UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 20-F/A

Amendment No. 1







| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

OR



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

For the fiscal year ended December 31, 2010

OR



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

OR



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

Date of event requiring this shell company report

For the transition period from  to

Commission File Number 000-31513





VIRYANET LTD.

(Exact name of Registrant as specified in its charter)





Israel

(Jurisdiction of incorporation or organization)

8 HaMarpe St.

Har Hotzvim

P.O. Box 45041

Jerusalem 91450

Israel

(Address of principal executive offices)

Memy Ish-Shalom

8 HaMarpe St.

Har Hotzvim

P.O. Box 45041

Jerusalem 91450

Israel

Telephone +972-2-584-1000

Facsimile: +972-2-581-5507

(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)





Securities
registered or to be registered pursuant to Section 12(b) of the Act: None

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

Ordinary Shares, par value NIS 5.0 per share

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None





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

As of December 31, 2010, the Registrant had 3,561,880 shares outstanding, comprised of 3,235,083 Ordinary Shares and 326,797 Preferred A Shares.

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities
Act.     ̈  Yes    x  No

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).     ̈  Yes     ̈  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.



|                        |  |   |  |                   |  |  
|----------------------- |  | - |  | ----------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  | x |  |                   |  |  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in
this filing:



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

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).     ̈  Yes    x  No









---

EXPLANATORY NOTE

This Amendment No. 1 (the Amendment) to the Annual Report on Form 20-F for the year ended December 31, 2010,
filed on July 15, 2011 with the Securities and Exchange Commission (the Original Report), is being filed by ViryaNet Ltd. (ViryaNet or the Company), to amend the Original Report for the
sole purposes of: (i) supplementing the disclosure under Item 11 (Quantitative and Qualitative Disclosures About Market Risk) to include sensitivity analysis based on hypothetical changes of 10% magnitude in foreign currency
exchange rates and 300 basis points in interest rates over the course of 2010, in keeping with the second disclosure alternative under Item 11 of Form 20-F; (ii) including a revised audit report issued by Nexia ASR (the Subsidiary
Auditor), the independent auditor of the Companys Australian subsidiary (which is included in this Amendment together with the audit report of Arik Eshel, CPA & Associates, PC, the Companys independent auditor,
pursuant to Item 18 of Form 20-F), that refers to the entire three year period ended December 31, 2010 for which the Subsidiary Auditor audited ViryaNets Australian subsidiarys financial statements, in keeping with the
requirements of Rule 2-02 of Regulation S-X promulgated by the Securities and Exchange Commission, thereby correcting the reference in the Subsidiary Auditors report included in the Original Report to the year in the period ended
December 31, 2010, which constituted an inadvertent typographical error; and (iii) including a consent of the Subsidiary Auditor to the incorporation by reference of its revised audit report (as included in the Amendment) in the
Companys Registration Statements on Form S-8 (File No. 333-146265) and Form F-3 (File No.s 333-114504 and 333-130632).

Other than as set forth herein, this Amendment does not, and does not purport to, amend or restate any other information contained in the Original Report, nor does this Amendment reflect any events that
have occurred after the Original Report was filed. The filing of this Amendment shall not be deemed an admission that the Original Report, when filed, included any untrue statement of a material fact or omitted to state a material fact necessary to
make a statement not misleading.

Capitalized terms appearing in this Amendment which are not otherwise defined shall have the
respective meanings assigned to them in the Original Report.



---

|Item 11. | Quantitative And Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

Exchange Rate Risks

Revenues generated and costs incurred outside
of the United States are generally denominated in non-dollar currencies. Costs not effectively denominated in United States dollars are remeasured to United States dollars, when recorded, at the prevailing exchange rates for the purposes of our
financial statements. Consequently, fluctuations in the rates of exchange between the dollar and non-dollar currencies will affect our results of operations. An increase in the value of a particular currency relative to the dollar will increase the
dollar reporting value for transactions in that particular currency, and a decrease in the value of that currency relative to the dollar will decrease the dollar reporting value for those transactions. This effect on the dollar reporting value for
transactions is generally only partially offset by the impact that currency fluctuations may have on costs. We do not generally engage in currency hedging transactions to offset the risks associated with variations in currency exchange rates.
Consequently, significant foreign currency fluctuations and other foreign exchange risks may have a material adverse effect on our business, financial condition and results of operations. Since our revenues are generated in United States dollars and
currencies other than United States dollars, and a substantial portion of our expenses are incurred and will continue to be incurred in NIS, we are exposed to risk that the NIS may appreciate relative to the U.S. dollar, or that even if the NIS
devaluates in relation to the U.S. dollar, that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of such devaluation will lag behind inflation in Israel. We do not engage in
any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations. We also do not own any market risk sensitive instruments. However, we may in the future undertake hedging or other
transactions or invest in market risk sensitive instruments if we determine that it is necessary to offset these risks.

