RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2016

U.S. DOLLARS IN THOUSANDS

INDEX

	Page

Reports of Independent Registered Public Accounting Firm	F2 - F3

Consolidated Balance Sheets	F4 - F5

Consolidated Statements of Income (Loss)	F6

Consolidated Statement of Comprehensive Income (Loss)	F7

Statements of Changes in Shareholders' Equity	F8

Consolidated Statements of Cash Flows	F9 - F10

Notes to Consolidated Financial Statements	F11 - F50

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 subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

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, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework and our report dated April 27, 2017 expressed an unqualified opinion thereon.

	/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
April 27, 2017	A Member of Ernst & Young Global

F - 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of

RADWARE LTD.

We have audited Radware Ltd. and subsidiaries internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (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, 2016, 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 subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income (loss), comprehensive income (loss), change in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated April 27, 2017 expressed an unqualified opinion thereon.

	/s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
April 27, 2017	A Member of Ernst & Young Global

F - 3

RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,
	2016		2015

ASSETS

CURRENT ASSETS:

Cash and cash equivalents	$	79,639	$	33,744
Available-for-sale marketable securities		20,452		16,003
Short-term bank deposits		125,995		80,922
Trade receivables (net of allowance for doubtful accounts and sales reserves in a total amount of $ 1,236 and $ 1,686 in 2016 and 2015, respectively)		19,407		26,410
Other current assets and prepaid expenses		4,159		5,042
Inventories		17,114		16,322

Total current assets		266,766		178,443

LONG-TERM INVESTMENTS:

Available-for-sale marketable securities		74,967		87,814
Long-term bank deposits		19,092		96,643
Severance pay fund		2,597		2,724

Totallong-term investments		96,656		187,181

Property and equipment, net		26,354		26,203
Intangible assets, net		2,399		3,518
Goodwill		30,069		30,069
Other long-term assets		8,092		5,473

Total assets	$	430,336	$	430,887

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

F - 4

RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2016			2015

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Trade payables	$	5,971		$	9,255
Deferred revenues		53,061			46,061
Employees and payroll accruals		11,713			10,791
Other payables and accrued expenses		14,519			11,307

Total current liabilities		85,264			77,414

LONG-TERM LIABILITIES:

Deferred revenues		31,100			25,136
Other long-term liabilities		14,209			9,214

Total long-term liabilities		45,309			34,350

COMMITMENTS AND CONTINGENT LIABILITIES

SHAREHOLDERS' EQUITY:

Share capital -
Ordinary shares of NIS 0.05 par value - Authorized: 60,000,000 at December 31, 2016 and 2015; Issued: 52,913,976 and 52,619,945 shares at December 31, 2016 and 2015, respectively; Outstanding: 43,188,850 and 44,778,847 shares at December 31, 2016 and 2015, respectively		663			661
Additional paid-in capital		325,338			312,784
Treasury stock (9,725,128) and (7,841,098) of ordinary shares at December 31, 2016 and 2015, respectively		(116,029	)		(94,049	)
Accumulated other comprehensive income (loss)		(20	)		1,257
Retained earnings		89,811			98,470

Total shareholders' equity		299,763			319,123

Total liabilities and shareholders' equity	$	430,336		$	430,887

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

F - 5

RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

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

	Year ended December 31,
	2016			2015		2014

Revenues:
Products	$	110,186		$	136,793	$	143,466
Services		86,399			79,773		78,426

Total revenues		196,585			216,566		221,892

Cost of revenues:
Products		27,320			29,159		29,448
Services		8,375			9,041		10,284

Total cost of revenues		35,695			38,200		39,732

Gross profit		160,890			178,366		182,160

Operating expenses:

Research and development, net		51,732			49,987		44,081
Sales and marketing		103,774			93,347		93,203
General and administrative		18,133			17,033		19,797

Total operating expenses		173,639			160,367		157,081

Operating income (loss)		(12,749	)		17,999		25,079
Financial income, net		5,741			5,867		5,802

Income (loss) before taxes on income		(7,008	)		23,866		30,881
Taxes on income		1,651			5,297		5,931

Net income (loss)	$	(8,659	)	$	18,569	$	24,950

Basic net earnings (loss) per share	$	(0.20	)	$	0.40	$	0.55

Diluted net earnings (loss) per share	$	(0.20	)	$	0.40	$	0.53

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

F - 6

RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

	Year ended December 31,
	2016			2015			2014

Net income (loss)	$	(8,659	)	$	18,569		$	24,950

Other comprehensive income (loss) before tax:
Unrealized gains (losses) on available-for-sale securities:
Changes in unrealized gains		68			3,903			(1,098	)
Less: reclassification adjustments for gains included in net income (loss)		(1,771	)		(2,438	)		(424	)

Other comprehensive income (loss) before tax		(1,703	)		1,465			(1,522	)
Income tax benefits (expense) related to components of other comprehensive income (loss)		426			(419	)		-

Other comprehensive income (loss), net of tax		(1,277	)		1,046			(1,522	)

Comprehensive income (loss)	$	(9,936	)	$	19,615		$	23,428

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

F - 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			Treasury stock, at cost			Accumulated other comprehensive income (loss)			Retained earnings			Total

Balance as of December 31, 2013		44,733,589		$	611	$	262,809		$	(25,984	)	$	1,733		$	54,951		$	294,120

Repurchase of ordinary shares		(887,855	)		-		-			(15,169	)		-			-			(15,169	)
Issuance of shares upon exercise of stock options		3,080,763			43		22,450			-			-			-			22,493
Stock based compensation		-			-		7,382			-			-			-			7,382
Tax benefit related to exercise of stock options		-			-		1,443			-			-			-			1,443
Other comprehensive loss, net of tax		-			-		-			-			(1,522	)		-			(1,522	)
Net income		-			-		-			-			-			24,950			24,950

Balance as of December 31, 2014		46,926,497			654		294,084			(41,153	)		211			79,901			333,697

Repurchase of ordinary shares		(2,824,772	)		-		-			(52,896	)		-			-			(52,896	)
Issuance of shares upon exercise of stock options		677,122			7		8,739			-			-			-			8,746
Stock based compensation		-			-		9,329			-			-			-			9,329
Tax benefit related to exercise of stock options		-			-		632			-			-			-			632
Other comprehensive income, net of tax		-			-		-			-			1,046			-			1,046
Net income		-			-		-			-			-			18,569			18,569

Balance as of December 31, 2015		44,778,847			661		312,784			(94,049	)		1,257			98,470			319,123

Repurchase of ordinary shares		(1,884,030	)		-		-			(21,980	)		-			-			(21,980	)
Issuance of shares upon exercise of stock options		294,033			2		1,581			-			-			-			1,583
Stock based compensation		-			-		11,520			-			-			-			11,520
Tax deficiency related to exercise of stock options		-			-		(547	)		-			-			-			(547	)
Other comprehensive loss, net of tax		-			-		-			-			(1,277	)		-			(1,277	)
Net loss		-			-		-			-			-			(8,659	)		(8,659	)

Balance as of December 31, 2016		43,188,850		$	663	$	325,338		$	(116,029	)	$	(20	)	$	89,811		$	299,763

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

F - 8

RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2016			2015			2014

Cash flows from operating activities:

