Exhibit 4(a)(16)



NOTE PURCHASE AGREEMENT



THIS NOTE PURCHASE AGREEMENT (Agreement) is made as of the 27 day of July, 2004 by and among ViryaNet Ltd., an
Israeli corporation (the Company), and the Investors set forth on the signature pages affixed hereto (each an Investor and collectively the Investors).



Recitals



A. The Company and the Investors are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the
provisions of Regulation D (Regulation D), as promulgated by the U.S. Securities and Exchange Commission (the SEC) under the Securities Act of 1933, as amended; and



B. The Investors wish to purchase from the Company, and the Company wishes to
sell and issue to the Investors, upon the terms and conditions stated in this Agreement, an aggregate of US$2,500,000 of the Companys 7.5% Convertible Notes in the form attached hereto as Exhibit A (the Notes), which are
convertible into Ordinary Shares, par value 1.0 NIS, of the Companys capital stock (the Ordinary Shares); and



C. Contemporaneous with the sale of the Notes, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached
hereto as Exhibit B (the Registration Rights Agreement), pursuant to which the Company will agree to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder, and applicable state securities laws.



In
consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:



1. Definitions. In addition to those terms defined above and
elsewhere in this Agreement, for the purposes of this Agreement, the following terms shall have the meanings set forth below:



Affiliate means, with respect to any Person, any other Person which directly or indirectly through one or more intermediaries Controls,
is controlled by, or is under common control with, such Person.



Business Day means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of business.



Companys Knowledge means the actual knowledge of the executive officers (as defined in Rule 405
under the 1933 Act) of the Company, after due inquiry.



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Confidential Information means trade secrets, confidential information and know-how
(including but not limited to ideas, formulae, compositions, processes, procedures and techniques, research and development information, computer program code, performance specifications, support documentation, drawings, specifications, designs,
business and marketing plans, and customer and supplier lists and related information).



Control (including the terms controlling, controlled by or under common control with) means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.



Conversion Shares means the Ordinary Shares issuable upon the conversion of the Notes.



Intellectual Property means all of the following: (i)
patents, patent applications, patent disclosures and inventions (whether or not patentable and whether or not reduced to practice); (ii) trademarks, service marks, trade dress, trade names, corporate names, logos, slogans and Internet domain names,
together with all goodwill associated with each of the foregoing; (iii) copyrights and copyrightable works; (iv) registrations, applications and renewals for any of the foregoing; and (v) proprietary computer software (including but not limited to
data, data bases and documentation).



Liens
means any pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, mortgage, security deed or deed of trust, easement or encumbrance, or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any
financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction). For the avoidance of doubts, Liens do not include the placement of Companys source codes in escrow under escrow
agreements with third parties in the ordinary course of business.



Material Adverse Effect means a material adverse effect on (i) the assets, liabilities, results of operations, condition (financial or otherwise), business, or prospects of the Company and its Subsidiaries taken as a
whole, or (ii) the ability of the Company to perform its obligations under the Transaction Documents.



Nasdaq means The Nasdaq Stock Market, Inc.



Payment Shares means Ordinary Shares issued (i) as pay-in-kind interest on the Notes and/or (ii) as payment pursuant to Section 7 of
the Note.



Permitted Liens means (a) Liens
imposed by law for taxes that are not yet due or are being contested in good faith and for which adequate reserves have been established in accordance with generally accepted accounting principles; (b) carriers, warehousemens,
mechanics, materialmens, repairmens and other like Liens imposed by law, arising in the



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ordinary course of business and securing obligations that are not overdue by more than 30 days or that are being
contested in good faith and by appropriate proceedings; (c) pledges and deposits made in the ordinary course of business in compliance with workers compensation, unemployment insurance and other social security laws or regulations; (d)
deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) easements, zoning
restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property.



Person means an individual, corporation,
partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed herein.



Purchase Price means Two Million Five
Hundred Thousand United States Dollars (US$2,500,000).



Repayment Shares means Ordinary Shares issued as payment pursuant to Section 4 of the Note.



Senior Debt means all amounts due to Bank Hapoalim under the loan provided by the bank to the Company.



Registration Statement has the meaning set forth in the
Registration Rights Agreement.



SEC Filings
has the meaning set forth in Section 4.6.



Securities means the Notes, the Conversion Shares, the Payment Shares and the Repayment Shares.



Subsidiary of any Person means another Person, an amount of the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first
Person.



Transaction Documents means this
Agreement, the Notes and the Registration Rights Agreement.



1933 Act means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated thereunder.



1934 Act means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules
and regulations promulgated thereunder.



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2. Purchase and Sale of the Notes. Subject to the terms and conditions of this Agreement, on the
Closing Date, each of the Investors shall severally, and not jointly, purchase, and the Company shall sell and issue to the Investors, the Notes in the respective amounts set forth opposite the Investors names on the signature pages attached
hereto in exchange for the Purchase Price as specified in Section 3 below.



3. Closing. Upon confirmation that the other conditions to closing specified herein have been satisfied or duly waived by the Investors, the Company shall deliver to Lowenstein Sandler PC, in trust, one or more
Notes, registered in such name or names as the Investors may designate, with instructions that such Notes are to be held for release to the Investors only upon payment in full of the Purchase Price to the Company by all the Investors. Upon such
receipt by Lowenstein Sandler PC of the Notes, each Investor shall promptly, but no more than one Business Day thereafter, cause a wire transfer in same day funds to be sent to the account of the Company as instructed in writing by the Company, in
an amount representing such Investors pro rata portion of the Purchase Price as set forth on the signature pages to this Agreement. On the date (the Closing Date) the Company receives the Purchase Price, the Notes shall be released
to the Investors (the Closing). The Closing of the purchase and sale of the Notes shall take place at the offices of Lowenstein Sandler PC, 1330 Avenue of the Americas, 21st Floor, New York, New York, or at such other location and on
such other date as the Company and the Investors shall mutually agree.



4. Representations and Warranties of the Company. The Company hereby represents and warrants to the Investors that, except as set forth in the schedules delivered herewith (collectively, the Disclosure Schedules):



4.1 Organization, Good Standing and Qualification.
Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing (to the extent relevant) under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to
carry on its business as now conducted and to own its properties. Each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property makes such qualification or leasing necessary unless the failure to so qualify has not and could not reasonably be expected to have a Material Adverse Effect. The Companys Subsidiaries are listed on
Schedule 4.1 hereto.



4.2 Authorization. The
Company has full power and authority and has taken all requisite action on the part of the Company, its officers, directors and stockholders necessary for (i) the authorization, execution and delivery of the Transaction Documents, (ii) authorization
of the performance of all obligations of the Company hereunder or thereunder, and (iii) the authorization, issuance (or reservation for issuance) and delivery of the Securities, other than the Repayment Shares and shares that may be issued pursuant
to Section 7 of the Note. The Transaction Documents constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating to or affecting creditors rights generally.



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4.3 Capitalization. Schedule 4.3 sets forth (a) the authorized capital stock of the Company
on the date hereof; (b) the number of shares of capital stock issued and outstanding; (c) the number of shares of capital stock issuable pursuant to the Companys stock plans; and (d) the number of shares of capital stock issuable and reserved
for issuance pursuant to securities (other than the Notes) exercisable for, or convertible into or exchangeable for any shares of capital stock of the Company. All of the issued and outstanding shares of the Companys capital stock have been
duly authorized and validly issued and are fully paid, nonassessable and free of pre-emptive rights and were issued in full compliance with applicable securities laws and any rights of third parties. Except as described on Schedule 4.3, all
of the issued and outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid, nonassessable and free of pre-emptive rights, were issued in full compliance with applicable securities laws
and any rights of third parties and are owned by the Company, beneficially and of record, subject to no Liens. Except as described on Schedule 4.3, no Person is entitled to pre-emptive or similar statutory or contractual rights with respect
to any securities of the Company. Except as described on Schedule 4.3, there are no outstanding warrants, options, convertible securities or other rights, agreements or arrangements of any character under which the Company or any of its
Subsidiaries is or may be obligated to issue any equity securities of any kind and except as contemplated by this Agreement, neither the Company nor any of its Subsidiaries is currently in negotiations for the issuance of any equity securities of
any kind. Except as described on Schedule 4.3 and except for the Registration Rights Agreement, there are no voting agreements, buy-sell agreements, option or right of first purchase agreements or other agreements of any kind among the
Company and any of the securityholders of the Company relating to the securities of the Company held by them. Except as described on Schedule 4.3 and except as provided in the Registration Rights Agreement, no Person has the right to require
the Company to register any securities of the Company under the 1933 Act, whether on a demand basis or in connection with the registration of securities of the Company for its own account or for the account of any other Person.



Except as described on Schedule 4.3, the issuance and sale of the
Securities hereunder will not obligate the Company to issue Ordinary Shares or other securities to any other Person (other than the Investors) and will not result in the adjustment of the exercise, conversion, exchange or reset price of any
outstanding security.



Except as described on Schedule
4.3, the Company does not have outstanding stockholder purchase rights or poison pill or any similar arrangement in effect giving any Person the right to purchase any equity interest in the Company upon the occurrence of certain
events.



4.4 Valid Issuance. The Notes have been duly
and validly authorized. The Conversion Shares have been duly and validly authorized and, upon the due conversion of the Notes, and will be validly issued, fully paid and non-assessable free and clear of all Liens, except for restrictions on transfer
set forth in the Transaction Documents or imposed by applicable securities laws and except for those created by the Investors. The Payment Shares have been duly and validly authorized and, upon issuance pursuant to the terms of the Notes, will be
validly issued, fully paid and non-assessable free and clear of all Liens, except for restrictions on



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transfer set forth in the Transaction Documents or imposed by applicable securities laws and except for those created by
the Investors. Upon approval of the issuance of the Repayment Shares by the stockholders of the Company, to the extent required, the Repayment Shares will be duly and validly authorized and, upon issuance pursuant to the terms of the Notes, will be
validly issued, fully paid and non-assessable free and clear of all Liens, except for restrictions on transfer set forth in the Transaction Documents or imposed by applicable securities laws and except for those created by the Investors. Subject to
the above, the Company has reserved a sufficient number of Ordinary Shares for issuance of the Conversion Shares, the Payment Shares and the Repayment Shares, free and clear of all Liens, except for restrictions on transfer set forth in the
Transaction Documents or imposed by applicable securities laws and except for those created by the Investors.



4.5 Consents. The execution, delivery and performance by the Company of the Transaction Documents and the offer, issuance and sale of the
Securities require no consent of, action by or in respect of, or filing with, any Person, governmental body, agency, or official other than filings that have been made pursuant to applicable securities laws and the approvals by the Israeli
Investment Center, the Israeli Chief Scientist and Bank Hapolaim, which will be obtained prior to the Closing Date, and post-sale filings pursuant to applicable securities laws which the Company undertakes to file within the applicable time periods
and other than the approval of the Companys stockholders which may necessary for the issuance of the Repayment Shares and shares that may be issued pursuant to Section 7 of the Note. Subject to the accuracy of the representations and
warranties of each Investor set forth in Section 5 hereof and the above, the Company has taken all action necessary to exempt (i) the issuance and sale of the Securities, (ii) the issuance of the Conversion Shares upon due conversion of the Notes,
(iii) the issuance of the Payment Shares in accordance with the terms of the Notes, (iv) the issuance of the Repayment Shares in accordance with the terms of the Notes and (v) the other transactions contemplated by the Transaction Documents from the
provisions of any shareholder rights plan or other poison pill arrangement, any anti-takeover, business combination or control share law or statute binding on the Company or to which the Company or any of its assets and properties may be
subject and any provision of the Companys memorandum of association or articles of association that is or could reasonably be expected to become applicable to the Investors as a result of the transactions contemplated hereby, including without
limitation, the issuance of the Securities and the ownership, disposition or voting of the Securities by the Investors or the exercise of any right granted to the Investors pursuant to this Agreement or the other Transaction Documents.



4.6 Delivery of SEC Filings; Business. The Company has made
available to the Investors through the EDGAR system, true and complete copies of the Companys most recent Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (as amended prior to the date hereof, the 20-F), and
all other reports filed by the Company pursuant to the 1934 Act since the filing of the 20-F and prior to the date hereof (collectively, the SEC Filings). The SEC Filings are the only filings required of the Company pursuant to the 1934
Act for such period. The Company and its Subsidiaries are engaged in all material respects only in the business described in the SEC Filings and the SEC Filings contain a complete and accurate description in all material respects of the business of
the Company and its Subsidiaries, taken as a whole.



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4.7 Use of Proceeds. The net proceeds of the sale of the Notes hereunder shall be used by the
Company for working capital and general corporate purposes.



4.8 No Material Adverse Change. Since December 31, 2003, except as identified and described in the SEC Filings or as described on Schedule 4.8, there has not been:



(i) any change in the consolidated assets, liabilities, financial condition or operating results of the Company from that
reflected in the financial statements included in the 20-F, except for changes in the ordinary course of business which have not and could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate;



(ii) any declaration or payment of any dividend, or any authorization or
payment of any distribution, on any of the capital stock of the Company, or any redemption or repurchase of any securities of the Company;



(iii) any material damage, destruction or loss, whether or not covered by insurance to any assets or properties of the Company or its Subsidiaries;



(iv) any waiver, not in the ordinary course of business, by
the Company or any Subsidiary of a material right or of a material debt owed to it;



(v) any satisfaction or discharge of any Liens or payment of any obligation by the Company or a Subsidiary, except in the ordinary course of business and which is not material to the assets, properties, financial
condition, operating results or business of the Company and its Subsidiaries taken as a whole (as such business is presently conducted and as it is proposed to be conducted);



(vi) any change or amendment to the Companys memorandum of association or articles of association, or material change
to any material contract or arrangement by which the Company or any Subsidiary is bound or to which any of their respective assets or properties is subject;



(vii) any material labor difficulties or labor union organizing activities with respect to employees of the Company or any Subsidiary;



(viii) any material transaction entered into by the Company or a Subsidiary
other than in the ordinary course of business;



(ix) the loss
of the services of any key employee, or material change in the composition or duties of the senior management of the Company or any Subsidiary;



(x) the loss or threatened loss of any customer which has had or could reasonably be expected to have a Material Adverse Effect; or



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(xi) any other event or condition of any character that has had or could reasonably be expected to have
a Material Adverse Effect.