In
2010, 93% of our revenues and 67% of our expenses were denominated in U.S. dollars. The net effect of the change in value of the U.S. dollar against other currencies in 2010 was an increase in our expenses (excluding financial expenses) of
approximately $0.13 million. The net effect of such changes in currency value on our revenues was immaterial.

The net effect
of the above-described risks stemming from currency exchange rate fluctuations on our operating results can be further quantified in a hypothetical manner as follows:

An increase of 10% in the value of the NIS and Australian dollar relative to the dollar in the year ended December 31, 2010 would have resulted in a net decrease in the dollar reporting value of our
operating income of $0.16 million, due to the adverse impact to our operating margins that we would experience as a result of such an increase. On the other hand, a 10% decrease in value of the NIS and Australian dollar relative to the dollar in the
year ended December 31, 2010 would have caused a net increase in the dollar reporting value of our operating income of $0.16 million for 2010, due to the favorable effect on our operating margins that would result from such devaluation of the
NIS and the Australian dollar.

In addition, we have a balance sheet exposure arising from assets and liabilities denominated
in currencies other than U.S. dollars, mainly in NIS and Australian dollars. Any change of the exchange rates between the U.S. dollar and these currencies may create financial gain or loss. In 2010 the net effect of the change in value of the U.S.
dollar against the NIS resulting from balance sheet exposure was an increase in financial expenses of $0.1 million.

The net
effect on our balance sheet of our currency exchange rate fluctuation exposure can be further quantified in a hypothetical manner as follows:

An instantaneous 10% depreciation in the NIS and Australian dollar from their levels against the dollar as of December 31, 2010, with all other variables held constant, would decrease the fair value
of our assets denominated in foreign currencies, held at December 31, 2010, by approximately $0.20 million and decrease the fair value of our liabilities denominated in foreign currencies, held at December 31, 2010, by approximately $0.26
million, thereby causing a net increase in our shareholders equity of $0.06 million. On the other hand, an instantaneous 10% appreciation in the NIS and Australian dollar from their levels against the dollar as of December 31, 2010, with all
other variables held constant, would increase the fair value of our assets denominated in foreign currencies, held at December 31, 2010, by approximately $0.20 million and increase the fair value of our liabilities denominated in foreign
currencies, held at December 31, 2010, by approximately $0.26 million, thereby causing a net decrease in our shareholders equity of $0.06 million.

Interest Rate Risks

As of December 31, 2010, we had long-term
bank loans in the amount of $1.1 million that were subject to variable interest rates adjustable in accordance with LIBOR. Any significant increase in LIBOR may have an adverse effect on our financial expenses and financial condition. Our exposure
to fluctuations in LIBOR can be quantified as follows:



---

An increase in LIBOR by three hundred (300) basis points over the course of the
entirety of the year ended December 31, 2010 would have increased our financial expense related to our long-term bank loans by $0.04 million.



|Item 18. | Financial Statements
|-------- | --------------------

See
the Index to Consolidated Financial Statements and related Financial Statements accompanying this Amendment to our Annual Report on Form 20-F, beginning on page F-1.