Net income (loss)	$	(8,659	)	$	18,569		$	24,950
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		10,372			9,401			8,102
Stock based compensation		11,520			9,329			7,382
Gain from sale of available-for-sale marketable securities		(1,771	)		(2,438	)		(424	)
Amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities, net		1,949			3,208			2,964
Accrued interest on bank deposits		1,179			(1,998	)		1,069
Increase (decrease) in accrued severance pay, net		401			125			(158	)
Changes in deferred income taxes, net		(2,687	)		215			(1,775	)
Decrease (increase) in trade receivables, net		7,003			(773	)		(726	)
Decrease (increase) in other current assets and prepaid expenses		883			(103	)		(1,913	)
Decrease (increase) in inventories		(792	)		522			(2,654	)
Increase (decrease) in trade payables		(3,284	)		(562	)		1,019
Increase in deferred revenues (short-term and long-term)		12,964			3,849			8,638
Increase in other payables and accrued expenses and other long-term liabilities		8,855			424			7,146
Excess tax deficiency (benefit) from stock-based compensation stock options		547			(632	)		(1,443	)

Net cash provided by operating activities		38,480			39,136			52,177

Cash flows from investing activities:

Purchase of property and equipment		(9,404	)		(13,774	)		(9,482	)
Proceeds from (investment in) other long-term assets		(53	)		(100	)		34
Proceeds from (investment in) bank deposits, net		31,295			(33,824	)		(20,929	)
Purchase of available-for-sale marketable securities		(16,219	)		(13,442	)		(44,063	)
Proceeds from maturity of available-for-sale marketable securities		17,205			26,530			29,390
Proceeds from redemption of available-for-sale marketable securities		5,535			27,757			10,393
Purchase of an intangible asset		-			-			(1,375	)

Net cash provided by (used in) investing activities		28,359			(6,853	)		(36,032	)

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

F - 9

RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2016			2015			2014

Cash flows from financing activities:

Proceeds from exercise of stock options		1,583			8,746			22,493
Excess tax (deficiency) benefit from stock-based compensation		(547	)		632			1,443
Repurchase of Ordinary shares		(21,980	)		(52,896	)		(15,169	)

Net cash provided by (used in) financing activities		(20,944	)		(43,518	)		8,767

Increase (decrease) in cash and cash equivalents		45,895			(11,235	)		24,912
Cash and cash equivalents at the beginning of the year		33,744			44,979			20,067

Cash and cash equivalents at the end of the year	$	79,639		$	33,744		$	44,979

Supplemental disclosure of cash flow information:

Cash paid during the year for income taxes	$	1,730		$	1,853		$	2,285

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

F - 10

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:-

GENERAL

Radware Ltd. (the “Company”), an Israeli corporation commenced operations in April 1997. The Company and its subsidiaries (the “Group") are engaged in the development, manufacture and sale of Cyber Security and Application Delivery solutions designed to ensure optimal service level for applications in virtual, cloud and software defined data centers. The Company's products are marketed worldwide.

The Company has established wholly-owned subsidiaries in the United States, France, Germany, Singapore, the United Kingdom, Japan, Korea, Canada, India, Australia, Italy, Hong Kong and China. In addition, the Company has established representative offices in Taiwan and Spain. The Company holds 91% of its Israeli subsidiary. The Company's subsidiaries are engaged primarily in sales, marketing and support activities of its core products, except for the Israeli subsidiary which is engaged primarily in real-time consumer applications across the web. The Israeli subsidiary operations were immaterial for the years ended December 31, 2014, 2015 and 2016. The net income (loss) attributable to non-controlling interests represents 0.29%, (0.69%) and (1.92%) out of consolidated net income (loss) in 2014, 2015 and 2016, respectively.

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

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").

Use of estimates:

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time these estimates are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

F - 11

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

On an ongoing basis, the Company's management evaluates estimates, including those related to fair values and useful lives of intangible assets, tax assets and liabilities, fair values of stock-based awards, as well as in estimates used in applying the revenue recognition policy related to separation of multiple elements. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Financial statements in United States dollars:

A majority of the revenues of the Group are denominated in United States dollars ("dollar" or "U.S. dollars"). In addition, a substantial portion of the Company's and certain of its subsidiaries' costs are denominated 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 re-measured into dollars in accordance with Accounting Standards Codification ("ASC") No. 830 "Foreign Currency Matters". Changes in currency exchange rates between the Company's functional currency and the currency in which a transaction is denominated are included in the Company's results of operations as financial income, net in the period in which the currency exchange rates change.

Principles of consolidation:

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

Cash equivalents:

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

Bank deposits:

Bank deposits with maturities of more than three months but less than one year are included in short-term deposits. Such short-term deposits are stated at cost which approximates market values.

Bank deposits with maturities of more than one year are included in long-term deposits. Deposits as of December 31, 2016 do not have contractual maturities that exceed 2.5 years. Such long-term deposits are stated at cost which approximates market values.

F - 12

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Investment in marketable securities:

The Company accounts for investments in marketable securities in accordance with ASC No. 320, "Investments- Debt and equity Securities". Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each balance sheet date.

The Company classified all of its debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in "accumulated other comprehensive income (loss)" in shareholders' equity. Realized gains and losses on sales of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities.

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

The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. The factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment recognized in the statement of income (loss) is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss). During the years 2014, 2015 and 2016, the Company did not record any other-than-temporary impairment loss with respect to its marketable securities.

The Company’s unrealized loss on debt securities in corporate bonds relates to several bonds. Because the Company has the ability to hold these debt securities until a recovery of fair value, which may be the maturity date of such bonds, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2016.

Inventories:

Inventories are stated at the lower of cost or market value. Inventory write-off is provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories and discontinued products. Inventory write-offs totaled $ 1,288, $ 750 and $ 1,071 in 2014, 2015 and 2016, respectively, and have been included in cost of revenues of product.

F - 13

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Cost is determined as follows:

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

Work-in-progress and finished products - raw materials as above with the addition of subcontracting costs - calculated on the basis of direct subcontractors costs and with direct overhead costs.

The Company assesses the carrying value of its inventory for each reporting period to ensure inventory is reported at the lower of cost or market in accordance with ASC 330-10-35. Charges for obsolete and slow moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. These assessments consider various factors, including historical usage rate, technological obsolescence, estimated current and future market values and new product introduction. In cases when there is evidence that the anticipated utility of goods, in their disposal in the ordinary course of business, will be less than the historical cost of the inventory, the Company recognizes the difference as a current period charge to earnings and carries the inventory at the reduced cost basis until it is sold or disposed of.

Property and equipment, net:

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

	%

Computers, peripheral equipment and software	15 - 33 (mainly 33)
Office furniture and equipment	6 - 20 (mainly 15)
Leasehold improvements	Over the shorter of the term of the lease or the useful life of the asset

Impairment of long lived assets and intangible assets subject to amortization:

Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

F - 14

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which range from 5 to 7 years. Some of the acquired customer arrangements are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer arrangements as compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line basis. During 2014, 2015 and 2016, no impairment losses were recorded.

Goodwill:

Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350 "Intangibles – Goodwill and Other" ("ASC 350"), goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value.

ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.

The Company operates in one operating segment, and this segment comprises its only reporting unit. The Company performs assessment of qualitative factors during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. This analysis determined that no indicators of impairment existed for 2014, 2015 and 2016.

F - 15

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Contingencies

The Company is currently involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss.

Revenue recognition:

The Group derive revenues mainly from sales of products, post-contract customer support ("PCS") and subscriptions. The Company's products are sold primarily through distributors and resellers, all of which are considered end-users.

Revenues from product sales are recognized in accordance with ASC No. 605, "Revenue Recognition" ("ASC 605"), when delivery has occurred, persuasive evidence of an agreement exists, the vendor's fee is fixed or determinable, and collectability is reasonably assured.