4.9 SEC Filings; F-3
Eligibility.



(a) At the time of filing thereof, the SEC
Filings complied as to form in all material respects with the requirements of the 1934 Act and did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.



(b) Each registration statement and any amendment thereto filed by the Company since January 1, 2002 pursuant to the 1933 Act and the rules and regulations thereunder, as of the date such statement or amendment became effective, complied as
to form in all material respects with the 1933 Act and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein not misleading;
and each prospectus filed pursuant to Rule 424(b) under the 1933 Act, as of its issue date and as of the closing of any sale of securities pursuant thereto did not contain any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.



(c) The Company is eligible to use Form F-3 to register the Registrable Securities (as such term is defined in the
Registration Rights Agreement) for sale by the Investors as contemplated by the Registration Rights Agreement.



4.10 No Conflict, Breach, Violation or Default. The execution, delivery and performance of the Transaction Documents by the Company and the
issuance and sale of the Securities will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under (i) the Companys memorandum of association or articles of association, both as
in effect on the date hereof (true and complete copies of which have been made provided to the Investors), or (ii)(a) any statute, rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction
over the Company, any Subsidiary or any of their respective assets or properties, or (b) any agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or a Subsidiary is bound or to which any of their
respective assets or properties is subject; provided, however, that approval of the Companys stockholders may be required for the issuance of any Repayment Shares and shares that may be issued pursuant to Section 7 of the Note.



4.11 Tax Matters. The Company and each Subsidiary has timely prepared
and filed all tax returns required to have been filed by the Company or such Subsidiary with all appropriate governmental agencies and timely paid all taxes shown thereon or otherwise owed by it. The charges, accruals and reserves on the books of
the Company in respect of taxes for all fiscal periods are adequate in all material respects, and there are no material unpaid assessments against the Company or any Subsidiary nor, to the Companys Knowledge, any basis for the assessment of
any additional taxes, penalties or interest for any fiscal period or audits by any



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federal, state or local taxing authority except for any assessment which is not material to the Company and its
Subsidiaries, taken as a whole. All taxes and other assessments and levies that the Company or any Subsidiary is required to withhold or to collect for payment have been duly withheld and collected and paid to the proper governmental entity or third
party when due. There are no tax Liens or claims pending or, to the Companys Knowledge, threatened against the Company or any Subsidiary or any of their respective assets or property. There are no outstanding tax sharing agreements or other
such arrangements between the Company and any Subsidiary or other corporation or entity.



4.12 Title to Properties. Except as disclosed in the SEC Filings, the Company and each Subsidiary has good and marketable title to all real properties and all other properties and assets owned by it, in each
case free from Liens, other than Permitted Liens and Liens in connection with the Senior Debt, and defects that would materially affect the value thereof or materially interfere with the use made or currently planned to be made thereof by them; and
except as disclosed in the SEC Filings, the Company and each Subsidiary holds any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or currently planned to be
made thereof by them.



4.13 Certificates, Authorities and
Permits. The Company and each Subsidiary possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by it, and neither the Company nor any Subsidiary
has received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or such Subsidiary, could reasonably be expected to have a Material Adverse
Effect, individually or in the aggregate.



4.14 No Labor
Disputes. No material labor dispute with the employees of the Company or any Subsidiary exists or, to the Companys Knowledge, is imminent.



4.15 Intellectual Property.



(a) No Intellectual Property of the Company or its Subsidiaries which is necessary for the conduct of Companys and each of its Subsidiaries
respective businesses as currently conducted or as currently proposed to be conducted has been or is now involved in any cancellation, dispute or litigation, and, to the Companys Knowledge, no such action is threatened. Neither the Company nor
its Subsidiaries owns any right, title and interest in any patent or patent application.



(b) All of the licenses and sublicenses and consent, royalty or other agreements concerning Intellectual Property which are necessary for the conduct of the Companys and each of its Subsidiaries respective
businesses as currently conducted or as currently proposed to be conducted to which the Company or any Subsidiary is a party or by which any of their assets are bound (other than generally commercially available, non-custom, off-the-shelf software
application programs having a retail acquisition price of less than $10,000 per license) (collectively, License Agreements) are valid and binding obligations of the Company or its Subsidiaries that are parties thereto and, to the
Companys Knowledge, the other



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parties thereto, enforceable in accordance with their terms, except to the extent that enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors rights generally, and there exists no event or condition which will result in a material violation or
breach of or constitute (with or without due notice or lapse of time or both) a default by the Company or any of its Subsidiaries under any such License Agreement.



(c) The Company and its Subsidiaries own or have the valid right to use all of the Intellectual Property that is necessary
for the conduct of the Companys and each of its Subsidiaries respective businesses as currently conducted and for the ownership, maintenance and operation of the Companys and its Subsidiaries properties and assets, free and
clear of all Liens (other than Permitted Liens and Liens in connection with the Senior Debt), adverse claims or obligations to license all such owned Intellectual Property and Confidential Information, other than licenses entered into in the
ordinary course of the Companys and its Subsidiaries businesses. The Company and its Subsidiaries have a valid and enforceable right to use all third party Intellectual Property and Confidential Information used or held for use in the
respective businesses of the Company and its Subsidiaries.



(d) To the Companys Knowledge, the conduct of the Companys and its Subsidiaries businesses as currently conducted does not infringe or otherwise impair or conflict with (collectively, Infringe) any Intellectual
Property rights of any third party or any confidentiality obligation owed to a third party, and, to the Companys Knowledge, the Intellectual Property and Confidential Information of the Company and its Subsidiaries which are necessary for the
conduct of Companys and each of its Subsidiaries respective businesses as currently conducted are not being Infringed by any third party. There is no litigation or order pending or outstanding or, to the Companys Knowledge,
threatened or imminent, that seeks to limit or challenge or that concerns the ownership, use, validity or enforceability of any Intellectual Property or Confidential Information of the Company and its Subsidiaries and the Companys and its
Subsidiaries use of any Intellectual Property or Confidential Information owned by a third party, and, to the Companys Knowledge, there is no valid basis for the same.



(e) The consummation of the transactions contemplated hereby and by the other Transaction Documents will not result in the
alteration, loss, impairment of or restriction on the Companys or any of its Subsidiaries ownership or right to use any of the Intellectual Property or Confidential Information which is necessary for the conduct of Companys and
each of its Subsidiaries respective businesses as currently conducted or as currently proposed to be conducted.



(f) The Company and its Subsidiaries have taken reasonable steps to protect the Companys and its Subsidiaries rights in their Intellectual
Property and Confidential Information. Each employee, consultant and contractor who has had access to Confidential Information which is necessary for the conduct of Companys and each of its Subsidiaries respective businesses as currently
conducted or as currently proposed to be conducted has executed an agreement to maintain the confidentiality of such Confidential Information and has executed appropriate agreements that are substantially consistent with the Companys standard
forms thereof. Except under confidentiality obligations, there has been no material disclosure of any of the Companys or its Subsidiaries Confidential Information to any third party.



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4.16 Environmental Matters. Neither the Company nor any Subsidiary is in violation of any statute,
rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or
human exposure to hazardous or toxic substances (collectively, Environmental Laws), owns or operates any real property contaminated with any substance that is subject to any Environmental Laws, is liable for any off-site disposal or
contamination pursuant to any Environmental Laws, and is subject to any claim relating to any Environmental Laws, which violation, contamination, liability or claim has had or could reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate; and there is no pending or, to the Companys Knowledge, threatened investigation that might lead to such a claim.



4.17 Litigation. Except as described on Schedule 4.17, there are no pending actions, suits or proceedings against or affecting the Company,
its Subsidiaries or any of its or their properties; and to the Companys Knowledge, no such actions, suits or proceedings are threatened or contemplated.



4.18 Financial Statements. The financial statements included in each SEC Filing present fairly, in all material respects, the consolidated
financial position of the Company as of the dates shown and its consolidated results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with United States generally accepted accounting
principles applied on a consistent basis (GAAP) (except as may be disclosed therein or in the notes thereto, and, in the case of quarterly financial statements, as permitted by Form 6-K under the 1934 Act). Except as set forth in the
financial statements of the Company included in the SEC Filings filed prior to the date hereof or as described on Schedule 4.18, neither the Company nor any of its Subsidiaries has incurred any liabilities, contingent or otherwise, except
those incurred in the ordinary course of business, consistent (as to amount and nature) with past practices since the date of such financial statements, none of which, individually or in the aggregate, have had or could reasonably be expected to
have a Material Adverse Effect.



4.19 Insurance
Coverage. The Company and each Subsidiary maintains in full force and effect insurance coverage that is customary for comparably situated companies for the business being conducted and properties owned or leased by the Company and each
Subsidiary, and the Company reasonably believes such insurance coverage to be adequate against all liabilities, claims and risks against which it is customary for comparably situated companies to insure.



4.20 Compliance with Nasdaq Continued Listing Requirements. Except as
described in Schedule 4.20, the Company is in compliance with applicable Nasdaq continued listing requirements. There are no proceedings pending or, to the Companys Knowledge, threatened against the Company relating to the continued
listing of the Companys Ordinary Shares on Nasdaq and the Company has not received any notice of, nor to the Companys



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Knowledge is there any basis for, the delisting of the Ordinary Shares from Nasdaq. The issuance of the Securities, other
than the Repayment Shares and other shares that may be issued in connection with Section 7 of the Note, as contemplated hereby does not and will not require approval of the Companys stockholders pursuant to Nasdaq Marketplace Rule 4350(i).



4.21 Brokers and Finders. No Person will have, as a
result of the transactions contemplated by the Transaction Documents, any valid right, interest or claim against or upon the Company, any Subsidiary or an Investor for any commission, fee or other compensation pursuant to any agreement, arrangement
or understanding entered into by or on behalf of the Company.



4.22 No Directed Selling Efforts or General Solicitation. Neither the Company nor any Person acting on its behalf has conducted any general solicitation or general advertising (as those terms are used in Regulation D) in connection
with the offer or sale of any of the Securities.



4.23 No
Integrated Offering. Neither the Company nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any Company security or solicited any offers to buy any security, under
circumstances that would adversely affect reliance by the Company on Section 4(2) for the exemption from registration for the transactions contemplated hereby or would require registration of the Securities under the 1933 Act.



4.24 Private Placement. The offer and sale of the Securities to the
Investors as contemplated hereby is exempt from the registration requirements of the 1933 Act.



4.25 Questionable Payments.Neither the Company nor any of its Subsidiaries nor, to the Companys Knowledge, any of their respective current or former stockholders, directors, officers,
employees, agents or other Persons acting on behalf of the Company or any Subsidiary, has on behalf of the Company or any Subsidiary or in connection with their respective businesses: (a) used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity; (b) made any direct or indirect unlawful payments to any governmental officials or employees from corporate funds; (c) established or maintained any unlawful or unrecorded fund
of corporate monies or other assets; (d) made any false or fictitious entries on the books and records of the Company or any Subsidiary; or (e) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any
nature.



4.26 Transactions with Affiliates. Except as
disclosed in the SEC Filings, none of the officers or directors of the Company and, to the Companys Knowledge, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than as
holders of stock options and/or warrants, and for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the Companys Knowledge, any entity in which any officer, director, or any such employee has a substantial interest or is an officer,
director, trustee or partner.



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4.27 Internal Controls. The Company is in material compliance with the provisions of the
Sarbanes-Oxley Act of 2002 currently applicable to the Company. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with
managements general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with managements general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. Since the date of the 20-F, there have been no significant changes in the Companys internal controls (as such term is defined in Item 307(b) of Regulation S-K) or, to the Companys Knowledge, in other
factors that could significantly affect the Companys internal controls. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with GAAP and the applicable requirements of
the 1934 Act.



4.28 Disclosures. Neither the Company nor
any Person acting on its behalf has provided the Investors or their agents or counsel with any information that constitutes or might constitute material, non-public information. The written materials delivered to the Investors in connection with the
transactions contemplated by the Transaction Documents do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which
they were made, not misleading.



5. Representations and
Warranties of the Investors. Each of the Investors hereby severally, and not jointly, represents and warrants to the Company that:



5.1 Organization and Existence. Such Investor is a validly existing corporation, limited partnership or limited liability company and has all
requisite corporate, partnership or limited liability company power and authority to invest in the Securities pursuant to this Agreement.



5.2 Authorization. The execution, delivery and performance by such Investor of the Transaction Documents to which such Investor is a party have
been duly authorized and will each constitute the valid and legally binding obligation of such Investor, enforceable against such Investor in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating to or affecting creditors rights generally.



5.3 Purchase Entirely for Own Account. The Securities to be received by such Investor hereunder will be acquired for such Investors own
account, not as nominee or agent, and not with a view to the resale or distribution of any part thereof in violation of the 1933 Act, and such Investor has no present intention of selling, granting any participation in, or



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otherwise distributing the same in violation of the 1933 Act without prejudice, however, to such Investors right at
all times to sell or otherwise dispose of all or any part of such Securities in compliance with applicable federal and state securities laws.Nothing contained herein shall be deemed a representation or warranty by such Investor to hold the
Securities for any period of time. Such Investor is not a broker-dealer registered with the SEC under the 1934 Act or an entity engaged in a business that would require it to be so registered.