|Item 19. | Exhibits
|-------- | --------



|               |  |                                                                                                                                                                                                                              |  |                                                                                                                                                                                      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description of Document                                                                                                                                                                                                      |  | Location of Document                                                                                                                                                                 
|               |  |                                                                                                                                                                                                                             
|1.1            |  | Memorandum of Association of the Company (English translation) dated March 8, 1988                                                                                                                                           |  | Filed as Exhibit 3.1 to the Companys Registration Statement on Form F-1, SEC File No. 333-42158, and incorporated herein by reference.                                              
|               |  |                                                                                                                                                                                                                             
|1.2            |  | Amended Articles of Association of the Company                                                                                                                                                                               |  | Filed as Exhibit 4(a)(26) to the Companys annual report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.                                     
|               |  |                                                                                                                                                                                                                             
|4.1            |  | Letter dated December 22, 2005 between the Company and Bank Hapoalim Ltd.                                                                                                                                                    |  | Translated from the Hebrew original. Filed as Exhibit 4(a)(23) to the Companys annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by
reference.
|               |  |                                                                                                                                                                                                                             
|4.2            |  | Letter dated August 29, 2007, between the Company and Bank Hapoalim Ltd.                                                                                                                                                     |  | Translated from the Hebrew original. Filed as Exhibit 4(a)(26) to the Companys annual report on Form 20-F for the year ended December 31, 2006 and incorporated herein by
reference.
|               |  |                                                                                                                                                                                                                             
|4.3            |  | Purchase Agreement, and Amended and Restated Notes dated August 5, 2005 by and between the Company and LibertyView Special Opportunities Fund LP, and exhibits thereto                                                       |  | Filed as Exhibit 4(a)(21) to the Companys annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by reference.                                     
|               |  |                                                                                                                                                                                                                             
|4.4            |  | Equity and Convertible Note Financing Agreements dated December 19, 2007 by and among the Company and the investors identified in such agreements, and exhibits thereto                                                      |  | Filed as Exhibit 4(a)(27) to the Companys annual report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.                                     
|               |  |                                                                                                                                                                                                                             
|4.5            |  | A new Lease agreement reducing the current Company premises leased in Jerusalem, Israel, to an area of approximately 7,600 square feet of office space, dated February 25, 2002
(as summarized and translated into English). |  | Filed as Exhibit 4(a) to the Companys annual report on Form 20-F for the year ended December 31, 2001 and incorporated herein by reference.                                         
|               |  |                                                                                                                                                                                                                             
|4.6            |  | Lease for approximately 6,000 square feet of office space in Jerusalem, Israel                                                                                                                                               |  | Filed as Exhibit 4.12.3 to the Companys annual report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.                                       
|               |  |                                                                                                                                                                                                                             
|4.7            |  | Lease for approximately 13,807 square feet in Southborough, Massachusetts.                                                                                                                                                   |  | Filed as Exhibit 10.15 to the Companys Registration Statement on Form F-1, File No. 333-42158, and incorporated herein by reference.                                                
|               |  |                                                                                                                                                                                                                             
|4.8            |  | Second Amendment and Extension of Lease for approximately 10,000 square feet of office space in Southborough, Massachusetts                                                                                                  |  | Filed as Exhibit 4(a)(29) to the Companys annual report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.                                     
|               |  |                                                                                                                                                                                                                             
|4.9            |  | Form of Indemnification Agreement entered into with directors and officers of the Company.                                                                                                                                   |  | Filed as Exhibit 10.16 to the Companys Registration Statement on Form F-1, File No. 333-42158, and incorporated herein by reference.                                                
|               |  |                                                                                                                                                                                                                             
|4.10           |  | The Companys 2005 Israeli Share Option and Restricted Share Plan.                                                                                                                                                           |  | Filed as Exhibit 4(c)(7) to the Companys annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by reference.                                      