Revenues from PCS, which represents mainly software updates, help desk support, unit replacement or repair, and security update services, and revenues from subscriptions are recognized ratably over the term of the agreement, which is typically between one year and three years. The timing for revenue recognition of the various products and customers is dependent upon satisfaction of such criteria and generally varies from shipment to delivery to the customer depending on the specific shipping terms of a given transaction, as stipulated in the agreement with each customer.

The Company's products and services generally qualify as separate units of accounting. As such, revenues from multiple element arrangements that include products, PCS and subscriptions are separated into their various elements using the relative selling price method. The estimated selling price for each deliverable is based on its vendor specific objective evidence (“VSOE”), if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.

The Company determines ESP in multiple-element arrangements as follows: VSOE for post-contract customer support is determined based on the price charged when such element is sold separately (renewals). 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, in the same territories and markets.

For the product and subscriptions, the Company determines the ESP based on management’s estimated selling price by considering several external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, and competition. The determination of ESP is made through consultation with and approval of management, taking into consideration the pricing model and go-to-market strategy.

F - 16

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company records a provision for estimated sale returns and stock rotation granted to customers on products in the same period the related revenues are recorded in accordance with ASC No. 605. These estimates are based on historical sales returns, stock rotations and other known factors. Such provisions amounted to $ 1,434 and $ 984 as of December 31, 2015 and 2016, respectively.

Deferred revenues include unearned amounts collected under post-contract customer support and subscription agreements, and are classified in short and long-term based on their contractual term.

Shipping and handling fees and costs:

Shipping and handling fees charged to the Company's customers are recognized as product revenue in the period shipped and the related costs for providing these services are recorded as a cost of revenues.

Cost of revenues:

Cost of products is comprised of cost of software and hardware production, manuals, packaging, license fees paid to third parties, inventory write-offs and amortization of acquired technology.

Cost of services is comprised of cost of post-sale customer support.

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, 2014, 2015 and 2016 were immaterial.

Research and development expenses:

Research and development costs are charged to the statements of income (loss) as incurred. ASC No. 985-20, “Software - Costs of Software to Be Sold, Leased, or Marketed”, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

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

F - 17

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Grants:

During 2012-2014 and 2016 the Company received non-royalty-bearing grants from the Government of Israel for approved research and development projects. These grants are recognized at the time the Company is entitled to such grants on the basis of the costs incurred as provided by the relevant agreement and included as a deduction from research and development expenses.

Research and development grants deducted from research and development expenses amounted to $ 297, nil and $ 880 in 2014, 2015 and 2016, respectively.

Accounting for stock-based compensation:

The Company accounts for stock-based compensation in accordance with ASC No. 718, "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statement of income.

The Company recognizes compensation expenses for the value of its awards based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

ASC 718 requires the cash flows resulting from the tax deductions in excess of the compensation costs recognized for those stock options to be classified as financing cash flows.

The Company selected the Black-Scholes-Merton option pricing model to account for the fair value of its stock-options awards with only service conditions and whereas the fair value of the restricted stocks awards is based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over an historical period equivalent to the option's expected term. The expected option term represents the period of time that options are expected to be outstanding. Expected term of options is based on historical experience. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

F - 18

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances.

The fair value of the Company's stock options granted to employees and directors for the years ended December 31, 2014, 2015 and 2016 was estimated using the following weighted average assumptions:

Employees' stock option plan:

	Year ended December 31,
	2016			2015			2014

Risk free interest rate		1.12	%		1.21	%		1.10	%
Dividend yields		0	%		0	%		0	%
Expected volatility		34	%		34	%		40	%
Weighted average expected term from grant date (in years)		3.88			3.86			3.72

Income taxes:

The Company accounts for income taxes in accordance with ASC No. 740, "Income Taxes" ("ASC 740"). 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 Group provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all of the deferred tax assets will not be realized.

Deferred tax liabilities and assets are classified as non-current in accordance with ASU 2015-17 (see also Note 2ab).

F - 19

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.

The second step is only addressed if the first step 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 likely than not criteria is recognized.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalty, if any related to unrecognized tax benefits in its taxes on income.

Concentrations of credit risks:

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

The majority of the Group’s cash and cash equivalents and bank deposits are invested in major banks in Israel and the U.S. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these cash equivalents may be redeemed upon demand and, therefore management believes that it bears a lower risk. The short-term and long-term bank deposits are held in financial institutions which management believes are institutions with high credit standing, and accordingly, minimal credit risk from geographic or credit concentration exists with respect to these bank deposits. As of December 31, 2016, 81% of the Group’s short-term and long-term bank deposits were deposited in major Israeli banks in Israel which are rated AAA, as determined by the Israeli affiliate of Standard & Poor’s (“S&P”), and 19% were deposited in the U.S. branch of another major Israeli bank which is also rated AAA, as determined by the Israeli affiliate of S&P.

As of December 31, 2016, the maximal contractual duration of any of the Group’s bank deposits was 2.51 years, the weighted average duration of the Group’s deposits was 1.32 years, and the weighted average time to maturity was 0.37 years.

The Group’s marketable securities include investments in foreign banks, government debentures and in corporate shares and debentures. The financial institutions that hold the Group’s marketable securities are major U.S. financial institutions, located in the United States. The Company's management believes that the Group’s marketable securities portfolio is a diverse portfolio of highly-rated securities and the Group’s investment policy limits the amount the Group’s may invest in each issuer, and accordingly, management believes that minimal credit risk exists from geographic or credit concentration with respect to these securities.

F - 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.)

As of December 31, 2016, 49% of the Group’s marketable securities portfolio was invested in debt securities of financial institutions, 10% in debt securities of governmental institutions, and 41% in debt securities of corporations. No more than 2% of the Group’s total investments portfolio was invested in debt securities of a single issuer.

From geographic prospective, 49% of the Group’s marketable securities portfolio was invested in debt securities of U.S. issuers, 29% was invested in debt securities of European issuers and 22% was invested in debt securities of other geographic-located issuers. As of December 31, 2016, 86% of the Group’s marketable securities portfolio was rated A- or higher, as determined by S&P, 10% was rated BBB or BBB+ and 4% was rated BB-.

The trade receivables of the Group 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. Bad debt expenses for the years ended December 31, 2014, 2015 and 2016 were $ 150, $ 80 and nil, respectively. Total write offs during 2014, 2015 and 2016 amounted to $ 214, nil and nil, respectively.

Employee related benefits:

Severance pay:

The Group’s liability for severance pay with respect to its Israeli employees for periods prior to April 1, 2007 (the “Transition Date") is calculated pursuant to the Israeli Severance Pay Law – 1963 ("ISP Law"), based on the most recent salary of the employees multiplied by the number of years of employment as of the Transition Date. The Company recorded as expenses the increase in the severance liability, net of earnings (losses) from the related investment fund. Israeli employees were entitled to one month's salary for each year of employment, or a portion thereof. Until the Transition Date, the Group’s liability was partially funded by monthly payments deposited with insurers; any unfunded amounts would be paid from operating funds and are covered by a provision established by the Company.

The carrying value of the deposited funds for the Group’s Israeli employees severance pay for employment periods prior to the Transition Date include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the ISP Law or employment agreements.

F - 21

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.)