5.4 Investment Experience. Such Investor acknowledges that it can bear
the economic risk and complete loss of its investment in the Securities and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment contemplated hereby.



5.5 Disclosure of Information. Such Investor has had an opportunity
to receive all information related to the Company requested by it and to ask questions of and receive answers from the Company regarding the Company, its business and the terms and conditions of the offering of the Securities. Such Investor
acknowledges receipt of copies of the SEC Filings. Neither such inquiries nor any other due diligence investigation conducted by such Investor shall modify, amend or affect such Investors right to rely on the Companys representations and
warranties contained in this Agreement.



5.6 Restricted
Securities. Such Investor understands that the Securities are characterized as restricted securities under the U.S. federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public
offering and that under such laws and applicable regulations such securities may be resold without registration under the 1933 Act only in certain limited circumstances.



5.7 Legends. It is understood that, except as provided below, certificates evidencing the Securities may bear the
following or any similar legend:



(a) The securities
represented hereby may not be transferred unless (i) such securities have been registered for sale pursuant to the Securities Act of 1933, as amended, (ii) such securities may be sold pursuant to Rule 144(k), or (iii) the Company has received an
opinion of counsel reasonably satisfactory to it that such transfer may lawfully be made without registration under the Securities Act of 1933 or qualification under applicable state securities laws.



(b) If required by the authorities of any state in connection with the
issuance of sale of the Securities, the legend required by such state authority.



5.8 Accredited Investor. Such Investor is an accredited investor as defined in Rule 501(a) of Regulation D, as amended, under the 1933 Act.



5.9 No General Solicitation. Such Investor did not learn of the investment in the Securities as a result of any
public advertising or general solicitation.



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5.10 Brokers and Finders. No Person will have, as a result of the transactions contemplated by the
Transaction Documents, any valid right, interest or claim against or upon the Company, any Subsidiary or an Investor for any commission, fee or other compensation pursuant to any agreement, arrangement or understanding entered into by or on behalf
of such Investor.



6. Conditions to Closing.



6.1 Conditions to the Investors Obligations. The obligation
of each Investor to purchase the Notes at the Closing is subject to the fulfillment to such Investors satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived by such Investor (as to itself only):



(a) The representations and warranties made by the Company
in Section 4 hereof qualified as to materiality shall be true and correct at all times prior to and on the Closing Date, except to the extent any such representation or warranty expressly speaks as of an earlier date, in which case such
representation or warranty shall be true and correct as of such earlier date, and, the representations and warranties made by the Company in Section 4 hereof not qualified as to materiality shall be true and correct in all material respects at all
times prior to and on the Closing Date, except to the extent any such representation or warranty expressly speaks as of an earlier date, in which case such representation or warranty shall be true and correct in all material respects as of such
earlier date. The Company shall have performed in all material respects all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date.



(b) The Company shall have obtained any and all consents, permits, approvals, registrations and waivers necessary or
appropriate for consummation of the purchase and sale of the Securities and the consummation of the other transactions contemplated by the Transaction Documents, all of which shall be in full force and effect (subject only to the approval of the
Companys stockholders which may or may not be required for the issuance of the Repayment Shares and shares that may be issued pursuant to Section 7 of the Note).



(c) The Company shall have executed and delivered the Registration Rights Agreement.



(d) The Company shall notify Nasdaq of the possible issuance of the
Companys shares to the Investor pursuant to the Conversion Price as per Section 6 of the Note, for inclusion in The Nasdaq SmallCap Market upon official notice of issuance.



(e) No judgment, writ, order, injunction, award or decree of or by any court, or judge, justice or magistrate, including
any bankruptcy court or judge, or any order of or by any governmental authority, shall have been issued, and no action or proceeding shall have been instituted by any governmental authority, enjoining or preventing the consummation of the
transactions contemplated hereby or in the other Transaction Documents.



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(f) The Company shall have delivered a Certificate, executed on behalf of the Company by its Chief
Executive Officer or its Chief Financial Officer, dated as of the Closing Date, certifying to the fulfillment of the conditions specified in subsections (a), (b), (d), (e) and (i) of this Section 6.1.



(g) The Company shall have delivered a Certificate, executed on behalf of
the Company by its Secretary, dated as of the Closing Date, certifying the resolutions adopted by the Board of Directors of the Company approving the transactions contemplated by this Agreement and the other Transaction Documents and the issuance of
the Securities, certifying the current versions of the memorandum of association or articles of association of the Company and certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf
of the Company.



(h) The Investors shall have received an
opinion from the Companys counsel, dated as of the Closing Date, to the effect set forth in Exhibit C attached hereto.



(i) No stop order or suspension of trading shall have been imposed by Nasdaq, the SEC or any other governmental or regulatory body with respect to public
trading in the Ordinary Shares.



6.2 Conditions to
Obligations of the Company. The Companys obligation to sell and issue the Notes at the Closing is subject to the fulfillment to the satisfaction of the Company on or prior to the Closing Date of the following conditions, any of which may
be waived by the Company:



(a) The representations and
warranties made by the Investors in Section 5 hereof, other than the representations and warranties contained in Sections 5.3, 5.4, 5.5, 5.6, 5.7, 5.8 and 5.9 (the Investment Representations), shall be true and correct in all material
respects when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date. The Investment Representations shall be true and correct in all respects
when made, and shall be true and correct in all respects on the Closing Date with the same force and effect as if they had been made on and as of said date. The Investors shall have performed in all material respects all obligations and conditions
herein required to be performed or observed by them on or prior to the Closing Date.



(b) The Investors shall have executed and delivered the Registration Rights Agreement.



(c) The Investors shall have delivered the Purchase Price to the Company.



(d) The Company shall have obtained any and all consents, permits, approvals, registrations and waivers necessary or
appropriate for consummation of the purchase and sale of the Securities and the consummation of the other transactions contemplated by the Transaction Documents, all of which shall be in full force and effect.



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(e) No judgment, writ, order, injunction, award or decree of or by any court, or judge, justice or
magistrate, including any bankruptcy court or judge, or any order of or by any governmental authority, shall have been issued, and no action or proceeding shall have been instituted by any governmental authority, enjoining or preventing the
consummation of the transactions contemplated hereby or in the other Transaction Documents.



6.3 Termination of Obligations to Effect Closing; Effects.



(a) The obligations of the Company, on the one hand, and the Investors, on the other hand, to effect the Closing shall terminate as follows:



(i) Upon the mutual written consent of the Company and the Investors;



(ii) By the Company if any of the conditions set forth in
Section 6.2 shall have become incapable of fulfillment, and shall not have been waived by the Company;



(iii) By an Investor (with respect to itself only) if any of the conditions set forth in Section 6.1 shall have become incapable of fulfillment, and
shall not have been waived by the Investor; or



(iv) By either
the Company or any Investor (with respect to itself only) if the Closing has not occurred on or prior to July 30, 2004;



provided, however, that, except in the case of clause (i) above, the party seeking to terminate its obligation to effect the Closing shall not then be in breach of any of
its representations, warranties, covenants or agreements contained in this Agreement or the other Transaction Documents if such breach has resulted in the circumstances giving rise to such partys seeking to terminate its obligation to effect
the Closing.



(b) In the event of termination by the Company or
any Investor of its obligations to effect the Closing pursuant to this Section 6.3, written notice thereof shall forthwith be given to the other Investors and the other Investors shall have the right to terminate their obligations to effect the
Closing upon written notice to the Company and the other Investors. Nothing in this Section 6.3 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions of this Agreement or the other
Transaction Documents or to impair the right of any party to compel specific performance by any other party of its obligations under this Agreement or the other Transaction Documents.



7. Covenants and Agreements of the Company.



7.1 Reservation of Ordinary Shares. The Company shall at all times reserve and keep available out of its authorized
but unissued Ordinary Shares, solely for the purpose of providing for the conversion of the Notes, such number of Ordinary Shares as shall from time to time equal the number of shares sufficient to permit the conversion of the Notes issued pursuant
to this Agreement in accordance with their respective terms.



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7.2 [Intentionally Omitted]



7.3 No Conflicting Agreements. The Company will not take any action, enter into any agreement or make any commitment
that would conflict or interfere in any material respect with the Companys obligations to the Investors under the Transaction Documents.



7.4 [Intentionally Omitted]



7.5 [Intentionally Omitted]



7.6 Listing of Underlying Shares and Related Matters. Prior to the Closing Date, the Company shall take all necessary action to cause the
Conversion Shares to be listed on the Nasdaq SmallCap Market and prior to the issuance thereof, the Company shall take all necessary action to cause the Repayment Shares and Payment Shares to be listed on the Nasdaq SmallCap Market. Further, if the
Company applies to have its Ordinary Shares or other securities traded on any other principal stock exchange or market, it shall include in such application the Conversion Shares and the Payment Shares and will take such other action as is necessary
to cause such Ordinary Shares to be so listed. Prior to the issuance thereof, the Company shall take all necessary action to cause the Repayment Shares to be so listed. The Company will use commercially reasonable efforts to continue the listing and
trading of its Ordinary Shares on the Nasdaq SmallCap Market and, in accordance, therewith, will use commercially reasonable efforts to comply in all respects with the Companys reporting, filing and other obligations under the bylaws or rules
of such market or exchange, as applicable.



7.7 Termination
of Covenants. The provisions of Sections 7.2 through 7.5 shall terminate and be of no further force and effect on the date on which the Companys obligations under the Registration Rights Agreement to register or maintain the effectiveness
of any registration covering the Registrable Securities (as such term is defined in the Registration Rights Agreement) shall terminate.



7.8 Removal of Legends. Upon the earlier of (i) registration for resale pursuant to the Registration Rights Agreement and receipt by the Company of
the Investors written confirmation that such Securities will not be disposed of except in compliance with the prospectus delivery requirements of the 1933 Act or (ii) Rule 144(k) becoming available the Company shall, upon an Investors
written request, promptly cause certificates evidencing the Investors Securities to be replaced with certificates which do not bear such restrictive legends, and Conversion Shares subsequently issued upon due conversion of the Notes and
Payment Shares subsequently issued under the terms of the Notes shall not bear such restrictive legends provided the provisions of either clause (i) or clause (ii) above, as applicable, are satisfied with respect to such Conversion Shares and
Payment Shares. When the Company is required to cause unlegended certificates to replace previously issued legended certificates, if unlegended certificates are not delivered to an Investor within seven (7) Business Days of submission by that
Investor of legended certificate(s) to the Companys transfer agent together with a representation



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letter in customary form, the Company shall be liable to the Investor for liquidated damages in an amount equal to 1% of
the aggregate purchase price of the Securities evidenced by such certificate(s) for each thirty (30) day period (or portion thereof, on a pro-rata basis) beyond such seven (7) Business Day that the unlegended certificates have not been so delivered.
For avoidance of doubt and as an example only, in the event that the Company is three days late in causing an unlegended US$100,000 certificate to be delivered to Investor after the lapse of the initial seven (7) Business Day, the Company would be
liable for liquidated damages in the amount of US$100.00.



7.9
Negative Pledge. So long as any amounts are outstanding under the Notes, the Company shall not, and shall cause each of its Subsidiaries not to, create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or
hereafter acquired other than (i) Liens securing the Senior Debt, (ii) Permitted Liens and (iii) indebtedness for borrowed money which is subordinated in right of payment to the Notes on terms reasonably satisfactory to the Investors.



8. Survival and Indemnification.



8.1 Survival. The representations, warranties, covenants and
agreements contained in this Agreement shall survive the Closing of the transactions contemplated by this Agreement for a period of two years.



8.2 Indemnification. The Company agrees to indemnify and hold harmless each Investor and its Affiliates and their respective directors, officers,
employees and agents from and against any and all losses, claims, damages, liabilities and expenses (including without limitation reasonable attorney fees and disbursements and other expenses incurred in connection with investigating, preparing or
defending any action, claim or proceeding, pending or threatened and the costs of enforcement thereof) (collectively, Losses) to which such Person may become subject as a result of any breach of representation, warranty, covenant or
agreement made by or to be performed on the part of the Company under the Transaction Documents, and will reimburse any such Person for all such amounts as they are incurred by such Person.



8.3 Conduct of Indemnification Proceedings. Promptly after receipt by
any Person (the Indemnified Person) of notice of any demand, claim or circumstances which would or might give rise to a claim or the commencement of any action, proceeding or investigation in respect of which indemnity may be
sought pursuant to Section 8.2, such Indemnified Person shall promptly notify the Company in writing and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Person, and shall
assume the payment of all fees and expenses; provided, however, that the failure of any Indemnified Person so to notify the Company shall not relieve the Company of its obligations hereunder except to the extent that the Company is
materially prejudiced by such failure to notify. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless: (i)
the Company and the Indemnified Person shall have mutually agreed to the retention of such counsel; or (ii) in the reasonable judgment of counsel to such Indemnified Person representation of both parties by the same counsel would be



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inappropriate due to actual or potential differing interests between them. The Company shall not be liable for any
settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent, or if there be a final judgment for the plaintiff, the Company shall indemnify and hold harmless
such Indemnified Person from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. Without the prior written consent of the Indemnified Person, which consent shall not be unreasonably withheld, the
Company shall not effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement
includes an unconditional release of such Indemnified Person from all liability arising out of such proceeding.