---

|     |  |                                                                                                                                                                                            |  |                                                                                                                                                                                            
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                           
|4.11 |  | The Companys 2005 International Share Option and Restricted Share Plan.                                                                                                                   |  | Filed as Exhibit 4(c)(8) to the Companys annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by reference.                                            
|     |  |                                                                                                                                                                                           
|4.12 |  | Lease for approximately 10,372 square feet in Westborough, Massachusetts                                                                                                                   |  | Filed as Exhibit 4.12 to the Companys original annual report on Form 20-F for the year ended December 31, 2010 (filed with the SEC on July 15, 2011) and incorporated
herein by reference.
|     |  |                                                                                                                                                                                           
|4.13 |  | Share Purchase Agreement dated as of June 30, 2011, by and between the Company and Jerusalem Technology Investments Ltd.                                                                   |  | Filed as Exhibit 4.13 to the Companys original annual report on Form 20-F for the year ended December 31, 2010 (filed with the SEC on July 15, 2011) and incorporated herein by
reference.
|     |  |                                                                                                                                                                                           
|12.1 |  | Certification of Chief Executive Officer (serving as co-principal executive officer) pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act                                      |  | Filed herewith.                                                                                                                                                                            
|     |  |                                                                                                                                                                                           
|12.2 |  | Certification of Executive Chairman (serving as co-principal executive officer and as acting principal financial officer) pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the
Exchange Act |  | Filed herewith.                                                                                                                                                                            
|     |  |                                                                                                                                                                                           
|13   |  | Certification of Chief Executive Officer and Executive Chairman pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350                                |  | Filed herewith.                                                                                                                                                                            
|     |  |                                                                                                                                                                                           
|15.1 |  | Consent of Arik Eshel, CPA & Assoc., PC                                                                                                                                                    |  | Filed as Exhibit 15.1 to the Companys original annual report on Form 20-F for the year ended December 31, 2010 (filed with the SEC on July 15, 2011) and incorporated herein by
reference.
|     |  |                                                                                                                                                                                           
|15.2 |  | Consent of Nexia ASR, for the audit of ViryaNet Pty Ltd.                                                                                                                                   |  | Filed herewith                                                                                                                                                                             



---

SIGNATURES

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Amendment No. 1 to its annual
report on its behalf.



|              |  |                                        
|------------- |  | ---------------------------------------
|VIRYANET LTD.
|              | 
|By:           |  | /S/    MEMY
ISH-SHALOM                 
|              |  | Memy Ish-Shalom Chief Executive Officer

Date: September 28, 2011



---

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2010

IN U.S. DOLLARS

INDEX



|                                                        |  |      |         | 
|------------------------------------------------------- |  | ---- | ------- | 
|                                                        |  | Page |        
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  |      | 2 - 3   | 
|                                                        | 
|Consolidated Balance Sheets                             |  |      | 4 - 5   | 
|                                                        | 
|Consolidated Statements of Operations                   |  |      | 6       | 
|                                                        | 
|Statements of Changes in Shareholders Equity           |  |      | 7 - 9   | 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  |      | 10 - 11 | 
|                                                        | 
|Notes to Consolidated Financial Statements              |  |      | 12 - 40 | 







---

VIRYANET LTD. AND ITS SUBSIDIARIES

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

VIRYANET LTD.

We have audited the accompanying consolidated balance
sheets of ViryaNet Ltd. and its subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income (loss), shareholders equity (deficit), and cash flows for each of the three years
in the period ended December 31, 2010. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the
financial statements of ViryaNet Pty Ltd. (Australia), a wholly-owned subsidiary, whose statements reflect total assets of 9.8 percent and 9.2 percent of the related consolidated totals as of December 31, 2010 and 2009, respectively, and total
revenue of 7.3 percent, 6.5 percent and 7.0 percent of the related consolidated totals for each of the three years in the period ended December 31, 2010. Those statements were audited by other auditors whose report has been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included for this subsidiary, is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ViryaNet Ltd. and its subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

ARIK ESHEL,
CPA & ASSOCIATES., PC

New York, New York

July 15, 2011



2



---

LOGO

INDEPENDENT AUDIT REPORT

TO THE MEMBERS OF VIRYANET PTY LTD (AUSTRALIA)

Scope

We have audited the balance sheets of ViryaNet Pty Ltd (Australia) (the Company) as of December 31, 2010 and December 31, 2009, and the
related statements of operations for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.

Audit approach

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over
the financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Audit opinion

In our opinion, the
financial statements referred to above present fairly, in all material respects, the financial position of the ViryaNet Pty Ltd (Australia) as of December 31, 2010 and December 31, 2009, and the results of its operations for each of the three years
in the period ended December 31, 2010, in conformity with United States generally accepted accounting principles.