Effective as of the Transition Date, the Group’s agreements with employees in Israel are in accordance with Section 14 of the ISP Law which provide that the employer's contributions to severance pay fund shall cover its entire severance obligation with respect to period of employment subsequent to the Transition Date. Upon termination, the release of the contributed amounts from the fund to the employee shall relieve the employer from any further severance obligation and no additional payments are required to be made by the employerto the employee. As a result, the related obligation and amounts deposited in respect of such obligation are not stated on the balance sheets, as the employeris legally released from severance obligation to employees once the amounts have been fully deposited, and the Company has no legal ownership in the amounts deposited. Consequently, effective from the Transition Date, the Company increased its contribution to the deposited funds to cover the full amount of the employees' salaries.

Severance pay expenses for the years ended December 31, 2016, 2015 and 2014 amounted to approximately $ 3,603, $ 2,886 and $ 2,432, respectively. Accrued severance pay is included in other long-term liabilities in the balance sheets.

Fair value of financial instruments:

The Company measures its cash equivalents, deposits and marketable securities at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2

Include other inputs that are directly or indirectly observable in the marketplace.

Level 3

Unobservable inputs which are supported by little or no market activity.

Comprehensive income (loss):

The Company accounts for comprehensive income (loss) in accordance with ASC No. 220, "Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in shareholders’ equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its only item of other comprehensive income (loss) relate to available-for-sale marketable securities adjustment.

F - 22

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.)

Treasury stock:

The Company repurchases its ordinary shares from time to time on the open market and holds such shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity. The voting rights attached to treasury stock are revoked.

Basic and diluted net income (loss) per share:

Basic net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus potential dilutive ordinary shares considered outstanding during the period, if any, in accordance with ASC No. 260, "Earnings Per Share". The total number of ordinary shares related to outstanding stock options excluded from the calculation of diluted income (loss) per share as they would have been anti-dilutive was 474,000, 4,174,953 and 4,665,638 for the years ended December 31, 2014, 2015 and 2016, respectively.

Business combinations:

The Company accounted for business combination in accordance with ASC No. 805, "Business Combinations" ("ASC 805"). ASC No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.

aa.

Reclassifications:

Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. The reclassification had no effect on previously reported net income or shareholders' equity. The reclassification was adjusted the revenues from services to revenues from products in order to align the 2016 presentation.

F - 23

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.)

ab.

Impact of recently issued accounting pronouncements:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 "Revenue from Contracts with Customers" (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method. The Company has made progress toward completing its evaluation of the potential changes from adopting this new standard on its financial reporting and disclosures. The Company formed an implementation work group and expects to complete the evaluation of the impact of the accounting and disclosure changes on its business processes, controls and systems throughout 2017, design any changes to such business processes, controls and systems, and implement the changes before the end of 2017. Based on its current analysis, one of the potential effects, if any, relates to incremental sales costs with respect to contracts signed during a period, which may require capitalization. The FASB has issued, and may issue in the future, interpretive guidance, which may cause the Company's evaluation to change. The Company continues to assess all the potential impacts under the new revenues standard. Management believes that the Company is following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the beginning of fiscal year 2018.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17) "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company has early adopted this standard in the fourth quarter of 2015 on a retrospective basis.

F - 24

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.)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU will be effective for the Company in the first quarter of 2019. The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for employee share-based payments including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU will be effective for the Company in the first quarter of 2017. The Company’s adoption of ASU 2016-09 will not have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which intends to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance will be effective for The Company in the first quarter of 2018. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In January 2017, the FASB issued ASU "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. ASU 2017-04 would require applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the standard on its future financial statements and disclosures but it is not expected to have a material impact.

F - 25

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3:-

MARKETABLE SECURITIES

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

	December 31,
	2016									2015
	Adjusted		Gross unrealized			Gross unrealized		Market		Adjusted		Gross unrealized			Gross unrealized		Market
	cost		losses			gains		Value		cost		losses			gains		Value

Foreign banks and government debentures	$	15,361	$	(10	)	$	51	$	15,402	$	5,895	$	(15	)	$	16	$	5,896
Corporate debentures		5,046		-			4		5,050		4,393		(1	)		17		4,409
Corporate shares		-		-			-		-		3,762		-			1,936		5,698

Total available-for-sale marketable securities	$	20,407	$	(10	)	$	55	$	20,452	$	14,050	$	(16	)	$	1,969	$	16,003

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

	December 31,
	2016									2015
	Adjusted		Gross unrealized			Gross unrealized		Market		Adjusted		Gross unrealized			Gross unrealized		Market
	cost		losses			gains		Value		cost		losses			gains		Value

Foreign banks and government debentures	$	31,040	$	(45	)	$	76	$	31,071	$	38,383	$	(117	)	$	149	$	38,415
Corporate debentures		28,980		(26	)		65		29,019		32,008		(143	)		43		31,908

Total available-for-sale marketable securities	$	60,020	$	(71	)	$	141	$	60,090	$	70,391	$	(260	)	$	192	$	70,323

Marketable securities with contractual maturities of more than three years are as follows:

	December 31,
	2016									2015
	Adjusted		Gross unrealized			Gross unrealized		Market		Adjusted		Gross unrealized			Gross unrealized		Market
	cost		Losses			gains		Value		cost		Losses			gains		Value

Foreign banks and government debentures	$	7,738	$	(111	)	$	-	$	7,627	$	6,356	$	(71	)	$	-	$	6,285
Corporate debentures		7,281		(60	)		29		7,250		11,342		(136	)		-		11,206

Total available-for-sale marketable securities	$	15,019	$	(171	)	$	29	$	14,877	$	17,698	$	(207	)	$	-	$	17,491

F - 26

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3:-

MARKETABLE SECURITIES (Cont.)

Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values as of December 31, 2016 and 2015 were as follows:

	December 31, 2016
	Investments with continuous unrealized losses for less than 12 months					Investments with continuous unrealized losses for 12 months or greater					Total investments with continuous unrealized losses
	Fair Value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses

Foreign banks and government debentures	$	20,118	$	(139	)	$	2,325	$	(28	)	$	22,443	$	(167	)
Corporate debentures		13,444		(79	)		1,013		(6	)		14,457		(85	)

Total available-for-sale marketable securities	$	33,562	$	(218	)	$	3,338	$	(34	)	$	36,900	$	(252	)

	December 31, 2015
	Investments with continuous unrealized losses for less than 12 months					Investments with continuous unrealized losses for 12 months or greater					Total investments with continuous unrealized losses
	Fair Value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses

Foreign banks and government debentures	$	16,041	$	(64	)	$	15,660	$	(139	)	$	31,701	$	(203	)
Corporate debentures		9,697		(93	)		24,347		(188	)		34,044		(281	)

Total available-for-sale marketable securities	$	25,738	$	(157	)	$	40,007	$	(327	)	$	65,745	$	(484	)

As of December 31, 2016 the Company had 3 investments with continuous unrealized loss for more than 12 months.

As of December 31, 2015 and 2016, interest receivable amounted to $ 852 and $ 866, respectively, and is included within available-for-sale marketable securities in the balance sheets.