9. Miscellaneous.



9.1 Successors and Assigns. This Agreement may not be assigned by a party hereto without the prior written consent of the Company or the Investors,
as applicable, provided, however, that an Investor may assign its rights and delegate its duties hereunder in whole or in part to an Affiliate or to a third party acquiring some or all of its Securities in a private transaction without the prior
written consent of the Company or the other Investors, after notice duly given by such Investor to the Company and the other Investors, provided, that no such assignment or obligation shall affect the obligations of such Investor hereunder. The
provisions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.



9.2 Counterparts; Faxes. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument. This Agreement may also be executed via facsimile, which shall be deemed an original.



9.3 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not
to be considered in construing or interpreting this Agreement.



9.4 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given as hereinafter described (i) if given by personal delivery, then such
notice shall be deemed given upon such delivery, (ii) if given by telex or telecopier, then such notice shall be deemed given upon receipt of confirmation of complete transmittal, (iii) if given by mail, then such notice shall be deemed given upon
the earlier of (A) receipt of such notice by the recipient or (B) three days after such notice is deposited in first class mail, postage prepaid, and (iv) if given by an internationally recognized overnight air courier, then such notice shall be
deemed given one business day after delivery to such carrier. All notices shall be addressed to the party to be



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notified at the address as follows, or at such other address as such party may designate by ten days advance
written notice to the other party:



If to the Company:



ViryaNet Ltd.

8 HaMarpe Street

Har Hotzvim

P.O. Box 45041

Jerusalem 91450

Israel

Attention:

Fax:



With a copy to:



Meitar Liquornik Geva & Leshem Brandwein

16 Abba Hillel Silver Rd.

Ramat Gan 52506, Israel

Attention: Raanan Lerner, Adv.

Fax:



If to the Investors:



to the addresses set forth on the signature pages hereto.



9.5 Expenses. The parties hereto shall pay their own costs and expenses in connection herewith, except that the Company shall pay the reasonable
fees and expenses of counsel to the Investors not to exceed US$35,000 in the aggregate. Such expenses shall be paid not later than the Closing. The Company shall reimburse the Investors upon demand for all reasonable out-of-pocket expenses incurred
by the Investors, including without limitation reimbursement of attorneys fees and disbursements, in connection with any amendment, modification or waiver of this Agreement or the other Transaction Documents requested by the Company. In the
event that legal proceedings are commenced by any party to this Agreement against another party to this Agreement in connection with this Agreement or the other Transaction Documents, the party or parties which do not prevail in such proceedings
shall severally, but not jointly, pay their pro rata share of the reasonable attorneys fees and other reasonable out-of-pocket costs and expenses incurred by the prevailing party in such proceedings.



9.6 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investors. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each holder of any Securities purchased under this Agreement at the time outstanding, each future holder of all such Securities, and the Company.



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9.7 Publicity. Except as set forth below, no public release or announcement concerning the
transactions contemplated hereby shall be issued by the Company or the Investors without the prior consent of the Company (in the case of a release or announcement by the Investors) or the Investors (in the case of a release or announcement by the
Company) (which consents shall not be unreasonably withheld), except as such release or announcement may be required by law or the applicable rules or regulations of any securities exchange or securities market, in which case the Company or the
Investors, as the case may be, shall allow the Investors or the Company, as applicable, to the extent reasonably practicable in the circumstances, reasonable time to comment on such release or announcement in advance of such issuance. By 8:30 a.m.
(New York City time) on the trading day immediately following the Closing Date, the Company shall issue a press release disclosing the consummation of the transactions contemplated by this Agreement. No later than the third trading day following the
Closing Date, the Company will file a Report of Foreign Issuer on Form 6-K attaching the press release described in the foregoing sentence as well as copies of the Transaction Documents. In addition, the Company will make such other filings and
notices in the manner and time required by the SEC and Nasdaq. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Investor, or include the name of any Investor in any filing with the SEC (other than the
Registration Statement and any exhibits to filings made in respect of this transaction in accordance with periodic filing requirements under the 1934 Act) or any regulatory agency or Nasdaq, without the prior written consent of such Investor, except
to the extent such disclosure is required by law or trading market regulations, in which case the Company shall provide the Investors with prior notice of such disclosure.



9.8 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof but shall be interpreted as if it were written so as to be enforceable to the maximum extent permitted by
applicable law, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereby waive any provision
of law which renders any provision hereof prohibited or unenforceable in any respect.



9.9 Entire Agreement. This Agreement, including the Exhibits and the Disclosure Schedules, and the other Transaction Documents constitute the entire agreement among the parties hereof with respect to the
subject matter hereof and thereof and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter hereof and thereof.



9.10 Further Assurances. The parties shall execute and deliver all such further instruments and documents and take
all such other actions as may reasonably be required to carry out the transactions contemplated hereby and to evidence the fulfillment of the agreements herein contained.



9.11 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by, and construed
in accordance with, the internal laws of the State



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of New York without regard to the choice of law principles thereof. Each of the parties hereto irrevocably submits to the
exclusive jurisdiction of the courts of the State of New York located in New York County and the United States District Court for the Southern District of New York for the purpose of any suit, action, proceeding or judgment relating to or arising
out of this Agreement and the transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of
notices under this Agreement. Each of the parties hereto irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the laying of venue in such court. Each party hereto irrevocably waives any objection
to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. EACH OF THE
PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.



9.12 Independent Nature of Investors Obligations and Rights. The
obligations of each Investor under any Transaction Document are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any
Transaction Document. The decision of each Investor to purchase Securities pursuant to the Transaction Documents has been made by such Investor independently of any other Investor. Nothing contained herein or in any Transaction Document, and no
action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or
as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Investor acknowledges that no other Investor has acted as agent for such Investor in connection with making its investment hereunder and
that no Investor will be acting as agent of such Investor in connection with monitoring its investment in the Securities or enforcing its rights under the Transaction Documents. Each Investor shall be entitled to independently protect and enforce
its rights, including, without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that each of the Investors has been provided with the same Transaction Documents for the purpose of closing a transaction with multiple Investors and not because it was required or requested to do so by any
Investor.



[signature page follows]



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IN WITNESS WHEREOF, the parties have executed this Agreement or caused their duly authorized officers to
execute this Agreement as of the date first above written.



|             |  |              |  | 
|------------ |  | ------------ |  | 
|The Company: |  | VIRYANET LTD
|             |  |             
|             |  | By:          |  | 
|             |  | Name:        |  | 
|             |  | Title:       |  | 







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|               |  |                                            |  |                  
|-------------- |  | ------------------------------------------ |  | -----------------
|The Investors: |  | LIBERTYVIEW SPECIAL OPPORTUNITIES FUND, LP
|               |  |                                           
|               |  | By:                                        |  |                  
|               |  | Name:                                      |  | Steven S. Rogers 
|               |  | Title:                                     |  | Authorized Person



Aggregate Purchase Price: US$2,500,000



|                    |  |  |  |  |  |  |  |                                |  |             
|------------------- |  |  |  |  |  |  |  | ------------------------------ |  | ------------
|Address for Notice: |  |  |  |  |  |  |  |                                |  |             
|                    |  |  |  |  |  |  |  | 111 Ri ver Street  Suite 1000
|                    |  |  |  |  |  |  |  | Hoboken, NJ 07030-5776        
|                    |  |  |  |  |  |  |  | Attn: Steven S. Rogers        
|                    |  |  |  |  |  |  |  | Telephone:                     |  | 201.595.2950
|                    |  |  |  |  |  |  |  | Facsimile:                     |  | 201.216.8625
|                    |  |  |  | 
|                    |  |  |  |  |  |  |  | with a copy to:               
|                    |  |  |  | 
|                    |  |  |  |  |  |  |  | Lowenstein Sandler PC         
|                    |  |  |  |  |  |  |  | 65 Livingston Avenue          
|                    |  |  |  |  |  |  |  | Roseland, NJ 07068            
|                    |  |  |  |  |  |  |  | Attn: John D. Hogoboom, Esq.  
|                    |  |  |  |  |  |  |  | Telephone:                     |  | 973.597.2500
|                    |  |  |  |  |  |  |  | Facsimile:                     |  | 973.597.2400



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REGISTRATION RIGHTS AGREEMENT



This Registration Rights Agreement (the Agreement) is made and entered into as of this 27 day of July, 2004 by
and among ViryaNet Ltd., an Israeli corporation (the Company), and the Investors named in that certain Note Purchase Agreement by and among the Company and the Investors (the Purchase Agreement).



The parties hereby agree as follows:



1. Certain Definitions.



As used in this Agreement, the following terms shall have the following
meanings:



Affiliate means, with respect to
any person, any other person which directly or indirectly controls, is controlled by, or is under common control with, such person.



Business Day means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of
business.



Closing Date means the closing of
the purchase and sale of the Note contemplated by the Purchase Agreement.



Conversion Shares means the Ordinary Shares issuable upon the conversion of the Notes.



Investors shall mean the Investors identified in the Purchase Agreement and any Affiliate or permitted transferee of any Investor who
is a subsequent holder of any Notes or Registrable Securities.



Notes means, the Companys convertible notes issued to the Investors pursuant to the Purchase Agreement, the form of which is attached to the Purchase Agreement as Exhibit A.



Ordinary Shares shall mean the Ordinary Shares, par value
NIS 1.0 per share, of the Company and any securities into which such shares may hereinafter be reclassified.



Payment Shares means Ordinary Shares issued (i) as pay-in-kind interest on the Notes and/or (ii) as payment pursuant to Section 7 of
the Note.



Prospectus shall mean the
prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all
other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus.



Register, registered and registration refer to a registration made by preparing and filing a
Registration Statement or similar document in compliance with the 1933 Act (as defined below), and the declaration or ordering of effectiveness of such Registration Statement or document.



Registrable Securities shall mean (i) the Conversion Shares, (ii) the Payment Shares, (iii) the Repayment
Shares and (iv) any other securities issued or issuable with respect to or in exchange for Registrable Securities; provided, that, a security shall cease to be a Registrable Security upon (A) sale pursuant to a Registration Statement or Rule 144
under the 1933 Act, or (B) such security becoming eligible for sale by the Investors pursuant to Rule 144(k).



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Repayment Shares means Ordinary Shares issued as payment pursuant to Section 4 of the
Note.



Registration Statement shall mean any
registration statement of the Company filed under the 1933 Act that covers the resale of any of the Registrable Securities pursuant to the provisions of this Agreement, amendments and supplements to such Registration Statement, including
post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement.



Required Investors means the Investors holding a majority of the Registrable Securities.



SEC means the U.S. Securities and Exchange Commission.



1933 Act means the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.



1934 Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.



2. Registration.



(a) Registration Statements.



(i) No later than the earlier of (i) five (5) Business Days following the effectiveness of the Companys registration statement on Form F-3 (SEC
file no. 333-117504) and (ii) the (60th) day after the closing of the purchase and sale of the securities contemplated by the Purchase Agreement (the Filing Deadline), the Company shall prepare and file with the SEC one Registration
Statement on Form F-3 (or, if Form F-3 is not then available to the Company, on such form of registration statement as is then available to effect a registration for resale of the Registrable Securities, subject to the Required Investors
consent), covering the resale of the Registrable Securities in an amount at least equal to the number of Conversion Shares into which the Notes are convertible plus the number of Ordinary Shares the Company reasonably believes it may issue as
Payment Shares. Such Registration Statement shall include the plan of distribution attached hereto as Exhibit A. Such Registration Statement also shall cover, to the extent allowable under the 1933 Act and the rules promulgated thereunder
(including Rule 416), such indeterminate number of additional Ordinary Shares resulting from stock splits, stock dividends or similar transactions with respect to the Registrable Securities. The Company shall use its reasonable best efforts to
obtain from each person who now has piggyback registration rights a waiver of those rights with respect to the Registration Statement. The Registration Statement (and each amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided in accordance with Section 3(c) to the Investors and their counsel prior to its filing or other submission. If a Registration Statement covering the Registrable Securities is not filed with the SEC on or
prior to the Filing Deadline, the Company will make pro rata payments to each Investor, as liquidated damages and not as a penalty, in an amount equal to 1.0% of the aggregate amount invested by such Investor for each 30-day period or pro rata for
any portion thereof following the date by which such Registration Statement should have been filed for which no Registration Statement is filed with respect to the



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Registrable Securities. Such payments shall be in partial compensation to the Investors, and shall not constitute the
Investors exclusive remedy for such events. Such payments shall be made to each Investor in cash. For the avoidance of doubt and as an example only, in the event that the Company files a Registration Statement three days after the Filing
Deadline, the Company would be liable for liquidated damages in the amount of US$2,500.00.