NEXIA ASR

ABN 16 847 721 257

GEORGE
S. DAKIS

Partner

Audit &
Assurance Services

Melbourne

15
July 2011

LOGO



3



---

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



U.S. dollars in thousands



|                                               |  |              |       |  |      |   |       | 
|---------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                               |  | December 31, |      
|                                               |  | 2009         |       |  | 2010 |  
|                                               |  |             
|Assets                                         |  |              |       |  |      |   |       | 
|                                               |  |             
|CURRENT ASSETS:                                |  |              |       |  |      |   |       | 
|Cash and cash equivalents                      |  | $            | 156   |  |      | $ | 97    | 
|Trade receivables                              |  |              | 289   |  |      |   | 592   | 
|Unbilled receivables                           |  |              | 258   |  |      |   | 474   | 
|Other accounts receivable and prepaid expenses |  |              | 97    |  |      |   | 200   | 
|                                               |  |              |       |  |      |   |       | 
|                                               |  |             
|Total current assets                           |  |              | 800   |  |      |   | 1,363 | 
|                                               |  |              |       |  |      |   |       | 
|                                               |  |             
|NON - CURRENT ASSETS:                          |  |              |       |  |      |   |       | 
|Severance pay fund                             |  |              | 912   |  |      |   | 1,018 | 
|Other                                          |  |              | 60    |  |      |   | 20    | 
|                                               |  |              |       |  |      |   |       | 
|                                               |  |             
|Total non - current assets                     |  |              | 972   |  |      |   | 1,038 | 
|                                               |  |              |       |  |      |   |       | 
|                                               |  |             
|PROPERTY AND EQUIPMENT, net                    |  |              | 89    |  |      |   | 106   | 
|                                               |  |              |       |  |      |   |       | 
|                                               |  |             
|GOODWILL                                       |  |              | 7,169 |  |      |   | 7,253 | 
|                                               |  |             
|OTHER INTANGIBLE ASSETS, net                   |  |              |       |  |      |   |       | 
|Customer relationship                          |  |              | 138   |  |      |   |      | 
|Other                                          |  |              | 73    |  |      |   |      | 
|                                               |  |              |       |  |      |   |       | 
|                                               |  |             
|Total intangible assets:                       |  |              | 7,380 |  |      |   | 7,253 | 
|                                               |  |              |       |  |      |   |       | 
|                                               |  |             
|Total assets                                   |  | $            | 9,241 |  |      | $ | 9,760 | 
|                                               |  |              |       |  |      |   |       | 

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



4



---

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



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



|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                                                                    |  | December 31, |         
|                                                                                                                                                                                                                                                    |  | 2009         |          |   | 2010 |  
|                                                                                                                                                                                                                                                    |  |             
|Liabilities and shareholders equity                                                                                                                                                                                                                |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|CURRENT LIABILITIES:                                                                                                                                                                                                                                |  |              |          |   |      |   |          |  
|Short-term bank credit                                                                                                                                                                                                                              |  | $            | 380      |   |      | $ | 288      |  
|Current maturities of long-term bank loans                                                                                                                                                                                                          |  |              | 400      |   |      |   | 500      |  
|Trade payables                                                                                                                                                                                                                                      |  |              | 530      |   |      |   | 386      |  
|Deferred revenues                                                                                                                                                                                                                                   |  |              | 2,961    |   |      |   | 3,356    |  
|Other accounts payable and accrued expenses                                                                                                                                                                                                         |  |              | 2,061    |   |      |   | 1,872    |  
|Convertible debt                                                                                                                                                                                                                                    |  |              |         |   |      |   | 517      |  
|Loan from related party                                                                                                                                                                                                                             |  |              | 79       |   |      |   | 79       |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|Total current liabilities                                                                                                                                                                                                                           |  |              | 6,411    |   |      |   | 6,998    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|LONG-TERM LIABILITIES:                                                                                                                                                                                                                              |  |              |          |   |      |   |          |  
|Long-term bank loan, net of current maturities                                                                                                                                                                                                      |  |              | 889      |   |      |   | 589      |  
|Long-term convertible debt                                                                                                                                                                                                                          |  |              | 530      |   |      |   |         |  
|Long-term deferred revenues                                                                                                                                                                                                                         |  |              | 641      |   |      |   | 317      |  
|Accrued severance pay                                                                                                                                                                                                                               |  |              | 1,376    |   |      |   | 1,499    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|Total long-term liabilities                                                                                                                                                                                                                         |  |              | 3,436    |   |      |   | 2,405    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|SHAREHOLDERS EQUITY (DEFICIT):                                                                                                                                                                                                                     |  |              |          |   |      |   |          |  
|Share capital -                                                                                                                                                                                                                                     |  |              |          |   |      |   |          |  
|Ordinary Shares of NIS 5.0 par value - Authorized: 6,600,000 shares at December 31, 2009 and 2010; Issued and outstanding:
2,944,048 and 3,235,083 shares at December 31, 2009 and 2010, respectively                                               |  |              | 3,592    |   |      |   | 3,981    |  
|Preferred A Shares of NIS 5.0 par value - Authorized: 400,000 shares at December 31, 2009 and 2010; Issued and outstanding:
326,797 shares at December 31, 2009 and 2010. Aggregate liquidation preference of $ 2,500 at December 31, 2009 and 2010 |  |              | 369      |   |      |   | 369      |  
|Additional paid-in capital                                                                                                                                                                                                                          |  |              | 116,603  |   |      |   | 116,456  |  
|Accumulated other comprehensive income                                                                                                                                                                                                              |  |              | 3        |   |      |   | 55       |  
|Accumulated deficit                                                                                                                                                                                                                                 |  |              | (121,173 | ) |      |   | (120,504 | )
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|Total shareholders equity (deficit)                                                                                                                                                                                                                |  |              | (606     | ) |      |   | 357      |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|                                                                                                                                                                                                                                                    |  |             
|Total liabilities and shareholders equity (deficit)                                                                                                                                                                                                |  | $            | 9,241    |   |      | $ | 9,760    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  