F - 27

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4:-

FAIR VALUE MEASUREMENTS

In accordance with ASC 820, "Fair Value Measurements and Disclosures", the Company measures its cash equivalents and available-for-sale marketable securities at fair value on recurring basis. Cash equivalents and marketable securities are classified within Level 1 or Level 2. This is because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

The Company's financial assets measured at fair value on a recurring basis, including interest receivable components consisted of the following types of instruments as of December 31, 2016 and 2015:

	December 31, 2016
	Fair value measurements using input type
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	578	$	-	$	-	$	578

Available-for-sale:

Foreign banks and government debentures		-		54,100		-		54,100
Corporate debentures		-		41,319		-		41,319

Total financial assets	$	578	$	95,419	$	-	$	95,997

	December 31, 2015
	Fair value measurements using input type
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	853	$	-	$	-	$	853

Available-for-sale:

Foreign banks and government debentures		-		50,596		-		50,596
Corporate debentures		-		47,523		-		47,523
Corporate shares		5,698		-		-		5,698

Total financial assets	$	6,551	$	98,119	$	-	$	104,670

F - 28

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5:-

INVENTORIES

Inventories are comprised of the following:

	December 31,
	2016		2015

Raw materials and components	$	1,989	$	2,655
Work-in-progress		429		442
Finished products		14,696		13,225

	$	17,114	$	16,322

NOTE 6:- PROPERTY AND EQUIPMENT, NET

	December 31,
	2016		2015
Cost:

Computer, peripheral equipment and software	$	78,521	$	71,571
Office furniture and equipment		10,103		8,953
Leasehold improvements		5,607		5,193

		94,231		85,717
Accumulated depreciation:

Computer, peripheral equipment and software		59,696		52,645
Office furniture and equipment		5,382		4,554
Leasehold improvements		2,799		2,315

		67,877		59,514

Property and equipment, net	$	26,354	$	26,203

Depreciation expenses for the years ended December 31, 2014, 2015 and 2016 were $ 6,413, $ 8,163 and $ 9,253, respectively.

In 2016, the Company commenced a project for a global roll-out of its Enterprise Resource Planning systems ("ERP"). The Company capitalizes costs incurred related to the system according to ASC 350-40 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". As of December 31, 2016, the Company capitalized an amount of $2,721, which is included in "Computer, peripheral equipment and software".

F - 29

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7:-

INTANGIBLE ASSETS, NET

Intangible assets:

	Weighted
	average
	amortization	December 31,
	Period	2016		2015
	(years)
Cost:
Acquired technology	7.6	$	16,314	$	16,314
Customers relationships and brand name	6.8		9,817		9,817

			26,131		26,131

Accumulated amortization:
Acquired technology			14,160		13,146
Customers relationships and brand name			9,572		9,467

			23,732		22,613

Intangible assets, net		$	2,399	$	3,518

Amortization expenses for the years ended December 31, 2014, 2015 and 2016 were $ 1,689, $ 1,238 and $ 1,119 respectively.

Future estimated amortization expenses for the years ending:

December 31,

2017	$	1,006
2018		687
2019		674
2020		32

Total	$	2,399

F - 30

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8:-

OTHER PAYABLES AND ACCRUED EXPENSES

	December 31,
	2016		2015

Accrued expenses and other	$	8,330	$	6,769
Subcontractors accrual		2,081		2,532
Accrued taxes		4,108		2,006

	$	14,519	$	11,307

NOTE 9:-

COMMITMENTS AND CONTINGENT LIABILITIES

Lease commitments:

The facilities of the Group are leased under various operating lease agreements, which expire on various dates, the latest of which is on May 31, 2022. Aggregate minimum rental payments under non-cancelable operating leases as of December 31, 2016 and for each succeeding fiscal year indicated below are (in the aggregate) as follows:

2017	$	4,865
2018		3,896
2019		3,222
2020		1,828
2021		668

	$	14,479

Total rent expenses for the years ended December 31, 2014, 2015 and 2016 were $ 4,628, $ 4,998 and $ 5,377 respectively (see also Note 15b).

Litigation:

On August 29, 2013, F5 Networks, Inc. (“F5”) filed an amended answer and counterclaim in an action brought by Radware against F5 on May 1, 2013 for infringement of three Radware’s patents regarding link load balancing technology. The Company prevailed in its affirmative case at trial, resulting in a damages award of $6,871 plus costs. The Court also permanently enjoined F5 from infringing Radware’s patents-in-suit. In its counterclaim, F5 alleged infringement of four F5 patents related to cookie persistence technology by Radware. In particular, while F5 acknowledged that the Company is licensed to each of the F5 patents-in-suit, F5 contends that the Company’s AppDirector and Alteon product lines perform unlicensed modes of the patents-in-suit. F5’s counterclaim further alleged trade libel and unfair competition resulting from statements allegedly made by the company asserting that F5 is responsible for certain internet service problems at major banks, including the Bank of America. On December 6, 2013, the Company filed an answer denying the allegations in F5’s counterclaims. On June 26, 2014, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s patent infringement counterclaim with respect to the Company’s AppDirector product line.

F - 31

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

In June 2015, in response to the Company’s Summary Judgment Motion, F5 conceded that the current version of Alteon does not infringe any of the F5 patents-in-suit and that its allegations are limited to a previous version of Alteon. On January 7, 2016, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s trade libel and unfair competition counterclaims. On May 9, 2016, F5 accepted the Company offer for judgment of $40 for all of F5’s remaining claims and on September 7, 2016 the Court entered judgment in the same amount. After judgment, both Radware and F5 appealed other portions of the judgment to the Federal Circuit. F5 appealed the judgment for Radware, while Radware appealed orders that limited the amount of damages and the scope of the permanent injunction. Accordingly the awarded amount was not recorded as of December 31, 2016. Oral hearing on the appeal has not yet been scheduled. F5 has posted a bond with the Court for the entire judgment amount in favor of Radware.

On April 4, 2016, F5 filed a lawsuit against the Company in the United States District Court for the Western District of Washington, alleging infringement of three U.S. patents of F5 relating to its ADC and WAF products. The Company denies that any of its products infringe any valid claims of the asserted F5 patents and it intends to continue to vigorously oppose F5’s claims. On December 16, 2016, the Company filed an amended counterclaim in this action for patent infringement of a recently issued Radware patent directed to outbound link load balancing. However, since discovery and litigation is still in a preliminary stage, the Company cannot estimate what impact, if any, the litigation may have on its results of operations, financial condition or cash flows.

On January 17, 2014, CRFD Research Inc. ("CRFD") filed a patent infringement complaint in the District of Delaware against Level 3 Communications LLC ("Level 3"), a reseller of products of Strangeloop Networks, the Canadian-based company that the Company acquired in 2013.. On January 21, 2014, Level 3 requested indemnification from Strangeloop seeking indemnification for patent infringement claims brought by CRFD against Level 3. The Company has agreed to indemnify and defend Level 3 in this action. On May 12, 2014, the District Court in Delaware granted the parties Stipulation of Dismissal with Prejudice dismissing the complaint against Level 3.

From time to time, the Company is party to other various legal proceedings, claims and litigation that arise in the normal course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows and believes that it had provided an adequate accrual to cover the costs to resolve the aforementioned legal proceedings, demands and claims.

F - 32

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- SHAREHOLDERS' EQUITY

The Company's shares are listed for trade on the NASDAQ Global Select Market under the symbol "RDWR".

a. Rights of shares:

Ordinary Shares:

The ordinary shares confer upon the holders the right to receive notice to participate and vote in shareholders meetings of the Company and to receive dividend, if declared.

b. Treasury stock:

In April 2015, the Company’s Board of Directors authorized a new plan for the repurchase of up to an aggregate amount of $ 40,000 of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan expired on April 30, 2016. In April 2016, the Company’s Board of Directors authorized a new plan for the repurchase of up to an aggregate amount of $ 40,000 of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan will expire on April 30, 2017. During 2015 and 2016 the Company purchased a total of 2,824,772 and 1,884,030 of its ordinary shares for total consideration of $ 52,896 and $ 21,980, respectively. Total consideration for the purchase of these ordinary shares was recorded as Treasury stock, at cost, as part of shareholders' equity.

c. Dividends:

Dividends, if any, will be paid in NIS. Dividends paid to shareholders outside Israel may be converted to U.S. dollars on the basis of the exchange rate prevailing at the date of the conversion. The Company does not intend to pay cash dividends in the foreseeable future.

d. Stock Option Plans:

The Company has two stock option plans, the Company's Key Employee Share Incentive Plan (1997) as amended and restated (the "1997 Plan") and the Directors and Consultants Option Plan (the “DC Plan" and together with the 1997 Plan, Stock Option Plans"). Under the Stock Option Plans, options may be granted to officers, directors, employees and consultants of the Group. 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 5.2 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.