(ii) Additional Registrable Securities. Upon the written demand of any Investor, upon any change in the Conversion Price (as defined in the Notes) such that additional Ordinary Shares become issuable upon the
conversion of the Notes, prior to any issuance of Repayment Shares and upon any increase in the number of Payment Shares to be issued under the Notes beyond those covered by the Registration Statement, the Company shall prepare and file with the SEC
one or more Registration Statements on Form F-3 or amend the Registration Statement filed pursuant to clause (i) above, if such Registration Statement has not previously been declared effective (or, if Form F-3 is not then available to the Company,
on such form of registration statement as is then available to effect a registration for resale of such additional Ordinary Shares (the Additional Shares), subject to the Required Investors consent) covering the resale of the
Additional Shares, but only to the extent the Additional Shares are not at the time covered by an effective Registration Statement. Such Registration Statement also shall cover, to the extent allowable under the 1933 Act and the rules promulgated
thereunder (including Rule 416), such indeterminate number of additional Ordinary Shares resulting from stock splits, stock dividends or similar transactions with respect to the Additional Shares. The Company shall use its reasonable best efforts to
obtain from each person who now has piggyback registration rights a waiver of those rights with respect to such Registration Statement. The Registration Statement (and each amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided in accordance with Section 3(c) to the Investors and their counsel prior to its filing or other submission. If a Registration Statement covering the Additional Shares is required to be filed under this
Section 2(a)(ii) and is not filed with the SEC within five Business Days of the request of any Investor or upon the occurrence of any of the events specified in this Section 2(a)(ii), the Company will make pro rata payments to each Investor, as
liquidated damages and not as a penalty, in an amount equal to 1.0% of the aggregate amount invested by such Investor for each 30-day period or pro rata for any portion thereof following the date by which such Registration Statement should have been
filed for which no Registration Statement is filed with respect to the Additional Shares. Such payments shall be in partial compensation to the Investors, and shall not constitute the Investors exclusive remedy for such events. Such payments
shall be made to each Investor in cash. For the avoidance of doubt and as an example only, in the event that a Registration Statement covering US$100,000 of Ordinary Shares was filed three days late, the Company would be liable for liquidated
damages in the amount of US$100.00.



(b) Expenses. The
Company will pay all expenses associated with each registration, including filing and printing fees, the Companys counsel and accounting fees and expenses, costs associated with clearing the Registrable Securities for sale under applicable
state securities laws, listing fees, fees and expenses of one counsel to the Investors and the Investors reasonable expenses in connection with the registration, but excluding discounts, commissions, fees of underwriters, selling brokers,
dealer managers or similar securities industry professionals with respect to the Registrable Securities being sold.



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(c) Effectiveness.



(i) The Company shall use commercially reasonable efforts to have the Registration Statement declared effective as soon as
practicable. The Company shall notify the Investors by facsimile or e-mail as promptly as practicable, and in any event, within twenty-four (24) hours, after any Registration Statement is declared effective and shall simultaneously provide the
Investors with copies of any related Prospectus to be used in connection with the sale or other disposition of the securities covered thereby. If (A)(x) a Registration Statement covering the Registrable Securities is not declared effective by the
SEC within ninety (90) days after Closing Date, or (y) a Registration Statement covering Additional Shares is not declared effective by the SEC within ninety (90) days following the time such Registration Statement was required to be filed pursuant
to Section 2(a)(ii), or (B) after a Registration Statement has been declared effective by the SEC, sales cannot be made pursuant to such Registration Statement for any reason (including without limitation by reason of a stop order, or the
Companys failure to update the Registration Statement), but excluding the inability of any Investor to sell the Registrable Securities covered thereby due to market conditions and except as excused pursuant to subparagraph (ii) below, then the
Company will make pro rata payments to each Investor, as liquidated damages and not as a penalty, in an amount equal to 1.0% of the aggregate amount invested by such Investor for each 30- day period or pro rata for any portion thereof following the
date by which such Registration Statement should have been effective (the Blackout Period). Such payments shall be in partial compensation to the Investors, and shall not constitute the Investors exclusive remedy for such events.
For the avoidance of doubt and as an example only, in the event that a Registration Statement covering US$100,000 of Ordinary Shares is declared effective three days after a deadline imposed in this Section 2(c)(i), the Company would be liable for
liquidated damages in the amount of US$100.00. The amounts payable as liquidated damages pursuant to this paragraph shall be paid monthly within three (3) Business Days of the last day of each month following the commencement of the Blackout Period
until the termination of the Blackout Period. Such payments shall be made to each Investor in cash.



(ii) For not more than twenty (20) consecutive days or for a total of not more than forty-five (45) days in any twelve (12) month period, the Company may
delay the disclosure of material non-public information concerning the Company, by suspending the use of any Prospectus included in any registration contemplated by this Section containing such information, the disclosure of which at the time is
not, in the good faith opinion of the Company, in the best interests of the Company (an Allowed Delay); provided, that the Company shall promptly (a) notify the Investors in writing of the existence of (but in no event, without the prior
written consent of an Investor, shall the Company disclose to such Investor any of the facts or circumstances regarding) material non-public information giving rise to an Allowed Delay, (b) advise the Investors in writing to cease all sales under
the Registration Statement until the end of the Allowed Delay and (c) use commercially reasonable efforts to terminate an Allowed Delay as promptly as practicable.



3. Company Obligations. The Company will use commercially reasonable efforts to effect the registration of the
Registrable Securities in accordance with the terms hereof, and pursuant thereto the Company will, as expeditiously as possible:



(a) use commercially reasonable efforts to cause such Registration Statement to become effective and to remain continuously effective for a period that
will terminate upon the earlier of (i) the date on which all Registrable Securities covered by such Registration Statement as amended from time to time, have been sold, and (ii) the date on which all Registrable Securities covered by such
Registration Statement may be sold pursuant to Rule 144(k) (the Effectiveness Period) and advise the Investors in writing when the Effectiveness Period has expired;



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(b) prepare and file with the SEC such amendments and post-effective amendments to the Registration
Statement and the Prospectus as may be necessary to keep the Registration Statement effective for the period specified in Section 3(a) and to comply with the provisions of the 1933 Act and the 1934 Act with respect to the distribution of all of the
Registrable Securities covered thereby;



(c) provide copies to
and permit counsel designated by the Investors to review each Registration Statement and all amendments and supplements thereto no fewer than three (3) Business Days prior to their filing with the SEC and not file any document to which such counsel
reasonably objects;



(d) furnish to the Investors and their
legal counsel (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company (but not later than two (2) Business Days after the filing date, receipt date or sending date, as the case may be) one (1)
copy of any Registration Statement and any amendment thereto, each preliminary prospectus and Prospectus and each amendment or supplement thereto, and each letter written by or on behalf of the Company to the SEC or the staff of the SEC, and each
item of correspondence from the SEC or the staff of the SEC, in each case relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment), and (ii)
such number of copies of a Prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as each Investor may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor that are covered by the related Registration Statement;



(e) use commercially reasonable efforts to (i) prevent the issuance of any stop order or other suspension of effectiveness and, (ii) if such order is issued, obtain the withdrawal of any such order at the earliest
possible moment;



(f) prior to any public offering of
Registrable Securities, use commercially reasonable efforts to register or qualify or cooperate with the Investors and their counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions requested by the Investors and do any and all other commercially reasonable acts or things necessary or advisable to enable the distribution in such jurisdictions of the Registrable Securities
covered by the Registration Statement; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (i) qualify to do business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(f), (ii) subject itself to general taxation in any jurisdiction where it would not otherwise be so subject but for this Section 3(f), or (iii) file a general consent to service of process in any such jurisdiction;



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(g) use commercially reasonable efforts to cause all Registrable Securities covered by a Registration
Statement to be listed on each securities exchange, interdealer quotation system or other market on which similar securities issued by the Company are then listed;



(h) immediately notify the Investors, at any time when a Prospectus relating to Registrable Securities is required to be
delivered under the 1933 Act, upon discovery that, or upon the happening of any event as a result of which, the Prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of any such holder, promptly prepare and furnish to such holder a reasonable
number of copies of a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and



(i) otherwise use commercially reasonable efforts to comply with all applicable rules and regulations of the SEC under the
1933 Act and the 1934 Act, take such other actions as may be reasonably necessary to facilitate the registration of the Registrable Securities hereunder; and make available to its security holders, as soon as reasonably practicable, but not later
than the Availability Date (as defined below), an earnings statement covering a period of at least twelve (12) months, beginning after the effective date of each Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the 1933 Act, including Rule 158 promulgated thereunder (for the purpose of this subsection 3(i), Availability Date means the 45th day following the end of the fourth fiscal quarter that includes the effective date of
such Registration Statement, except that, if such fourth fiscal quarter is the last quarter of the Companys fiscal year, Availability Date means the 90th day after the end of such fourth fiscal quarter).



(j) With a view to making available to the Investors the benefits of Rule
144 (or its successor rule) and any other rule or regulation of the SEC that may at any time permit the Investors to sell Ordinary Shares to the public without registration, the Company covenants and agrees to: (i) make and keep public information
available, as those terms are understood and defined in Rule 144, until the earlier of (A) six months after such date as all of the Registrable Securities may be resold pursuant to Rule 144(k) or any other rule of similar effect or (B) such date as
all of the Registrable Securities shall have been resold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the 1934 Act; and (iii) furnish to each Investor upon request, as long as such Investor
owns any Registrable Securities, (A) a written statement by the Company that it has complied with the reporting requirements of the 1934 Act, (B) a copy of the Companys most recent Annual Report on Form 20-F or Report of Foreign Issuer on Form
6-K, and (C) such other information as may be reasonably requested in order to avail such Investor of any rule or regulation of the SEC that permits the selling of any such Registrable Securities without registration.



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4. Due Diligence Review; Information. The Company shall make available, during normal business
hours, for inspection and review by the Investors, advisors to and representatives of the Investors (who may or may not be affiliated with the Investors and who are reasonably acceptable to the Company), all financial and other records, all SEC
Filings (as defined in the Purchase Agreement) and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Companys officers,
directors and employees, within a reasonable time period, to supply all such information reasonably requested by the Investors or any such representative, advisor or underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investors
and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of such Registration Statement.



The Company shall not disclose material nonpublic information to the
Investors, or to advisors to or representatives of the Investors, unless prior to disclosure of such information the Company identifies such information as being material nonpublic information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such material nonpublic information for review and any Investor wishing to obtain such information enters into an appropriate confidentiality agreement with the Company with respect
thereto.



5. Obligations of the Investors.



(a) Each Investor shall furnish in writing to the Company such
information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it, as shall be reasonably required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may reasonably request. At least five (5) Business Days prior to the first anticipated filing date of any Registration Statement, the Company shall notify each Investor of
the information the Company requires from such Investor if such Investor elects to have any of the Registrable Securities included in the Registration Statement. An Investor shall provide such information to the Company at least two (2) Business
Days prior to the first anticipated filing date of such Registration Statement if such Investor elects to have any of the Registrable Securities included in the Registration Statement.



(b) Each Investor, by its acceptance of the Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of a Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from such
Registration Statement.



(c) Each Investor agrees that, upon
receipt of any notice from the Company of either (i) the commencement of an Allowed Delay pursuant to Section 2(c)(ii) or (ii) the happening of an event pursuant to Section 3(h) hereof, such Investor will immediately



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discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable
Securities, until the Investors receipt of the copies of the supplemented or amended prospectus filed with the SEC and until any related post-effective amendment is declared effective and, if so directed by the Company, the Investor shall
deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in the Investors possession of the Prospectus covering the Registrable Securities current at the time of
receipt of such notice.



6. Indemnification.



(a) Indemnification by the Company. The Company will indemnify
and hold harmless each Investor and its officers, directors, members, employees and agents, successors and assigns, and each other person, if any, who controls such Investor within the meaning of the 1933 Act, against any losses, claims, damages or
liabilities, joint or several, to which they may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or
alleged untrue statement of any material fact contained in any Registration Statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof; (ii) any blue sky application or other document executed
by the Company specifically for that purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the Registrable Securities under the securities laws thereof (any such
application, document or information herein called a Blue Sky Application); (iii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading;
(iv) any violation by the Company or its agents of any rule or regulation promulgated under the 1933 Act applicable to the Company or its agents and relating to action or inaction required of the Company in connection with such registration; or (v)
any failure to register or qualify the Registrable Securities included in any such Registration in any state where the Company or its agents has affirmatively undertaken or agreed in writing that the Company will undertake such registration or
qualification on an Investors behalf and will reimburse such Investor, and each such officer, director or member and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such Investor or any such controlling person in writing specifically for use in such Registration Statement or
Prospectus.



(b) Indemnification by the Investors. Each
Investor agrees, severally but not jointly, to indemnify and hold harmless, to the fullest extent permitted by law, the Company, its directors, officers, employees, stockholders and each person who controls the Company (within the meaning of the
1933 Act) against any losses, claims, damages, liabilities and expense (including reasonable attorney fees) resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement
or Prospectus or preliminary prospectus or amendment or supplement thereto or necessary to make the statements therein not misleading, to the extent, but only to the extent that such untrue statement or omission is contained in any information
furnished in writing by such



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Investor to the Company specifically for inclusion in such Registration Statement or Prospectus or amendment or
supplement thereto. In no event shall the liability of an Investor be greater in amount than the dollar amount of the proceeds (net of all expense paid by such Investor in connection with any claim relating to this Section 6 and the amount of any
damages such Investor has otherwise been required to pay by reason of such untrue statement or omission) received by such Investor upon the sale of the Registrable Securities included in the Registration Statement giving rise to such indemnification
obligation.



(c) Conduct of Indemnification
Proceedings. Any person entitled to indemnification hereunder shall (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party; provided that any person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the
fees and expenses of such counsel shall be at the expense of such person unless (a) the indemnifying party has agreed to pay such fees or expenses, or (b) the indemnifying party shall have failed to assume the defense of such claim and employ
counsel reasonably satisfactory to such person or (c) in the reasonable judgment of any such person, based upon written advice of its counsel, a conflict of interest exists between such person and the indemnifying party with respect to such claims
(in which case, if the person notifies the indemnifying party in writing that such person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim
on behalf of such person); and provided, further, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations hereunder, except to the extent that such failure
to give notice shall materially adversely affect the indemnifying party in the defense of any such claim or litigation. It is understood that the indemnifying party shall not, in connection with any proceeding in the same jurisdiction, be liable for
fees or expenses of more than one separate firm of attorneys at any time for all such indemnified parties. No indemnifying party will, except with the consent of the indemnified party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation.



