. With respect to the third
                employee, there is no date scheduled for the hearing and the Company
                and
                employees are in settlement negotiations. 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.




27


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





**NOTE
              9:-**
            **SHAREHOLDERS'
                EQUITY**





The
      Company's shares are listed for trade on the NASDAQ National Market and since
      April 2004 on the Tel-Aviv Stock Exchange, both under the symbol
      "RDWR".





a.
            Treasury
                stock:





In
      July
      2006, the Company's Board of Directors authorized the repurchase of up to
      $ 50,000 in the open market, subject to normal trading restrictions. During
      2006, the Company purchased 846,855 of its Ordinary shares for total
      consideration of $ 11,069 which were recorded as Treasury shares, at cost
      as part of shareholders' equity.





b.
            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.





Stock
      Option Plans:





The
      Company adopted SFAS No. 123(R) using the modified prospective transition
      method, which requires the application of the accounting standard starting
      from
      January 1, 2006, the first day of the Company's fiscal year 2006. Under the
      modified prospective transition method, compensation cost recognized in the
      year
      ended December 31, 2006 and 2007, includes: (a) compensation cost for all
      share-based payments granted prior to, but not yet vested as of January 1,
      2006,
      based on the grant date fair value estimated in accordance with the original
      provisions of SFAS No. 123, and (b) compensation cost for all share-based
      payments granted subsequent to January 1, 2006, based on the grant-date fair
      value estimated in accordance with the provisions of SFAS No. 123(R). Results
      for prior periods have not been restated.





c.
            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. As of December 31, 2007, an aggregate of 248,139 Ordinary shares of
      the
      Company were still available for future grants. 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 2007.





The
                Company recognizes compensation expenses for the value of its awards,
                which have graded vesting, granted prior to January 1, 2006, based
                on the
                accelerated attribution method and for awards granted subsequent
                to
                January 1, 2006, based on the straight-line-method over the requisite
                service period of each awards, net of estimated forfeitures. Estimated
                forfeitures are based on actual historical pre-vesting forfeitures.


28


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





**NOTE
              9:-**
            **SHAREHOLDERS'
                EQUITY (Cont.)**





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





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





The
      fair
      value of the Company's stock options granted to employees and directors for
      the
      years ended December 31, 2005, 2006 and 2007 was estimated using the following
      weighted average assumptions:





**Year ended**
              **December 31,****2005**
            
            **2006**
            
            **2007**Risk
                free interest
            
            
            4.5
            %
            
            4.88
            %
            
            4.46
            %Dividend
                yields
            
            
            0
            %
            
            0
            %
            
            0
            %Volatility
            
            
            41
            %
            
            50
            %
            
            47
            %Expected
                term (in years)
            
            
            3.5
            
            
            3.89
            
            
            4.10





A
      summary
      of employee option activity under the Company's Stock Option Plans as of
      December 31, 2007 and changes during the year ended December 31, 2007 are as
      follows:





**Number of**
              **options**
            
            **Weighted-**
              **average**
              **exercise**
              **price**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **term**
              **(in years)**
            
            **Aggregate**
              **intrinsic**
              **value**Outstanding
                at January 1, 2007
            
            
            3,284,999
            
            $
            15.13Granted
            
            
            2,414,900
            
            $
            14.30Exercised
            
            
            (148,000
            )
            $
            9.24Expired
            
            
            (771
            )
            $
            8.05Forfeited
                and cancelled
            
            
            (846,999
            )
            $
            16.35Outstanding
                at December 31, 2007
            
            
            4,704,129
            
            $
            14.94
            
            
            3.38
            
            $
            5,877Exercisable
                at December 31, 2007
            
            
            1,509,396
            
            $
            14.94
            
            
            1.24
            
            $
            2,896Vested
                and expected to vest at December 31, 2007
            
            
            4,284,078
            
            $
            14.97
            
            
            3.31
            
            $
            5,376





29


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





**NOTE
              9:-**
            **SHAREHOLDERS'
                EQUITY (Cont.)**





A
      summary
      of the employee option activity under the Company’s Stock Option Plans as of
      December 31, 2005 and 2006, and changes in activity during the years ended
      on
      those dates, are as follow:


**December 31, 2005**
              
              **December 31, 2006****Number of**
                **options**
              
              **Weighted**
                **average**
                **exercise**
                **price**
              
              **Number**
                **of options**
              
              **Weighted**
                **average**
                **exercise**
                **price**Options outstanding at the beginning of the year
              
              
              3,902,433
              
              $
              13.21
              
              
              4,054,380
              
              $
              14.31Changes
                  during the year:Granted
              
              
              1,007,250
              
              $
              18.80
              
              
              1,122,400
              
              $
              14.69Exercised
              
              
              (503,591
              )
              $
              12.15
              
              
              (1,196,998
              )
              $
              10.55Expired
              
              
              (45,174
              )
              $
              45.88
              
              
              -
              
              $
              -Forfeited
                  and cancelled
              
              
              (306,538
              )
              $
              13.96
              
              
              (694,783
              )
              $
              17.48Options
                  outstanding at the end of the year
              
              
              4,054,380
              
              $
              14.31
              
              
              3,284,999
              
              $
              15.13Options
                  exercisable at the end of the year
              
              
              1,428,575
              
              $
              9.52
              
              
              1,034,230
              
              $
              13.18




The
      weighted-average grant-date fair value of options granted during the years
      ended
      December 31, 2005, 2006 and 2007 was $ 7.1, $ 5.04 and $ 4.96,
      respectively. The aggregate intrinsic value in the table above represents the
      total intrinsic value (the difference between the Company's closing stock price
      on the last trading day of fiscal 2007 and the exercise price, multiplied by
      the
      number of in-the-money options) that would have been received by the option
      holders had all option holders exercised their options on December 31,
      2007. This amount changes, based on the fair market value of the Company's
      stock. Total intrinsic value of options exercised for the year ended December
      31, 2007 was approximately $ 911. As of December 31, 2007, there was
      approximately $ 11,047 of total unrecognized compensation costs related to
      non-vested share-based compensation arrangements granted under the Company's
      stock option plans. That cost is expected to be recognized over a
      weighted-average period of 1.22 years. Total grant-date fair value of vested
      options for the year ended December 31, 2007 was approximately
      $ 12,107.





The
      options outstanding under the Company's Stock Option Plans as of December 31,
      2007, have been separated into ranges of exercise price as follows:





**Options**
            
            **Weighted**
            
            
            
            **Options**
            
            **Weighted****outstanding**
            
            **average**
            
            **Weighted**
            
            **exercisable**
            
            **average exercise****Ranges of**
            
            **as of**
            
            **remaining**
            
            **average**
            
            **as of**
            
            **price of****exercise**
            
            **December 31,**
            
            **contractual**
            
            **exercise**
            
            **December 31,**
            
            **exercisable****price**
            
            **2007**
            
            **life (years)**
            
            **price**
            
            **2007**
            
            **options**$
            8-11
            
            
            403,837
            
            
            0.42
            
            $
            9.02
            
            
            403,837
            
            $
            9.02$
            12.5-15
            
            
            2,517,975
            
            
            3.47
            
            $
            14.13
            
            
            520,500
            
            $
            14.79$
            15.22
                - 17
            
            
            1,229,492
            
            
            4.66
            
            $
            15.98
            
            
            290,798
            
            $
            17.00$
            18-20.08
            
            
            333,425
            
            
            2.51
            
            $
            18.60
            
            
            150,261
            
            $
            18.83$
            23.13-25.30
            
            
            219,400
            
            
            1.94
            
            $
            23.84
            
            
            144,000
            
            $
            23.854,704,129
            
            
            
            
            
            
            
            
            1,509,396




30


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





**NOTE
              9:-**
            **SHAREHOLDERS’
                EQUITY (Cont.)**





The
      following table illustrates the effect on the net income and net earnings per
      share, assuming that the Company had applied the fair value recognition
      provision of SFAS No. 123 on its stock-based employee compensation for the
      year
      ended December 31, 2005:





**Year
                ended**
              **December
                31,****2005**Net
                income as reported
            
            $
            9,344Add:
                stock-based employee compensation expenses included in reported net
                loss -
                intrinsic value
            
            
            58Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method
            
            
            (6,082
            )Pro
                forma net income
            
            $
            3,320Basic
                net income per share as reported
            
            $
            0.50Diluted
                net income per share as reported
            
            $
            0.47Pro
                forma basic net earnings per share
            
            $
            0.18Pro
                forma diluted net earnings per share
            
            $
            0.17





On
      December 31, 2007, the Company granted 500,000 stock options to its 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 the
      Company's Ordinary shares. The options expire seven years from the grant date.
      The fair value of these options was estimated using the Monte Carlo simulation
      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%.