F - 33

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

Pursuant to the Stock Option Plans, the Company reserved for issuance 28,445,714 ordinary shares. As of December 31, 2016, an aggregate of 1,025,066 ordinary shares of the Company were still available for future grants.

On February 1, 2010, the Company's Board of Directors adopted an additional addendum to the share option plan allowing the allocation of short-term options to grantees who are not residents of Israel or the United States, with a grant price of 90% of the closing market price of the shares on the NASDAQ on the date of grant of a respective option award. As of December 31, 2016, 1,000,000 ordinary shares have been reserved for option grants under this addendum. As of December 31, 2016, an aggregate of 763,306 ordinary shares of the Company, under this addendum, were still available for future grants.

Restricted Shares Units ("RSUs"):

In addition to granting stock options, since 2013, the Company started to routinely grant Restricted Stock Units ("RSUs") under the 1997 Plan. RSUs vest primarily over a four years period of employment. RSUs that are cancelled or forfeited become available for future grants.

Employee Stock Purchase Plan ("ESPP"):

On February 1, 2010 the Company's Board of Directors adopted the 2010 Employee Share Purchase Plan ("ESPP"), which provides for the issuance of a maximum of 2,000,000 ordinary shares. Pursuant to the ESPP, eligible employees (including only Israeli and United States residents) could have up to 10% of their net income withheld, up to certain maximums, to be used to purchase the Company's ordinary shares. The ESPP is implemented with overlapping one year Offering Periods, each one consisting of two purchases, once in every six-month period. The price of each ordinary share purchased under the ESPP is equal to 90% of the closing price for the shares on the respective Offering Date.

As of December 31, 2016, 1,744,440 ordinary shares are available for issuance under future ESPP. During 2016, 2015 and 2014 there was no offering under the ESPP.

Modification of Stock Options:

During 2016, the Board of Directors of the Company approved the repricing of 667,750 stock options for several employees and senior management, previously granted under the Stock Option Plans. As a result, the exercise price of the options was lowered to the price per share of the stock at the free market. There was no change in the number of shares subject to each option, vesting or other terms of the options. The incremental expense for the repricing of the options is approximately $1,187. For the year ended December 31, 2016, the Company recorded expenses totaling $359 associated with the repricing.

F - 34

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

A summary of employees and directors option activity under the Company's Stock Option Plans as of December 31, 2016, 2015 and 2014 is as follows:

	Number of options			Weighted-average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value

Outstanding at January 1, 2016		5,201,661		$	16.51		3.06	$	2,748
Granted		2,772,300			12.94
Exercised		(139,400	)		12.18
Expired		(416,523	)		17.06
Forfeited		(1,389,150	)		19.09

Outstanding at December 31, 2016		6,028,888		$	14.33		3.27	$	5,070

Exercisable at December 31, 2016		2,014,403		$	15.28		1.85	$	597

Vested and expected to vest at December 31, 2016		5,475,668		$	14.44		3.16	$	4,236

	Number of options			Weighted-average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value

Outstanding at January 1, 2015		4,702,920		$	15.54		3.22	$	30,474
Granted		1,562,000			18.96
Exercised		(600,393	)		14.57
Expired		(160,000	)		16.92
Forfeited		(302,866	)		17.76

Outstanding at December 31, 2015		5,201,661		$	16.51		3.06	$	2,748

Exercisable at December 31, 2015		1,791,130		$	15.32		1.91	$	1,578

Vested and expected to vest at December 31, 2015		4,878,629		$	16.44		2.99	$	2,655

F - 35

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

	Number of options			Weighted-average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value

Outstanding at January 1, 2014		7,073,511		$	11.74		2.62	$	44,716
Granted		1,239,375			17.14
Exercised		(3,058,966	)		7.35
Expired		-			-
Forfeited		(551,000	)		14.83

Outstanding at December 31, 2014		4,702,920		$	15.54		3.22	$	30,474

Exercisable at December 31, 2014		1,265,300		$	15.57		1.58	$	8,161

Vested and expected to vest at December 31, 2014		4,320,142		$	15.99		3.14	$	26,033

The aggregate intrinsic value of options outstanding at December 31, 2016, represents intrinsic value of 3,925,483 outstanding options that are in-the-money as of December 31, 2016.

The aggregate intrinsic value of options exercisable at December 31, 2016 represents intrinsic value of 982,890 outstanding options that are in-the-money as of December 31, 2016.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $ 3.48, $ 5.29 and $ 5.42, respectively.

As of December 31, 2016, there was approximately $ 10,612 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company's stock option plans (including expenses associated with the repricing).. That cost is expected to be recognized over a weighted-average period of 1.62 years. Total grant-date fair value of vested options for the year ended December 31, 2016 was approximately $ 10,281.

As of December 31, 2015, there was approximately $ 9,866 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company's stock option plans. That cost was expected to be recognized over a weighted-average period of 1.60 years. Total grant-date fair value of vested options for the year ended December 31, 2015 was approximately $ 9,696.

F - 36

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

As of December 31, 2014, there was approximately $ 10,643 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 1.53 years. Total grant-date fair value of vested options for the year ended December 31, 2014 was approximately $ 6,841.

The options outstanding under the Company's Stock Option Plans as of December 31, 2016, 2015 and 2014 have been separated into ranges of exercise price as follows:

December 31, 2016
Outstanding								Exercisable
				Weighted
				average		Weighted				Weighted
Ranges of				remaining		average				average
exercise		Number of		contractual		exercise		Number of		exercise
price		options		life (years)		price		options		price

$	10.08-14.74		4,190,733		3.66		13.38		982,890		13.97
$	15.09-19.30		1,793,905		2.37		16.34		1,031,513		16.52
$	20.62-23.66		44,250		3.47		22.81		-		-

			6,028,888						2,014,403

December 31, 2015
Outstanding								Exercisable
				Weighted
				average		Weighted				Weighted
Ranges of				remaining		average				average
exercise		Number of		contractual		exercise		Number of		exercise
price		options		life (years)		price		options		price

$	12.18-14.74		1,861,208		2.98		13.91		863,792		13.56
$	15.09-19.30		2,557,703		2.67		16.69		927,338		16.96
$	20.62-23.66		782,750		4.53		22.10		-		-

			5,201,661						1,791,130

December 31, 2014
Outstanding								Exercisable
				Weighted
				average		Weighted				Weighted
Ranges of				remaining		average				average
exercise		Number of		contractual		exercise		Number of		exercise
price		options		life (years)		price		options		price

$	7.65		60,350		0.25		7.65		60,350		7.65
$	11.94-14.47		1,861,533		3.32		13.58		334,200		12.19
$	15.09-19.30		2,781,037		3.21		17.03		870,750		17.41

			4,702,920						1,265,300

F - 37

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

The following table summarizes information relating to RSUs, as well as changes to such awards during 2016:

	Year ended December 31,
	2016
	Number in thousands

Outstanding at January 1, 2016		818,364
Granted		743,188
Vested		(154,633	)
Forfeited		(123,989	)

Outstanding as of December 31, 2016		1,282,930

As of December 31, 2016, there was approximately $ 12,570 of total unrecognized compensation costs related to non-vested RSUs granted under the Company's stock option plans. That cost is expected to be recognized over a weighted-average period of 1.67 years.