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



5



---

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



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



|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|----------------------------------------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | 
|                                                                                          |  | Year ended December 31, |          
|                                                                                          |  | 2008                    |           |   | 2009 |   |           | 2010 | 
|REVENUES:                                                                                 |  |                         |           |   |      |   |           |      |  |   |           | 
|Software licenses                                                                         |  | $                       | 1,380     |   |      | $ | 1,508     |      |  | $ | 1,648     | 
|Maintenance and services                                                                  |  |                         | 9,990     |   |      |   | 8,919     |      |  |   | 9,472     | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|Total revenues                                                                            |  |                         | 11,370    |   |      |   | 10,427    |      |  |   | 11,120    | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|COST OF REVENUES:                                                                         |  |                         |           |   |      |   |           |      |  |   |           | 
|Software licenses                                                                         |  |                         | 275       |   |      |   | 206       |      |  |   | 142       | 
|Maintenance and services                                                                  |  |                         | 5,586     |   |      |   | 3,967     |      |  |   | 4,340     | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|Total cost of revenues                                                                    |  |                         | 5,861     |   |      |   | 4,173     |      |  |   | 4,482     | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|GROSS PROFIT                                                                              |  |                         | 5,509     |   |      |   | 6,254     |      |  |   | 6,638     | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|OPERATING EXPENSES:                                                                       |  |                         |           |   |      |   |           |      |  |   |           | 
|Research and development                                                                  |  |                         | 1,753     |   |      |   | 1,076     |      |  |   | 1,068     | 
|Selling and marketing                                                                     |  |                         | 3,119     |   |      |   | 2,700     |      |  |   | 2,920     | 
|General and administrative                                                                |  |                         | 2,289     |   |      |   | 1,775     |      |  |   | 1,670     | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|Total operating expenses                                                                  |  |                         | 7,161     |   |      |   | 5,551     |      |  |   | 5,658     | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|INCOME (LOSS) FROM OPERATIONS                                                             |  |                         | (1,652    | ) |      |   | 703       |      |  |   | 980       | 
|FINANCIAL EXPENSES, net                                                                   |  |                         | 414       |   |      |   | 160       |      |  |   | 242       | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|NET INCOME (LOSS) BEFORE TAXES                                                            |  | $                       | (2,066    | ) |      | $ | 543       |      |  | $ | 738       | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|TAXES ON INCOME                                                                           |  |                         | 14        |   |      |   | 47        |      |  |   | 69        | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|NET INCOME (LOSS) AFTER TAXES                                                             |  | $                       | (2,080    | ) |      | $ | 496       |      |  | $ | 669       | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|BASIS NET EARNINGS (LOSS) PER SHARE                                                       |  | $                       | (0.70     | ) |      | $ | 0.16      |      |  | $ | 0.19      | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTING BASIC NET EARNINGS (LOSS) PER SHARE   |  |                         | 2,992,752 |   |      |   | 3,176,831 |      |  |   | 3,467,302 | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|DILUTED NET EARNINGS (LOSS) PER SHARE                                                     |  | $                       | (0.70     | ) |      | $ | 0.14      |      |  | $ | 0.17      | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 
|                                                                                          |  |                         |          
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTING DILUTED NET EARNINGS (LOSS) PER SHARE |  |                         | 2,992,752 |   |      |   | 3,540,467 |      |  |   | 3,884,201 | 
|                                                                                          |  |                         |           |   |      |   |           |      |  |   |           | 