Total
      compensation expenses amount to $ 3,176 which will be recognized over the
      vesting period as a result, no compensation expenses were recorded as of
      December 31, 2007.





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. **** 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 will be recognized over the vesting period.
      During the year ended December 31, 2007, the Company recorded an amount of
      $ 43
      as compensation expenses.


31


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                10:-**
            **TAXES
                ON INCOME**





a.
            General





In
                June 2006, the FASB issued Interpretation No. 48, "Accounting for
                Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting
                for uncertainty in income taxes recognized in an enterprise’s financial
                statements in accordance with FAS 109. This interpretation prescribes
                a
                minimum recognition threshold a tax position is required to meet
                before
                being recognized in the financial statements. FIN 48 also provides
                guidance on derecognition of tax positions, classification on the
                balance
                sheet, interest and penalties, accounting in interim periods, disclosure
                and transition. FIN 48 requires significant judgment in determining
                what
                constitutes an individual tax position as well as assessing the outcome
                of
                each tax position. Changes in judgment as to recognition or measurement
                of
                tax positions can materially affect the estimate of the effective
                tax rate
                and consequently, affect the operating results of the
                Company.





The
      Company adopted the provisions of FIN 48 as of January 1, 2007. The adoption
      of
      FIN 48 as of January 1, 2007 did not have any effect on the Company's retained
      earnings and financial position. As of January 1, 2007, tax liabilities in
      respect of unrecognized tax positions in accordance with FIN 48 amounted to
      $
      287.





A
      reconciliation of the beginning and ending amount of unrecognized tax positions
      is as follows:




**Unrecognized**
              **tax benefits**Balance
                at January 1, 2007 (*)
            
            $
            287Additions
                based on tax positions related to the current year
            
            
            -Balance
                at December 31, 2007
            
            $
            287





(*)
            all
                of Company's gross tax liabilities as of January 1, 2007 were already
                accrued under prior GAAP before the adoption of FIN
                48.





The
      Company and its subsidiaries file income tax returns in Israel and in other
      jurisdictions of its subsidiaries. As of December 31, 2007, the Company received
      final tax assessments from the Israeli Tax Authorities for the tax years 1999
      through 2002. In respect of the Company’s main subsidiaries, tax assessments are
      open to examination by the local tax authorities form inception through
      2007.





b.
            Israeli
                income taxes:





1.
            Measurement
                of taxable income:





Commencing
      in taxable year 2003, the Company has elected to measure its taxable income
      and
      file its tax return under the Israeli Income Tax Regulations (Principles
      Regarding the Management of Books of Account of Foreign Invested Companies
      and
      Certain Partnerships and the Determination of Their Taxable Income), 1986.


32


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                10:-**
            **TAXES
                ON INCOME (Cont.)**





2.
            Tax
                rates:





On
      July
      25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment
      of
      the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a
      gradual decrease in the corporate tax rate in Israel to the following tax rates:
      in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter -
      25%.





3.
            Carryforward
                tax losses:





The
      Company has estimated total available carryforward operating tax losses of
      approximately $ 5,800, to offset against future taxable profit. As of
      December 31, 2007, the Company provided a full valuation allowance in respect
      of
      all the deferred tax assets resulting from the carryforward operating tax losses
      (totaling $ 5,800) 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.The Company also recorded deferred
      tax
      assets in the total amount of approximately $ 1,321 (net of valuation allowance)
      in respect of carryforward capital losses which are planed to be utilized
      against capital gains based on its tax planning 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 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.





As
      mentioned above, the approval, which the Investment Center granted the Company,
      is for establishing an Approved Enterprise program in Tel-Aviv and Jerusalem,
      Israel. The income derived from the "Approved Enterprise" program shall be
      allocated between the facilities in Tel-Aviv and Jerusalem based on a mechanism
      as determined by the Investment Center.