The weighted-average grant date fair value of RSUs granted during the year ended December 31, 2016, 2015 and 2014 were $ 12.79, 18.36 and 16.96, respectively.

Stock-based compensation was recorded in the following items within the consolidated statements of income (loss):

	Year ended December 31,
	2016		2015		2014

Cost of revenues	$	180	$	141	$	79
Research and development, net		3,339		2,456		1,421
Sales and marketing		5,661		4,098		2,950
General and administrative		2,340		2,634		2,932

Total expenses	$	11,520	$	9,329	$	7,382

F - 38

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11:-

EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net earnings per share:

	Year ended December 31,
	2016			2015		2014

Numerator for basic and diluted net earnings (loss) per share:

Net income (loss)	$	(8,659	)	$	18,569	$	24,950

Weighted average shares outstanding, net of treasury stock:

Denominator for basic net earnings (loss) per share		43,868,221			45,895,321		45,308,554
Effect of dilutive securities:
Employee stock options		-			843,283		1,586,061

Denominator for diluted net earnings (loss) per share		43,868,221			46,738,604		46,894,615

Basic net earnings (loss) per share	$	(0.20	)	$	0.40	$	0.55

Diluted net earnings (loss) per share	$	(0.20	)	$	0.40	$	0.53

F - 39

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 12:-

TAXES ON INCOME

a. General:

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

	2016		2015

Beginning balance	$	12,306	$	10,117
Additions for prior year tax positions		911		36
Additions for current year tax positions		-		2,153

Ending balance	$	13,217	$	12,306

The Company's Israeli tax returns have been examined for all years including and prior to fiscal 2008, and the Company is no longer subject to audit for these periods. During 2016 the Israeli Tax Authorities (“ITA”) began assessment of 2012-2014 tax years.

As of December 31, 2016, the entire amount of the unrecognized tax benefits could affect the Company's income tax provision and the effective tax rate.

During the years ended December 31, 2016, 2015 and 2014 amounts of $ 912, $ 36, and ($ 404), respectively, were added (deducted) to the unrecognized tax benefits derived from interest and exchange rate differences expenses related to prior years' uncertain tax positions. As of December 31, 2016 and 2015, the Company had accrued interest liability related to uncertain tax positions in the amounts of $ 1,225 and $ 498 respectively, which is included within income tax accrual on the balance sheets.

Exchange rate differences are recorded within financial income, net, while interest is recorded within taxes on income expense.

The Company's U.S subsidiary files income tax return in the U.S federal jurisdiction. Tax returns have been examined for all years prior to fiscal 2010, and the Company's U.S subsidiary is no longer subject to audit for these periods.

The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. The final tax outcome of its tax audits could be different from that which is reflected in the Company's income tax provisions and accruals. Such differences could have a material effect on the Company's income tax provision and net income in the period in which such determination is made.

F - 40

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:-

TAXES ON INCOME (Cont.)

Israeli Taxation:

Foreign Exchange Regulations:

Commencing in taxable year 2003, the Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations. Under the Foreign Exchange Regulations the Israeli company is calculating its tax liability in U.S. Dollars according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into NIS according to the exchange rate as of December 31st of each year.

Tax rates:

The Israeli corporate tax rate in 2016 is 25% (2014 and 2015 – 26.5%). A company is taxable on its real capital gains at the corporate tax rate in the year of sale.

In August 2013, the Israeli Parliament issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 ("the Budget Law"), which consists, among others, of taxation of revaluation gains effective from August 1, 2013 but contingent on the publication of regulations that define what should be considered as "retained earnings not subject to corporate tax" and regulations that set forth provisions for avoiding double taxation of foreign assets. As of the date of approval of these financial statements, no such regulations were issued.

In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.

Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):

Under the amended Law, as amended in April 2005 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.

The Company's income derived from the Privileged Enterprise 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).

F - 41

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:-

TAXES ON INCOME (Cont.)

Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of the Company's business income from export. In order to be eligible for the tax benefits, the Amendment states that a company must make an investment in the Privileged 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 Privileged 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 Privileged 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 Privileged 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 to 10 years from the commencement year, or 12 years from the first day of the year of election.

The Company elected 2009 and 2012 as years of election according to the Law prior to the reform mentioned below.

In the event of distribution of dividends from tax-exempt income generated under Privileged or Approved Enterprise, the amount distributed will be subject to the same reduced corporate tax rate that would have been applied to the Approved Enterprise's and Privileged Enterprise's income.

In addition, as a result of the amendment, tax-exempt income attributed to Privileged Enterprise, will subject the Company to taxes upon distribution in any manner including complete liquidation.

Out of the Company's retained earnings as of December 31, 2016, $ 87,762 are tax-exempted attributable to its Privileged Enterprise programs. If such tax-exempt income is distributed in a manner other than upon complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits, and an income tax liability of up to $ 17,552 would be incurred as of December 31, 2016.

The Company's Board of Directors has determined that it will not distribute any amounts of its undistributed tax-exempt income as dividend. The Company intends to reinvest its tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to the Company's Approved Enterprise and Privileged Enterprise programs as the undistributed tax exempt income is essentially permanent by reinvestment.

F - 42

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:-

TAXES ON INCOME (Cont.)

In 2012, new legislation amending to the Investment Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies, as opposed to the current law's incentives, which are limited to income from Approved Enterprises during their benefits period. Under the new law as amended in July 2013, and starting January 1, 2014 the uniform tax rate will be 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel.

Under the transition provisions of the new legislation, the Company decided to irrevocably implement the new law, effective January 1, 2014.

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

In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the Amendment") was published. According to the Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).

The Amendment also prescribes special tax tracks for technological enterprises, which are subject to rules that are to be issued by the Minister of Finance by March 31, 2017.

The new tax tracks under the Amendment are as follows:

Technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).

Special technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise's geographical location.

Any dividends distributed to "foreign companies", as defined in the Law, deriving from income from the technological enterprises will be subject to tax at a rate of 4%.

F - 43

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:-

TAXES ON INCOME (Cont.)

Since as of December 31, 2016 definitive criteria to determine the tax benefits had not yet been established, it cannot be concluded that the legislation in respect of technological enterprises had been enacted or substantively enacted as of that date.

Accordingly, the above changes in the tax rates relating to technological enterprises were not taken into account in the computation of deferred taxes as of December 31, 2016.

Taxes on income are comprised as follows:

	Year ended December 31,
	2016			2015		2014

Current taxes	$	4,338		$	5,082	$	7,706
Deferred taxes		(2,687	)		215		(1,775	)

	$	1,651		$	5,297	$	5,931

Domestic	$	283		$	3,084	$	4,899
Foreign		1,368			2,213		1,032

	$	1,651		$	5,297	$	5,931

	Year ended December 31,
	2016			2015			2014
Domestic taxes:

Current taxes	$	494		$	2,715		$	5,538
Deferred taxes		(211	)		369			(639	)

		283			3,084			4,899
Foreign taxes:

Current taxes		3,844			2,367			2,168
Deferred taxes		(2,476	)		(154	)		(1,136	)

		1,368			2,213			1,032

Taxes on income	$	1,651		$	5,297		$	5,931

F - 44

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:-

TAXES ON INCOME (Cont.)