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



6



---

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



U.S. dollars in thousands, except
share data



|                                                                                                   |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | --------------- | --------- |  | ---------------- | - | ----- | ------------------------ |  |  | ------------------------------------------ |  |  | ------------------ | --- |  | ------------------------------- | - | ------- | ------------------------- |  | - | ------ | - |  | - | -------- | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                   |  | Ordinary Shares |           |  | Preferred Shares |   |       | Additionalpaid-incapital |  |  | Accumulatedothercomprehensiveincome (loss) |  |  | Accumulateddeficit |     |  | Totalcomprehensiveincome (loss) |   |         | Totalshareholders
equity | 
|                                                                                                   |  | Number          |           |  | Amount           |   |       | Number                   |  |  | Amount                                     |  |  |                    |     |  |                                
|Balance as of January 1, 2008                                                                      |  |                 | 2,570,240 |  |                  |   | 3,087 |                          |  |  | 326,797                                    |  |  |                    | 369 |  |                                 |   | 116,121 |                           |  |   | 62     |   |  |   | (119,589 | ) |  |   |        |   |  |   | 50     |  
|Issuance of shares and convertible note to investors, net of issuance cost (see also note 11b)     |  |                 |           |  |                  |   |       |                          |  |  |                                           |  |  |                    |    |  |                                 |   | 406     |                           |  |   |       |   |  |   |         |   |  |   |        |   |  |   | 406    |  
|Issuance of shares, in connection with interest expenses                                           |  |                 | 29,646    |  |                  |   | 42    |                          |  |  |                                           |  |  |                    |    |  |                                 |   | (6      | )                         |  |   |       |   |  |   |         |   |  |   |        |   |  |   | 36     |  
|Issuance of shares, in connection with shareholder                                                 |  |                 | 46,535    |  |                  |   | 59    |                          |  |  |                                            |  |  |                    |     |  |                                 |   | (12     | )                         |  |   |        |   |  |   |          |   |  |   |        |   |  |   | 47     |  
|Issuance of shares and release of restricted shares in connection with compensation to consultants |  |                 | 97,092    |  |                  |   | 138   |                          |  |  |                                           |  |  |                    |    |  |                                 |   | 5       |                           |  |   |        |   |  |   |          |   |  |   |        |   |  |   | 143    |  
|Stock based compensation                                                                           |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   | 199     |                           |  |   |       |   |  |   |         |   |  |   |        |   |  |   | 199    |  
|Release of restricted shares to employees and directors, net                                       |  |                 | 36,940    |  |                  |   | 53    |                          |  |  |                                           |  |  |                    |    |  |                                 |   | (53     | )                         |  |   |       |   |  |   |         |   |  |   |        |   |  |   |       |  
|Comprehensive loss:                                                                                |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |  
|Foreign currency translation adjustments                                                           |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   |        |                           |  |   | (176   | ) |  |   |         |   |  | $ | (176   | ) |  |   | (176   | )
|Net loss                                                                                           |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   |        |                           |  |   |       |   |  |   | (2,080   | ) |  |   | (2,080 | ) |  |   | (2,080 | )
|                                                                                                   |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |  
|Total comprehensive loss                                                                           |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |        |   |  |   |          |   |  | $ | (2,256 | ) |  |   |        |  
|                                                                                                   |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |  
|Balance as of December 31, 2008                                                                    |  |                 | 2,780,453 |  |                  | $ | 3,379 |                          |  |  | 326,797                                    |  |  | $                  | 369 |  |                                 | $ | 116,660 |                           |  | $ | *)(114 | ) |  | $ | (121,669 | ) |  |   |        |   |  | $ | (1,375 | )
|                                                                                                   |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |  