(d) Contribution. If for any reason the indemnification provided for
in the preceding paragraphs (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless, other than as expressly specified therein, then the indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the 1933 Act shall be entitled to contribution from any person not guilty of such fraudulent misrepresentation. In no event shall the contribution obligation of a
holder of Registrable Securities be greater in amount than the dollar amount of the proceeds (net of all expenses paid by such holder in connection with any claim relating to this Section 6 and the amount of any damages such holder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission) received by it upon the sale of the Registrable Securities giving rise to such contribution obligation.



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7. Miscellaneous.



(a) Amendments and Waivers. This Agreement may be amended only by a writing signed by the Company and the Required
Investors. The Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the Required
Investors.



(b) Notices. All notices and other
communications provided for or permitted hereunder shall be made as set forth in Section 9.4 of the Purchase Agreement.



(c) Assignments and Transfers by Investors. The provisions of this Agreement shall be binding upon and inure to the benefit of the Investors and
their respective successors and assigns. An Investor may transfer or assign, in whole or from time to time in part, to one or more persons its rights hereunder in connection with the transfer of Registrable Securities by such Investor to such
person, provided that such Investor complies with all laws applicable thereto and provides written notice of assignment to the Company promptly after such assignment is effected.



(d) Assignments and Transfers by the Company. This Agreement may not be assigned by the Company (whether by
operation of law or otherwise) without the prior written consent of the Required Investors, provided, however, that the Company may assign its rights and delegate its duties hereunder to any surviving or successor corporation in connection with a
merger or consolidation of the Company with another corporation, or a sale, transfer or other disposition of all or substantially all of the Companys assets to another corporation, without the prior written consent of the Required Investors,
after notice duly given by the Company to each Investor.



(e)
Benefits of the Agreement. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.



(f) Counterparts; Faxes. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may also be executed via facsimile, which shall be deemed an original.



(g) Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.



(h) Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof but shall be interpreted as if it were written so as to be enforceable to the maximum extent permitted



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by applicable law, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereby waive any provision of law which renders any provisions hereof prohibited or unenforceable in any respect.



(i) Further Assurances. The parties shall execute and deliver all
such further instruments and documents and take all such other actions as may reasonably be required to carry out the transactions contemplated hereby and to evidence the fulfillment of the agreements herein contained.



(j) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.



(k) Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York without regard to the choice
of law principles thereof. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the State of New York located in New York County and the United States District Court for the Southern District of New York for
the purpose of any suit, action, proceeding or judgment relating to or arising out of this Agreement and the transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party
hereto anywhere in the world by the same methods as are specified for the giving of notices under this Agreement. Each of the parties hereto irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the
laying of venue in such court. Each party hereto irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO
THIS WAIVER.



-11-



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IN WITNESS WHEREOF, the parties have executed this Agreement or caused their duly authorized officers to
execute this Agreement as of the date first above written.



|             |  |               |  | 
|------------ |  | ------------- |  | 
|The Company: |  | VIRYANET LTD.
|             |  |              
|             |  | By:           |  | 
|             |  | Name:         |  | 
|             |  | Title:        |  | 



-12-



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|               |  |                                            |  |                  
|-------------- |  | ------------------------------------------ |  | -----------------
|The Investors: |  | LIBERTYVIEW SPECIAL OPPORTUNITIES FUND, LP
|               |  |                                           
|               |  | By:                                        |  |                  
|               |  | Name:                                      |  | Steven S. Rogers 
|               |  | Title:                                     |  | Authorized Person





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Exhibit A



Plan of Distribution



The selling shareholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling Ordinary shares or interests
in Ordinary shares received after the date of this prospectus from a selling shareholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their Ordinary
shares or interests therein on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to
the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.



The selling shareholders may use any one or more of the following methods when disposing of shares or interests therein:



| |  |  | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | block trades in which the broker-dealer will attempt to sell the Ordinary shares as agent, but may position and resell a portion of the block as principal to facilitate the
transaction;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | an exchange distribution in accordance with the rules of the applicable exchange;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | privately negotiated transactions;
| | - |  | ----------------------------------



| |  |  | short sales effected after the date the registration statement of which this Prospectus is a part is declared effective by the SEC;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | broker-dealers may agree with the selling shareholders to sell a specified number of such Ordinary shares at a stipulated price per share;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a combination of any such methods of sale; and
| | - |  | ----------------------------------------------



| |  |  | any other method permitted pursuant to applicable law.
| | - |  | ------------------------------------------------------



The selling shareholders may, from time to time, pledge or grant a security interest in some or all of the Ordinary shares owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the Ordinary shares, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act amending the list of selling



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shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this
prospectus. The selling shareholders also may transfer the Ordinary shares in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.



In connection with the sale of our Ordinary shares or
interests therein, the selling shareholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Ordinary shares in the course of hedging the positions they assume.
The selling shareholders may also sell Ordinary shares short and deliver these securities to close out their short positions, or loan or pledge Ordinary shares to broker-dealers that in turn may sell these securities. The selling shareholders may
also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of Ordinary shares
offered by this prospectus, which Ordinary shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).



The aggregate proceeds to the selling shareholders from the sale of the
Ordinary shares offered by them will be the purchase price of the Ordinary shares less discounts or commissions, if any. Each of the selling shareholders reserves the right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of Ordinary shares to be made directly or through agents. We will not receive any of the proceeds from this offering.



The selling shareholders also may resell all or a portion of the Ordinary shares in open market transactions in reliance upon Rule 144 under the
Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.



The selling shareholders and any underwriters, broker-dealers or agents that participate in the sale of Ordinary shares or interests therein may be
underwriters within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of Ordinary shares may be underwriting discounts and commissions under the Securities Act.
Selling shareholders who are underwriters within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.



To the extent required, the Ordinary shares to be sold, the names of the
selling shareholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying
prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.



In order to comply with the securities laws of some states, if applicable, the Ordinary shares may be sold in these jurisdictions only through registered
or licensed brokers or dealers. In addition, in some states the Ordinary shares may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.



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We have advised the selling shareholders that the anti-manipulation rules of Regulation M under the
Exchange Act may apply to sales of Ordinary shares in the market and to the activities of the selling shareholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time)
available to the selling shareholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling shareholders may indemnify any broker-dealer that participates in transactions involving the sale of the
Ordinary shares against certain liabilities, including liabilities arising under the Securities Act.



We have agreed to indemnify the selling shareholders against liabilities, including liabilities under the Securities Act and state securities laws,
relating to the registration of the Ordinary shares offered by this prospectus.



We have agreed with the selling shareholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the Ordinary shares covered by this
prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which such Ordinary shares may be sold pursuant to Rule 144(k) of the Securities Act.



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EXHIBIT A



THE SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNLESS (I) SUCH SECURITIES HAVE BEEN REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS
AMENDED, (II) SUCH SECURITIES MAY BE SOLD PURSUANT TO RULE 144(K), OR (III) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 OR
QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS.



71/2% CONVERTIBLE NOTE



|             |  |              
|------------ |  | -------------
|US$2,500,000 |  | July 27, 2004



FOR VALUE RECEIVED,
ViryaNet Ltd., an Israeli corporation (the Company), hereby unconditionally promises to pay to the order of LibertyView Special Opportunities Fund, LP (the Holder), having an address at c/o Neuberger Berman,
LLC, 111 River Street  Suite 1000, Hoboken, NJ 07030, at such address or at such other place as may be designated in writing by the Holder, or its assigns, the aggregate principal sum of Two Million Five Hundred Thousand United States Dollars
(US$2,500,000.00), together with interest from July 27, 2004 on the unpaid principal balance of this Note outstanding at a rate equal to seven and one-half percent (7.5%) (computed on the basis of the actual number of days elapsed in a 360-day year)
per annum and continuing on the outstanding principal until this 71/2% Convertible Note (the
Note) is converted into Ordinary Shares as provided herein or indefeasibly and irrevocably paid in full by the Company. Interest on this Note shall accrue and be compounded quarterly and shall be payable quarterly on the fifteenth
day of July, October, January and April of each year (each, an Interest Payment Date), commencing on October 15, 2004, to the Holder of record on the immediately preceding July 1, October 1, January 1 or April 1, as applicable
(each, an Interest Record Date). Subject to the other provisions of this Note, the principal of this Note and all accrued and unpaid interest hereon shall mature and become due and payable on July 27, 2014 (the Stated
Maturity Date). Except as provided herein, all payments of principal and interest by the Company under this Note shall be made in United States dollars in immediately available funds to an account specified by the Holder.



Subject to the provisions of the next paragraph, the
Company shall have the option to pay all or any portion of the interest accrued on this Note in newly issued, fully paid and nonassessable Ordinary Shares, with each share of Ordinary Shares having a value equal to the average Market Price of a
share of Ordinary Shares for each of the ten Trading Days immediately preceding the date on which such interest is paid.



Notwithstanding any provision of this Note to the contrary, the Company shall not have the right to issue Ordinary Shares in lieu of a cash payment under
any provision of this Note unless (i) the Ordinary Shares to be issued have been authorized and approved for issuance by the Companys stockholders (if required) in accordance with the requirements of applicable



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law and any securities exchange or market on which the Ordinary Shares are then traded or quoted prior to such issuance
and (ii) either (A) such Ordinary Shares are then registered pursuant to a Registration Statement (as defined in the Registration Rights Agreement) which is available for the resale of such Ordinary Shares immediately upon issuance or (B) such
Ordinary Shares are registered within forty-five (45) days pursuant to a Registration Statement (as defined in the Registration Rights Agreement) which is available for the resale of such Ordinary Shares immediately upon issuance. To the extent that
the Company is not able to issue Ordinary Shares meeting the requirements of this paragraph during such forty-five-day period, interest shall continue to accrue on this Note or the amount to be paid hereunder, as applicable, at a rate equal to seven
and one-half percent (7.5%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum and continuing until Ordinary Shares meeting such requirements are delivered to the Holder.



From and after the Stated Maturity Date, all amounts due and owing under this
Note shall automatically, and without action by any party hereto, bear interest at an annual rate of twelve percent (12%). In no event shall any interest charged, collected or reserved under this Note exceed the maximum rate then permitted by
applicable law and if any such payment is paid by the Company, then such excess sum shall be credited by the Holder as a payment of principal.



1. Definitions. Unless the context otherwise requires, when used herein the following terms shall have the meaning indicated:



Additional Shares shall have the meaning ascribed to such
term in Section 7.



Affiliate shall mean,
with respect to any Person, any other Person which directly or indirectly through one or more intermediaries Controls, is controlled by, or is under common control with, such Person.



Board shall mean the Board of Directors of Company.



Business Day other than a Saturday or Sunday, on which
banks in New York City are open for the general transaction of business.



Change of Control means, at any time (i) any Person or any Persons acting together that would constitute a group for purposes of Section 13(d) under the Exchange Act, or any successor
provision thereto, shall acquire beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) in a single transaction or a series of related transactions, of more than 50% of the aggregate voting
power of the Company; or (ii) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior
to such transaction own less than 50% of the aggregate voting power of the Company or the successor entity of such transaction; or (iii) the Company sells or transfers its assets, as an entirety or substantially as an entirety, to another Person.



Change of Control Conditions means either
(A) the consideration received by holders of the Ordinary Shares in connection with the Change of Control transaction consists of all cash, (B) the Person effecting the Change of Control does not have a class of equity securities registered pursuant
to Section 12(b) or 12(g) of the Exchange Act or (C) the Person effecting the Change of Control has a Market Capitalization of less than US$25,000,000



-2-



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Company shall have the meaning ascribed to such term in the first paragraph herein.



Control (including the terms
controlling, controlled by or under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.



Conversion Price shall mean US$4.2996 per share, subject to adjustment as provided in Section 6; provided, however, that in the event that the Conversion Rate is adjusted pursuant to Section 7 hereof, the Conversion Price
shall equal US$1,000 divided by the Conversion Rate in effect after giving effect to any adjustment pursuant to Section 7.



Conversion Rate shall mean initially US$1,000 divided by the Conversion Price then in effect, subject to adjustments as provided in
Section 7.



Designated Event means the
occurrence of either (i) a Change of Control meeting the Change of Control Conditions or (ii) a Termination of Trading.



Designated Event Repurchase Date shall have the meaning ascribed to such term in Section 5 hereof.



Designated Event Repurchase Notice shall have the meaning
ascribed to such term in Section 5 hereof.



Designated
Event Repurchase Price shall have the meaning ascribed to such term in Section 5 hereof.



Effective Date shall have the meaning ascribed to such term in Section 7.



Event of Default shall have the meaning ascribed to such term in Section 7 herein.



Exchange Act shall mean the Securities Exchange Act of
1934, as amended.



Holder shall have the
meaning ascribed to such term in the first paragraph herein.



Interest Payment Date shall have the meaning ascribed to such term in the first paragraph herein.



Interest Record Date shall have the meaning ascribed to such term in the first paragraph herein.



Investors shall have the meaning ascribed to such term in
the Purchase Agreement.



Market
Capitalization shall mean, as to any Person on any date of determination, the product of (i) the number of shares of capital stock or other similar equity interests of such Person issued and outstanding as of the date of determination
(excluding, for this purpose, any shares of capital stock or other similar equity interests issued by such Person in connection with a Change of Control transaction) and (ii) the average Market Price per share of such shares of capital stock or
other similar equity interests for each of the ten Trading Days ending immediately prior to the date of determination.