The
      entitlement to the above benefits is conditional upon the Company's fulfilling
      the conditions stipulated by the above law, regulations published hereunder
      and
      the letters of approval for the specific investments in "Approved Enterprises".
      In the event of failure to comply with these conditions, the benefits may be
      partially or fully canceled and the Company may be required to refund the amount
      of the benefits, in whole or in part, including interest.


33


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                10:-**
            **TAXES
                ON INCOME (Cont.)**




As
      of
      December 31, 2007, retained earnings included approximately $ 25,000 in
      tax-exempt income earned by the Company's "Approved Enterprise". The Company
      has
      decided not to declare dividends out of such tax-exempt income. Accordingly,
      no
      deferred income taxes have been provided on income attributable to the Company's
      "Approved Enterprise".





If
      the
      retained tax-exempt income is distributed, it would be taxed at the corporate
      tax rate applicable to such profits with respect to the gross amount as if
      the
      Company had not elected the alternative tax benefits (currently between 10%
      -
      25%).





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





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





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





Tax
      benefits are available under the Amendment to production facilities (or other
      eligible facilities), which are generally required to derive more than 25%
      of
      the Company's business income from export. In order to receive the tax benefits,
      the Amendment states that a company must make an investment in the 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, 2007,
      the
      Company did not generate income under the provisions of the new
      law.


34


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                10:-**
            **TAXES
                ON INCOME (Cont.)**





c.
            Taxes
                on income are comprised as follows:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Current
                taxes
            
            $
            (304
            )
            $
            (1,313
            )
            $
            (580
            )Increase
                in deferred tax assets
            
            
            64
            
            
            957
            
            
            152$
            (240
            )
            $
            (356
            )
            $
            (428
            )Domestic
            
            $
            (203
            )
            $
            170
            
            $
            40Foreign
            
            
            (37
            )
            
            (526
            )
            
            (468
            )$
            (240
            )
            $
            (356
            )
            $
            (428
            )





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,****2006**
            
            **2007**Deferred
                tax assets:Carryforward
                tax losses
            
            $
            2,895
            
            $
            4,136Tax
                benefit related to employee stock option exercises
            
            
            900
            
            
            935Gross
                deferred tax assets
            
            
            3,795
            
            
            5,071Valuation
                allowance
            
            
            (1,820
            )
            
            (2,815
            )Net
                deferred tax asset
            
            
            1,975
            
            
            2,256Gross
                deferred tax liabilitiesTemporary
                differences relating to property and equipment
            
            
            (64
            )
            
            (193
            )Net
                deferred tax assets
            
            $
            1,911
            
            $
            2,063





e.
            Foreign:





The
      Company's U.S. subsidiary has estimated total available carryforward tax losses
      of approximately $ 2,100 to offset against future taxable profit until
      2022. As of December 31, 2007, the Company recorded a deferred tax asset of
      $
      763 relating to the available net carryforward tax losses.





Utilization
      of U.S. net operating losses may be subject to substantial annual limitation
      due
      to the "change in ownership" provisions of the Internal Revenue Code of 1986
      and
      similar state provisions. The annual limitation may result in the expiration
      of
      net operating losses before utilization.


35


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                10:-**
            **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.





In
      addition, two other subsidiaries have estimated total available carryforward
      tax
      losses of approximately $ 1,100 to offset against future taxable profit. As
      of
      December 31, 2007, the Company recorded a deferred tax asset of $ 146 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,****2005**
            
            **2006**
            
            **2007**Income
                before taxes, as reported in the consolidated statements of
                income
            
            $
            9,584
            
            $
            (924
            )
            $
            (11,583
            )Statutory
                tax rate
            
            
            34
            %
            
            31
            %
            
            29
            %Theoretical
                tax expenses (benefit) on the above amount at the Israeli statutory
                tax
                rate
            
            $
            (3,259
            )
            $
            286
            
            $
            3,359Decrease
                in taxes resulting from "Approved Enterprise" benefits (1)
            
            
            2,746
            
            
            -
            
            
            -Tax
                adjustment in respect of different tax rate of foreign subsidiary
            
            
            (55
            )
            
            (55
            )
            
            (263
            )Non-deductible
                expenses and other permanent differences
            
            
            (528
            )
            
            1,318
            
            
            (1,213
            )Deferred
                taxes on losses for which valuation allowance was provided,
                net
            
            
            -
            
            
            (920
            )
            
            (995
            )Stock
                compensation relating to option per SFAS 123(R)
            