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,
	2016			2015

Carryforward tax losses	$	2,210		$	1,625
Deferred revenues		5,764			4,172
Temporary differences		5,881			4,982
Intangible assets		36			294

Deferred tax assets before valuation allowance		13,891			11,073
Valuation allowance		(1,495	)		(1,032	)

Net deferred tax asset		12,396			10,041

Intangible assets, including goodwill		(2,997	)		(2,931	)
Depreciable assets		(1,989	)		(1,840	)
Unrealized losses (gains) on marketable securities		7			(419	)

Deferred tax liability		(4,979	)		(5,190	)

Net deferred tax assets	$	7,417		$	4,851

The net change in the total valuation allowance for the year ended December 31, 2016 was mainly relates to the losses carryforwards of the Israeli subsidiary that the Company concluded that it is not more likely than not that the net deferred tax assets will be realized and a valuation allowance has been recorded against these assets..

	December 31,
	2016		2015

Domestic deferred tax asset, net	$	1,233	$	598
Foreign deferred tax asset, net		6,184		4,253

	$	7,417	$	4,851

Non-current deferred tax asset, net is included within other long-term assets in the balance sheets. Deferred taxes are carried directly to equity if the tax relates to equity items (see also Note 2ab).

F - 45

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:-

TAXES ON INCOME (Cont.)

Foreign:

The Company's subsidiaries in the U.S. have provided valuation allowance in respect of deferred tax assets resulting from carry forward of net operating loss relating to excess tax deduction from stock options prior to the adoption of ASC 718 on January 1, 2007. ASC No. 718 prohibits recognition of a deferred tax asset for excess tax benefits due to stock option exercises that have not yet been realized through a reduction in income tax payable. Such unrecognized deferred tax benefits will be accounted for as a credit to additional paid-in-capital, if and when realized.

Through December 31, 2016, the U.S. subsidiary had a U.S. federal loss carry forward of $ 5,388, which can be carried forward and offset against taxable income up to 20 years, expiring between fiscal 2024 and fiscal 2027.

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

F - 46

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:-

TAXES ON INCOME (Cont.)

A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the statement of operations is as follows:

	Year ended December 31,
	2016			2015			2014

Income (loss) before taxes, as reported in the consolidated statements of income	$	(7,008	)	$	23,866		$	30,881

Statutory tax rate		25	%		26.5	%		26.5	%
Theoretical tax expense (benefit) on the above amount at the Israeli statutory tax rate	$	(1,752	)	$	6,324		$	8,183
Tax adjustment in respect of different tax rate of foreign subsidiary		427			622			190
Non-deductible expenses and other permanent differences		200			322			772
Deferred taxes on losses for which valuation allowance was provided, net		463			377			270
Utilization of tax losses and deferred taxes for which valuation allowance was provided, net		-			(555	)		-
Stock compensation relating to stock options per ASC No. 718		1,342			1,186			1,624
Approved, Privileged and Preferred enterprise loss (benefits) (*)		916			(3,047	)		(5,154	)
Other		55			68			46

Actual tax expense	$	1,651		$	5,297		$	5,931

(*)	Basic earnings per share amounts of the benefit resulting from the "Approved, Privileged and Preferred Enterprise" status	$	0.03	$	0.07	$	0.11

	Diluted earnings per share amounts of the benefit resulting from the "Approved, Privileged and Preferred Enterprise" status	$	0.03	$	0.06	$	0.11

F - 47

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 12:-

TAXES ON INCOME (Cont.)

Income (loss) before income taxes is comprised as follows:

	Year ended December 31,
	2016			2015		2014

Domestic	$	(11,475	)	$	20,247	$	28,203
Foreign		4,467			3,619		2,678

Income (loss) before income taxes	$	(7,008	)	$	23,866	$	30,881

NOTE 13:-

GEOGRAPHIC INFORMATION

Summary information about geographic areas:

The Company operates in one reportable segment (see Note 1 for a brief description of the Company's business). The total revenues are attributed to geographic areas based on the location of the end-users.

The following table presents total revenues for the years ended December 31, 2016, 2015 and 2014 from a geographical perspective:

	Year ended December 31,
	2016		2015		2014
Revenues from sales to customers located at:

The United States	$	67,953	$	69,125	$	75,881
America – other		16,780		19,560		17,605
EMEA *)		53,724		62,689		55,376
Asia Pacific		58,128		65,192		73,030

	$	196,585	$	216,566	$	221,892

Europe, the Middle East and Africa.

F - 48

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:-

GEOGRAPHIC INFORMATION (Cont.)

The following table presents long-lived assets as of December 31, 2015 and 2016 from a geographical perspective:

	December 31,
	2016		2015
Long-lived assets, by geographic region:

America (principally the United States)	$	1,973	$	2,101
Israel		22,963		22,286
EMEA - other		357		578
Asia Pacific		1,061		1,238

	$	26,354	$	26,203

NOTE 14:-

SELECTED STATEMENTS OF INCOME DATA

Financial income, net:

	Year ended December 31,
	2016			2015			2014
Financial income (expenses):

Interest on bank deposits and other	$	2,947		$	2,580		$	2,053
Amortization of premiums, accretion of discounts and interest on marketable debt securities, net		1,813			2,153			3,404
Gain from sale of available-for-sale marketable securities		1,771			2,438			424
Bank charges		(116	)		(157	)		(242	)
Foreign currency translation differences, net		(674	)		(1,147	)		163

	$	5,741		$	5,867		$	5,802

F - 49

RADWARE LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 15:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES

Represents transactions and balances with other entities in which certain members of the Company's Board of Directors, management or shareholders have interest:

The following related party balances are included in the balance sheets:

	December 31,
	2016		2015

Trade receivables and prepaid expenses	$	1,620	$	2,084

Trade payables and accrued expenses	$	636	$	1,323

The following related party transactions are included in the statements of income:

	Year ended December 31,
	2016		2015		2014

Revenues (1)	$	1,766	$	2,304	$	3,651

Expenses, net - primarily lease, sub-contractors and communications (2)	$	7,641	$	6,331	$	5,594

Purchase of property and equipment	$	1,869	$	5,463	$	4,209

(1)

Distribution of 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.

NOTE 16:-

EVENTS AFTER THE REPORTING DATE

In January 2017, the Company completed the acquisition of Seculert Ltd (“Seculert Acquisition” or “Seculert”), a company engaged in cyber-attack detection and HTTP analytics solutions and developing user and entity behavioral analysis “UEBA” solutions, for total consideration of $10,000 in cash and contingent payments of up to $10,000.

F - 50

Exhibit No.	Exhibit
1.1	Memorandum of Association ¶ (A)
1.2	Amended and Restated Articles of Association (B)
4.1	Form of Directors and Officers Indemnity Deed (C)
4.2	Distributor Agreement with Bynet Data Communications Ltd. (D)
4.3	Summary of Material Terms of the Lease Agreements for the Company's Headquarters (E)
4.4	1997 Key Employee Share Incentive Plan, as amended and restated (F)
4.5	2010 Addendum (for international grantees) (G)
4.6	Radware Ltd. – 2010 Employee Share Purchase Plan (H)
4.7	Amended and Restated Compensation Policy for Executive Officers and Directors (I)
8.1	List of Subsidiaries*
12.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

12.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**
13.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
13.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
15.1	Consent of Independent Registered Public Accounting Firm**
101	The following financial information from the Registrant's Annual Report on Form 20-F for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Comprehensive Income (Loss); (iv) Statements of Changes in Shareholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail*

	RADWARE LTD.

	By:	/s/ Doron Abramovitch
		Doron Abramovitch
		Chief Financial Officer