-3-



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Market Price, as of a particular date (the Valuation Date), shall
mean the following with respect to any class of securities: (A) if such security is then listed on a national stock exchange, the Market Price shall be the closing bid price of one share of such security on such exchange on the last Trading Day
prior to the Valuation Date, provided that if such security has not traded in the prior ten (10) trading sessions, the Market Price shall be the average closing bid price of such security in the most recent ten (10) trading sessions during which
such security has traded; (B) if such security is then included in The Nasdaq Stock Market, Inc. (Nasdaq), the Market Price shall be the closing bid price of one share of such security on Nasdaq on the last Trading Day prior to
the Valuation Date or, if no such closing sale price is available, the average of the high bid and the low ask price quoted on Nasdaq as of the end of the last Trading Day prior to the Valuation Date, provided that if such security has not traded in
the prior ten (10) trading sessions, the Market Price shall be the average closing price of one share of such security in the most recent ten (10) trading sessions during which such security has traded; (C) if such security is then included in the
Over-the-Counter Bulletin Board, the Market Price shall be the closing sale price of one share of such security on the Over-the-Counter Bulletin Board on the last Trading Day prior to the Valuation Date or, if no such closing sale price is
available, the average of the high bid and the low ask price quoted on the Over-the-Counter Bulletin Board as of the end of the last Trading Day prior to the Valuation Date, provided that if such stock has not traded in the prior ten (10) trading
sessions, the Market Price shall be the average closing price of one share of such security in the most recent ten (10) trading sessions during which such security has traded; or (D) if such security is then included in the pink sheets,
the Market Price shall be the closing sale price of one share of such security on the pink sheets on the last Trading Day prior to the Valuation Date or, if no such closing sale price is available, the average of the high bid and the low
ask price quoted on the pink sheets as of the end of the last Trading Day prior to the Valuation Date, provided that if such stock has not traded in the prior ten (10) trading sessions, the Market Price shall be the average closing price
of one share of such security in the most recent ten (10) trading sessions during which such security has traded.



Note shall have the meaning ascribed to such term in the first paragraph herein.



Ordinary Shares shall mean the Ordinary shares, par value
NIS 1.0 per share, of the Company.



Person
means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, sole proprietorship, unincorporated organization, governmental authority or any other form of entity
not specifically listed herein.



Purchase
Agreement shall mean the Note Purchase Agreement, dated as of July 26, 2004, and as that agreement may be amended from time to time, by and among the Company and the Investors.



Registration Rights Agreement shall mean the Registration Rights Agreement, dated as of July
, 2004, and as that agreement may be amended from time to time, by and among the Company and the Investors.



Repurchase Date shall have the meaning ascribed to such term in Section 4 hereof.



-4-



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Repurchase Notice shall have the meaning ascribed to such term in Section 4 hereof.



Repurchase Price shall have the meaning
ascribed to such term in Section 4 hereof.



Stated
Maturity Date shall have the meaning ascribed to such term in the first paragraph herein.



Stock Price shall have the meaning ascribed to such term in Section 7.



Termination of Trading will be deemed to have occurred at any time when the Ordinary Shares is neither
listed for trading on a U.S. national securities exchange nor approved for trading on the Nasdaq Stock Market or any similar system of automated dissemination of quotations of securities prices.



Trading Day means (i) if the relevant stock or security is
listed or admitted for trading on The New York Stock Exchange, Inc. or any other national securities exchange, a day on which such exchange is open for business; (ii) if the relevant stock or security is quoted on the Nasdaq Stock Market or any
other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; or (iii) if the relevant stock or security is not listed or admitted for trading on any national securities
exchange or quoted on the Nasdaq Stock Market or any other system of automated dissemination of quotation of securities prices, a day on which the relevant stock or security is traded in a regular way in the over-the-counter market and for which a
closing bid and a closing asked price for such stock or security are available, shall mean a day, other than a Saturday or Sunday, on which The New York Stock Exchange, Inc. is open for trading.



2. Purchase Agreement. This Note is one of the several 71/2% Convertible Notes of the Company issued pursuant to the Purchase Agreement. This Note is subject to the terms and
conditions of, and entitled to the benefit of, the provisions of the Purchase Agreement. This Note is transferable and assignable to any person to whom such transfer is permissible under the Purchase Agreement and applicable law. The Company agrees
to issue from time to time a replacement Note in the form hereof to facilitate such transfers and assignments. In addition, after delivery of an indemnity in form and substance reasonably satisfactory to the Company, the Company also agrees to
promptly issue a replacement Note if this Note is lost, stolen, mutilated or destroyed.



3. No Right of Prepayment or Redemption. This Note shall not be prepayable or redeemable by the Company prior to the Stated Maturity Date.



4. Repurchase of the Note at the Option of the Holder.



(a) The Note shall be purchased by the Company at the option of the Holder on July 15, 2008, July 15, 2009 and July 15, 2011
(each, a Repurchase Date), at a purchase price equal to 100% of the principal amount of this Note, plus accrued and unpaid interest on this Note, to (but excluding) such Repurchase Date (the Repurchase Price).
If the Repurchase Date is on a date that is after an Interest Record Date and on or prior to the corresponding Interest Payment Date, the Company shall pay such interest to the Holder of record on the corresponding Interest Record Date and the
Repurchase Price shall only be 100% of the principal amount of the



-5-



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Note. The Company shall have the option to pay all or any portion of the Repurchase Price in newly issued, fully paid and
nonassessable Ordinary Shares, with each share of Ordinary Shares having a value equal to the average Market Price of a share of Ordinary Shares for each of the ten Trading Days immediately preceding the date on which the Repurchase Price is paid.



(b) Subject to the proviso in the last sentence of Section
4(a), in the event that the Company desires to issue Ordinary Shares in payment of some or all of the Repurchase Price, the Company shall provide the Holder with written notice not later than five (5) Business Days prior to any Repurchase Date
specifying the portions of the Repurchase Price payable in cash and/or Ordinary Shares.



(c) Purchases of this Note shall be made, at the option of the Holder thereof, upon delivery to the Company by the Holder of (i) a written notice of repurchase (a Repurchase Notice) at any time
prior to 5:00 p.m., New York time, on the relevant Repurchase Date stating the portion of the Note which the Holder will deliver to be purchased, which portion must be in principal amounts of $1,000 or an integral multiple of $1,000, and irrevocably
agreeing that such principal amount of the Note shall be purchased by the Company as of the Repurchase Date and (ii) this Note.



(d) In the event that this Note is repurchased in part, upon surrender of this Note, the Company shall execute and deliver to the Holder a new Note equal
in principal amount to the unpurchased portion of the Note surrendered.



5. Repurchase of the Note at the Option of the Holder Upon Certain Events.



(a) If a Designated Event occurs, this Note shall be purchased by the Company, at the option of the Holder thereof, at a cash purchase price equal to 101% of the principal amount of those Securities, plus accrued and
unpaid interest (the Designated Event Repurchase Price) to, but not including, the later of (i) the date that is 30 days following the date of the notice of a Designated Event delivered by the Company pursuant to clause (b) below
and (ii) the effective date of the Designated Event (the later of such dates, the Designated Event Repurchase Date), subject to satisfaction by or on behalf of the Holder of the requirements set forth in clause (c) below. If the
Designated Event Repurchase Date is on a date that is after an Interest Record Date and on or prior to the corresponding Interest Payment Date, the Company shall pay such interest to the holder of record on the corresponding Interest Record Date and
the Designated Event Repurchase Price shall only be 101% of the principal amount of this Note.



(b) No later than 30 days after the occurrence of a Designated Event, the Company shall give written notice thereof to the Holder, which notice shall include a form of repurchase notice to be completed by the Holder
and shall (i) state briefly, the events causing a Designated Event and the date of such Designated Event, (ii) specify the Designated Event Repurchase Price and (iii) the Designated Event Repurchase Date.



(c) The Holder may exercise its rights specified in this Section 5 upon
delivery to the Company of (i) a written notice of purchase (a Designated Event Repurchase Notice) to the Company at any time on or prior to 5:00 p.m., New York time, on the Designated Event Repurchase Date stating the portion of
the Note which the Holder will deliver to be



-6-



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purchased, which portion must be in principal amounts of $1,000 or an integral multiple of $1,000, and irrevocably
agreeing that such principal amount of the Note shall be purchased by the Company as of the Designated Event Repurchase Date and (ii) this Note.



(d) In the event that this Note is repurchased in part, upon surrender of this Note, the Company shall execute and deliver to the Holder a new Note equal
in principal amount to the unpurchased portion of the Note surrendered.



6. Conversion Rights.



(a) Subject to and upon
compliance with the provisions of this Note, prior to the Stated Maturity Date, the Holder shall have the right, at its option at any time, to convert some or all of the Note into such number of fully paid and nonassessable Ordinary Shares as is
obtained by: (i) adding (A) the principal amount of this Note to be converted and (B) the amount of any accrued but unpaid interest with respect to such portion of this Note to be converted; and (ii) dividing the result obtained pursuant to clause
(i) above by the Conversion Price then in effect The rights of conversion set forth in this Section 6 shall be exercised by the Holder by giving written notice to the Company that the Holder elects to convert a stated amount of this Note into
Ordinary Shares and by surrender of this Note (or, in lieu thereof, by delivery of an appropriate lost security affidavit in the event this Note shall have been lost or destroyed) to the Company at its principal office (or such other office or
agency of the Company as the Company may designate by notice in writing to the Holder) at any time on the date set forth in such notice (which date shall not be earlier than the Companys receipt of such notice), together with a statement of
the name or names (with address) in which the certificate or certificates for Ordinary Shares shall be issued.



(b) Promptly after receipt of the written notice referred to in Section 6(a) above and surrender of this Note (or, in lieu thereof, by delivery of an
appropriate lost security affidavit in the event this Note shall have been lost or destroyed), but in no event more than three (3) Business Days thereafter, the Company shall issue and deliver, or cause to be issued and delivered, to the Holder,
registered in such name or names as the Holder may direct in writing, a certificate or certificates for the number of whole Ordinary Shares issuable upon the conversion of such portion of this Note. To the extent permitted by law, such conversion
shall be deemed to have been effected, and the Conversion Price shall be determined, as of the close of business on the date on which such written notice shall have been received by the Company and this Note shall have been surrendered as aforesaid
(or, in lieu thereof, an appropriate lost security affidavit has been delivered to the Company), and at such time, the rights of the Holder shall cease with respect to the principal amount of the Notes being converted, and the Person or Persons in
whose name or names any certificate or certificates for Ordinary Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby.



(c) No fractional shares shall be issued upon any conversion of this Note
into Ordinary Shares. If any fractional share of Ordinary Shares would, except for the provisions of the first sentence of this Section 6(c), be delivered upon such conversion, the Company, in lieu of delivering such fractional share, shall pay to
the Holder an amount in cash equal to the Market Price of such fractional share of Ordinary Shares. In case the principal amount of this Note



-7-



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exceeds the principal amount being converted, the Company shall, upon such conversion, execute and deliver to the Holder,
at the expense of the Company, a new Note for the principal amount of this Note surrendered which is not to be converted.



(d) If the Company shall, at any time or from time to time while this Note is outstanding, pay a dividend or make a distribution on its Ordinary Shares in
Ordinary Shares, subdivide its outstanding Ordinary Shares into a greater number of shares or combine its outstanding Ordinary Shares into a smaller number of shares or issue by reclassification of its outstanding Ordinary Shares any shares of its
capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the Conversion Price in effect immediately prior to the date upon which such change shall
become effective, shall be adjusted by the Company so that the Holder thereafter converting this Note shall be entitled to receive the number of Ordinary Shares or other capital stock which the Holder would have received if the Note had been
converted immediately prior to such event upon payment of a Conversion Price that has been adjusted to reflect a fair allocation of the economics of such event to the Holder, without regard to any conversion limitation specified in this Section 6.
Such adjustments shall be made successively whenever any event listed above shall occur.



(e) If any capital reorganization, reclassification of the capital stock of the Company, consolidation or merger of the Company with another corporation in which the Company is not the survivor, or sale, transfer or
other disposition of all or substantially all of the Companys assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful
and adequate provision shall be made whereby the Holder shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the Ordinary Shares immediately theretofore issuable
upon conversion of this Note, without regard to any conversion limitation specified in Section 6, such shares of stock, securities or assets as would have been issuable or payable with respect to or in exchange for a number of Ordinary Shares equal
to the number of Ordinary Shares immediately theretofore issuable upon conversion of this Note, had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, without regard to any conversion
limitation specified in Section 6, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provision for adjustment of the
Conversion Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or assets thereafter deliverable upon the conversion hereof. The Company shall not effect any such
consolidation, merger, sale, transfer or other disposition unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation
purchasing or otherwise acquiring such assets or other appropriate corporation or entity shall assume the obligation to deliver to the Holder, at the last address of the Holder appearing on the books of the Company, such shares of stock, securities
or assets as, in accordance with the foregoing provisions, the Holder may be entitled to purchase, without regard to any conversion limitation specified in Section 6, and the other obligations under this Note. The provisions of this paragraph (e)
shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions.



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(f) In case the Company shall fix a payment date for the making of a distribution to all holders of
Ordinary Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (other than cash dividends or cash distributions payable
out of consolidated earnings or earned surplus or dividends or distributions referred to in Section 6(d)), or subscription rights or Notes, the Conversion Price to be in effect after such payment date shall be determined by multiplying the
Conversion Price in effect immediately prior to such payment date by a fraction, the numerator of which shall be the total number of Ordinary Shares outstanding multiplied by the Market Price of Ordinary Shares immediately prior to such payment
date, less the fair market value (as determined by the Board of Directors in good faith) of said assets or evidences of indebtedness so distributed, or of such subscription rights or Notes, and the denominator of which shall be the total number of
Ordinary Shares outstanding multiplied by such Market Price immediately prior to such payment date. Such adjustment shall be made successively whenever such a payment date is fixed.