            
            -
            
            
            (1,400
            )
            
            (1,316
            )Income
                taxes in respect of prior years
            
            
            604
            
            
            473
            
            
            -Other
            
            
            175
            
            
            (58
            )
            
            -Actual
                tax expense
            
            $
            (240
            )
            $
            (356
            )
            $
            (428
            )(1)Per
                share amounts (basic) of the tax benefit resulting from the
                exemption
            
            $
            0.15
            
            $
            -
            
            $
            -Per
                share amounts (diluted) of the tax benefit resulting from the
                exemption
            
            $
            0.14
            
            $
            -
            
            $
            -




36





**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                10:-**
            **TAXES
                ON INCOME (Cont.)**





g.
            Income
                before income taxes is comprised as
                follows:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Domestic
            
            $
            7,601
            
            $
            (2,129
            )
            $
            (13,015
            )Foreign
            
            
            1,983
            
            
            1,205
            
            
            1,432Income
                (loss) before income taxes
            
            $
            9,584
            
            $
            (924
            )
            $
            (11,583
            )





**NOTE
              11:-**
            **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 presents total revenues for the years ended December 31, 2005, 2006
      and 2007 and long-lived assets as of December 31, 2006 and 2007:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Revenues
                from sales to customers located at:America
                (principally the United States)
            
            $
            31,900
            
            $
            27,646
            
            $
            24,368EMEA
                *)
            
            
            24,074
            
            
            27,529
            
            
            29,412Asia
                Pacific
            
            
            21,610
            
            
            26,235
            
            
            34,851$
            77,584
            
            $
            81,410
            
            $
            88,631





*)
            Europe,
                the Middle East and Africa.





**December
                31,****2006**
            
            **2007**Long-lived
                assets, by geographic region:America
            
            $
            1,669
            
            $
            4,638EMEA
            
            
            8,957
            
            
            10,923Asia
                Pacific
            
            
            990
            
            
            1,454$
            11,616
            
            $
            17,015





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





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Customer
                A
            
            
            16
            %
            
            12
            %
            
            5
            %


37


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                12:-**
            **SELECTED
                STATEMENTS OF INCOME DATA**




Financial
      income, net:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Financial
                income:Interest
                on bank deposits
            
            $
            3,426
            
            $
            1,048
            
            $
            2,917Foreign
                currency translation differences, net
            
            
            -
            
            
            892
            
            
            70Amortization
                of premiums, accretion of discounts and interest on marketable debt
                securities, net
            
            
            2,856
            
            
            5,620
            
            
            4,5696,282
            
            
            7,560
            
            
            7,556Financial
                expenses:Interest
                and other bank charges
            
            
            (70
            )
            
            (138
            )
            
            (136
            )Foreign
                currency translation differences, net
            
            
            (1,053
            )
            
            -
            
            
            -$
            5,159
            
            $
            7,422
            
            $
            7,420




**NOTE
              13:-**
            **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,****2006**
            
            **2007**Trade
                receivables
            
            $
            1,452
            
            $
            1,320Trade
                payables
            
            $
            68
            
            $
            175





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





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Revenues
                (1)
            
            $
            3,111
            
            $
            3,656
            
            $
            4,184Operating
                expenses, net - primarily rental, sub-contractors and communications
                (2)
            
            $
            1,309
            
            $
            917
            
            $
            1,374Purchase
                of property and equipment
            
            $
            377
            
            $
            939
            
            $
            948





(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.


38


**RADWARE
      LTD.**  **AND
      ITS SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**U.S.
      dollars in thousands**





**NOTE
                14:-**
            **SUBSEQUENT
                EVENTS**





a.
            As
                of December 31, 2007, the Company’s Structured deposit amounted to
                $ 10,236 (see also Note 2g). During April, 2008, the Structured
                deposit was redeemed in the amount of
                $ 10,069.





b.
            In
                respect of the plaintiffs as discussed in Note 8b(1), 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. The Company is awaiting
                a
                decision from the Court on the class certification
                motion.





c.
            In
                respect of Coverlight acquisition, the Company could have possibly
                been
                required to make an additional cash payment of $8,500 earn-out upon
                reaching sales performance targets by April 2008. Since the sales
                targets
                were not achieved, the Company was not required to pay the additional
                earn-out amount.









39