(g) An adjustment to the Conversion Price shall become effective immediately after the payment date in the case of each
dividend or distribution and immediately after the effective date of each other event which requires an adjustment.



(h) In the event that, as a result of an adjustment made pursuant to this Section 6, the Holder shall become entitled to receive any shares of capital
stock of the Company other than Ordinary Shares, the number of such other shares so receivable upon conversion of this Note shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to
the provisions contained in this Note.



(i) Notwithstanding
anything herein to the contrary, in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion upon conversion of which the sum of (1) the number of Ordinary Shares beneficially owned by such Holder and its
Affiliates (other than Ordinary Shares which may be deemed beneficially owned through ownership of the unconverted portion of this Note or the unexercised or unconverted portion of any other security of the holder subject to a limitation on
conversion analogous to the limitations contained herein) and (2) the number of Ordinary Shares issuable upon the conversion of that portion of this Note with respect to which the determination of this proviso is being made, would result in
beneficial ownership by the Holder and its Affiliates of more than 9.99% of the then outstanding Ordinary Shares. The waiver by the Holder of any limitation contained in an Option or Convertible Security now or hereafter held by such holder that is
similar or analogous to the limitations set forth in this Section 6(i) shall not be deemed a waiver or otherwise effect the limitation set forth in this Section 6(i), unless such waiver expressly states it is a waiver of the provisions of this
Section 6(i). For purposes of this Section 6(i), beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso. The Holder
may waive the limitations set forth herein by sixty-one (61) days written notice to the Company.



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(j) In case at any time:



(i) the Company shall declare any dividend upon its Ordinary Shares or any other class or series of capital stock of the
Company payable in cash or stock or make any other distribution to the holders of its Ordinary Shares or any such other class or series of capital stock;



(ii) the Company shall offer for subscription pro rata to the holders of its Ordinary Shares or any other class or series of capital stock
of the Company any additional shares of stock of any class or other rights; or



(iii) there shall be any capital reorganization or reclassification of the capital stock of the Company, any acquisition or a liquidation, dissolution or winding up of the Company;



then, in any one or more of said cases, the Company shall give, by delivery in person or by
certified or registered mail, return receipt requested, addressed to the Holder at the address of such Holder as shown on the books of the Company, (a) at least ten (10) Business Days prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any event set forth in clause (iii) of this Section 6(j) and (b) in the case of any event set forth
in clause (iii) of this Section 6(j), at least ten (10) Business Days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of Ordinary Shares or such other class or series of capital stock shall be entitled thereto and such notice in accordance with the foregoing clause (b) shall also specify
the date on which the holders of Ordinary Shares and such other series or class of capital stock shall be entitled to exchange their Ordinary Shares and other stock for securities or other property deliverable upon consummation of the applicable
event set forth in clause (iii) of this Section 6(j).



(k) Upon
any adjustment of the Conversion Price, then and in each such case the Company shall give prompt written notice thereof, by delivery in person or by certified or registered mail, return receipt requested, addressed to the Holder at the address of
such Holder as shown on the books of the Company, which notice shall state the Conversion Price resulting from such adjustment and setting forth in reasonable detail the method upon which such calculation is based.



(l) The Company shall at all times to reserve and keep available out of its
authorized Ordinary Shares, solely for the purpose of issuance upon conversion of this Note as herein provided, such number of Ordinary Shares as shall then be issuable upon the conversion of this Note without regard to the conversion limitations
set forth in Section 6. The Company covenants that all Ordinary Shares which shall be so issued shall be duly and validly issued and fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof, and,
without limiting the generality of the foregoing, and that the Company will from time to time take all such action as may be requisite to assure that the par value per share of the Ordinary Shares is at all times equal to or less than the Conversion
Price in effect at the time. The Company shall take all such action as may be necessary to assure that all such Ordinary Shares may be so issued without violation of any applicable law or regulation, or of any requirement of any national securities
exchange upon which the Ordinary Shares may be listed. The Company shall not take any action which results in any adjustment of the Conversion Price



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if the total number of Ordinary Shares issued and issuable after such action upon conversion of this Note would exceed
the total number of Ordinary Shares then authorized by the Companys articles of association or memorandum of association.



(m) The issuance of certificates for Ordinary Shares upon conversion of this Note shall be made without charge to the holders thereof for any issuance tax
in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder.



(n) The Company will not at any time close its transfer books against the
transfer, as applicable, of this Note or of any Ordinary Shares issued or issuable upon the conversion of this Note in any manner which interferes with the timely conversion of this Note, except as may otherwise be required to comply with applicable
securities laws.



7. Additional Adjustments Upon a Change of
Control.



(a) If a Change of Control meeting the Change of
Control Conditions occurs on or prior to July 15, 2008, and the Holder elects to convert this Note at any time from and after the effective date of such Change of Control transaction (the Effective Date) and prior to 5:00 p.m., New York
time, on the Designated Event Repurchase Date, then the Conversion Rate in respect of such conversion shall be increased by a number of additional Ordinary Shares (the Additional Shares) as described below.



(b) The number of Additional Shares will be determined by reference to the
table attached as Schedule A hereto, based on the effective date of the Change of Control transaction (the Effective Date) and the price (the Stock Price) paid per share of the Ordinary Shares in such Change of
Control transaction. If holders of Ordinary Shares receive only cash in such transaction, the Stock Price shall be the cash amount paid per share. Otherwise, the Stock Price shall be the average of the Market Price of Ordinary Shares on the five
Trading Days up to but not including the Effective Date of the transaction.



(c) The Stock Prices set forth in the first row of the table in Schedule A hereto will be adjusted as of any date on which the Conversion Rate of this Note is adjusted as a result of an adjustment of the Conversion
Price pursuant to Section 6. The adjusted Stock Price will equal the Stock Price applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise
to the Stock Price adjustment and the denominator of which is the Conversion Rate as so adjusted. The number of Additional Shares will be adjusted in the same manner as the Conversion Price, as set forth in Section 6.



(d) The exact Stock Prices and Effective Dates may not be set forth in the
table in Schedule A, in which case: if the Stock Price is between two Stock Price amounts in the table or the Effective Date is between two Effective Dates in the table, the number of Additional Shares will be determined by a straight-line
interpolation between the number of Additional Shares set forth for the higher and lower Stock Price amounts and the two dates, as applicable, based on a 365-day year,



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(e) Any adjustment of the Conversion Rate pursuant to this Section 7 shall result in an immediate,
concomitant adjustment in the Conversion Price.



8. Event of
Default. The occurrence of any of following events shall constitute an Event of Default hereunder:



(a) the failure of the Company to make any payment of principal on this Note when due, whether at maturity, upon acceleration or otherwise, and such
failure continues for more than five (5) days;



(b) the failure
of the Company to make any payment of interest on this Note, or any other amounts due under the Purchase Agreement, the Registration Rights Agreement or this Note when due, whether at maturity, upon acceleration or otherwise, and such failure
continues for more than five (5) days;



(c) the Company and/or
its Subsidiaries fail to make a required payment or payments on indebtedness for borrowed money of Two Hundred Fifty Thousand United States Dollars (US$250,000) or more in aggregate principal amount and such failure continues for more than ten (10)
days;



(d) there shall have occurred an acceleration of the
stated maturity of any indebtedness for borrowed money of the Company or its Subsidiaries of Two Hundred Fifty Thousand United States Dollars (US$250,000) or more in aggregate principal amount (which acceleration is not rescinded, annulled or
otherwise cured within ten (10) days of receipt by the Company or a Subsidiary of notice of such acceleration);



(e) the Company makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an
order, judgment or decree is entered adjudicating the Company as bankrupt or insolvent; or any order for relief with respect to the Company is entered under the Federal Bankruptcy Code or any other bankruptcy or insolvency law; or the Company
petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Company or of any substantial part of the assets of the Company, or commences any proceeding relating to it under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Company and either (i) the Company by
any act indicates its approval thereof, consents thereto or acquiescence therein or (ii) such petition application or proceeding is not dismissed within sixty (60) days;



(f) a final, non-appealable judgment which, in the aggregate with other outstanding final judgments against the Company and
its Subsidiaries, exceeds Two Hundred Fifty Thousand United States Dollars (US$250,000) shall be rendered against the Company or a Subsidiary and within sixty (60) days after entry thereof, such judgment is not discharged or execution thereof stayed
pending appeal, or within sixty (60) days after the expiration of such stay, such judgment is not discharged;



(g) the Company is in breach of the requirements of Section 7.9 of the Purchase Agreement;



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(h) if any representation or statement of fact made in the Purchase Agreement proves to have been false
in any material respect when made or furnished within two years of the Closing Date, or if any other representation or statement of fact furnished to the Holder at any time by or on behalf of the Company proves to have been false in any material
respect when made or furnished; or



(i) if the Company fails to
observe or perform in any material respect any of its covenants contained in the Purchase Agreement, the Registration Rights Agreement or this Note (other than any failure which is covered by Section 7(a), (b) or (g)), and such failure continues for
thirty (30) days after receipt by the Company of notice thereof.



Upon the occurrence of any such Event of Default all unpaid principal and accrued interest under this Note shall become immediately due and payable (A) upon election of the Holder, with respect to (a) through (d) and (f) through (i), and
(B) automatically, with respect to (e). Upon the occurrence of an Event of Default, the Holder shall have the right to exercise any other right, power or remedy as may be provided herein or as may be provided at law or in equity.



9. No waiver. No delay or omission on the part of the Holder in
exercising any right under this Note shall operate as a waiver of such right or of any other right of the Holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future
occasion.



10. Amendments in Writing. None of the terms
or provisions of this Note may be excluded, modified or amended except by a written instrument duly executed by the Holder and the Company expressly referring to this Note and setting forth the provision so excluded, modified or amended.



11. Waivers. The Company hereby forever waives presentment, demand,
presentment for payment, protest, notice of protest, notice of dishonor of this Note and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note.



12. Waiver of Jury Trial. THE COMPANY HEREBY WAIVES ITS RIGHT TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS NOTE OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THE COMPANY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.



13. Governing Law; Consent to Jurisdiction. This Note shall be
governed by and construed under the law of the State of New York, without giving effect to the conflicts of law principles thereof. The Company and, by accepting this Note, the Holder, each irrevocably submits to the exclusive jurisdiction of the
courts of the State of New York located in New York County and the United States District Court for the Southern District of New York for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Note and the
transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of notices under this Note. The
Company and, by accepting this



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Note, the Holder, each irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding
and to the laying of venue in such court. The Company and, by accepting this Note, the Holder, each irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any
claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.



14. Costs. In the event that legal proceedings are commenced by the Holder or the Company in connection with Note, the party or parties which do
not prevail in such proceedings shall severally, but not jointly, pay their pro rata share of the reasonable attorneys fees and other reasonable out-of-pocket costs and expenses incurred by the prevailing party in such proceedings.



15. Notices. All notices hereunder shall be given in writing and
shall be deemed delivered when received by the other party hereto at the address set forth in the Purchase Agreement or at such other address as may be specified by such party from time to time in accordance with the Purchase Agreement.



16. Successors and Assigns. This Note shall be binding upon the
successors or assigns of the Company and shall inure to the benefit of the successors and assigns of the Holder.



[Remainder of Page Intentionally Left Blank]



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VIRYANET LTD.By:Name:Title:






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SCHEDULE A



The following table sets forth the number of Additional Shares to be received per $1,000 principal amount of Notes.



|               |  |             |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |      
|-------------- |  | ----------- | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | -----
|               |  | Stock Price
|Effective Date |  | $           | 4.30  |  | $ | 4.75  |  | $ | 5.00  |  | $ | 5.50  |  | $ | 6.00  |  | $ | 6.50  |  | $ | 7.00  |  | $ | 7.50  |  | $ | 8.00  |  | $ | 8.50  |  | $ | 9.00  |  | $ | 9.50  |  | $ | 10.00
|July 31, 2004  |  |             | 46.51 |  |   | 40.27 |  |   | 37.29 |  |   | 32.14 |  |   | 27.85 |  |   | 24.22 |  |   | 21.11 |  |   | 18.41 |  |   | 16.05 |  |   | 13.97 |  |   | 12.12 |  |   | 10.47 |  |   | 8.97 
|July 31, 2005  |  |             | 37.21 |  |   | 32.22 |  |   | 29.83 |  |   | 25.71 |  |   | 22.28 |  |   | 19.38 |  |   | 16.89 |  |   | 14.73 |  |   | 12.84 |  |   | 11.18 |  |   | 9.70  |  |   | 8.37  |  |   | 7.18 
|July 31, 2006  |  |             | 27.91 |  |   | 24.16 |  |   | 22.38 |  |   | 19.29 |  |   | 16.71 |  |   | 14.53 |  |   | 12.67 |  |   | 11.05 |  |   | 9.63  |  |   | 8.38  |  |   | 7.27  |  |   | 6.28  |  |   | 5.38 
|July 31, 2007  |  |             | 18.60 |  |   | 16.11 |  |   | 14.92 |  |   | 12.86 |  |   | 11.14 |  |   | 9.69  |  |   | 8.44  |  |   | 7.37  |  |   | 6.42  |  |   | 5.59  |  |   | 4.85  |  |   | 4.19  |  |   | 3.59 
|July 31, 2008  |  |             | 9.28  |  |   | 8.03  |  |   | 7.44  |  |   | 6.41  |  |   | 5.56  |  |   | 4.83  |  |   | 4.21  |  |   | 3.63  |  |   | 3.20  |  |   | 2.79  |  |   | 2.42  |  |   | 2.09  |  |   | 1.79 



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