|*) | All accumulated other comprehensive income (loss) derived from foreign currency translation adjustments.
|-- | --------------------------------------------------------------------------------------------------------

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



7



---

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



U.S. dollars in thousands, except
share data



|                                                             |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |   |  |   |          |   |  |   |     |  |  |   |        |  
|------------------------------------------------------------ |  | --------------- | --------- |  | ---------------- | - | ----- | ------------------------ |  |  | ------------------------------------------ |  |  | ------------------ | --- |  | ------------------------------- | - | ------- | ------------------------- |  | - | ---- | - |  | - | -------- | - |  | - | --- |  |  | - | ------ | -
|                                                             |  | Ordinary Shares |           |  | Preferred Shares |   |       | Additionalpaid-incapital |  |  | Accumulatedothercomprehensiveincome (loss) |  |  | Accumulateddeficit |     |  | Totalcomprehensiveincome (loss) |   |         | Totalshareholders
equity | 
|                                                             |  | Number          |           |  | Amount           |   |       | Number                   |  |  | Amount                                     |  |  |                    |     |  |                                
|Balance as of January 1, 2009                                |  |                 | 2,780,453 |  |                  |   | 3,379 |                          |  |  | 326,797                                    |  |  |                    | 369 |  |                                 |   | 116,660 |                           |  |   | (114 | ) |  |   | (121,669 | ) |  |   |     |  |  |   | (1,375 | )
|                                                             |  |                 |           |  |                  |   |       |                          | 
|Stock based compensation                                     |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   | 130     |                           |  |   |     |   |  |   |         |   |  |   |     |  |  |   | 130    |  
|                                                             |  |                 |           |  |                  |   |       |                          | 
|Release of restricted shares to employees and directors, net |  |                 | 163,595   |  |                  |   | 213   |                          |  |  |                                           |  |  |                    |    |  |                                 |   | (187    | )                         |  |   |     |   |  |   |         |   |  |   |     |  |  |   | 26     |  
|                                                             |  |                 |           |  |                  |   |       |                          | 
|Comprehensive income:                                        |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |   |  |   |          |   |  |   |     |  |  |   |        |  
|Foreign currency translation adjustments                     |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   |        |                           |  |   | 117  |   |  |   |         |   |  | $ | 117 |  |  |   | 117    |  
|Net income                                                   |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   |        |                           |  |   |     |   |  |   | 496      |   |  |   | 496 |  |  |   | 496    |  
|                                                             |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |   |  |   |          |   |  |   |     |  |  |   |        |  
|Total comprehensive income                                   |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |   |  |   |          |   |  | $ | 613 |  |  |   |        |  
|                                                             |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |   |  |   |          |   |  |   |     |  |  |   |        |  
|Balance as of December 31, 2009                              |  |                 | 2,944,048 |  |                  | $ | 3,592 |                          |  |  | 326,797                                    |  |  | $                  | 369 |  |                                 | $ | 116,603 |                           |  | $ | *)3  |   |  | $ | (121,173 | ) |  |   |     |  |  | $ | (606   | )
|                                                             |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |   |  |   |          |   |  |   |     |  |  |   |        |  



|*) | All accumulated other comprehensive income (loss) derived from foreign currency translation adjustments.
|-- | --------------------------------------------------------------------------------------------------------

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



8



---

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



U.S. dollars in thousands, except
share data



|                                                                  |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |  |  |   |          |   |  |   |     |  |  |   |      |  
|----------------------------------------------------------------- |  | --------------- | --------- |  | ---------------- | - | ----- | ------------------------ |  |  | ------------------------------------------ |  |  | ------------------ | --- |  | ------------------------------- | - | ------- | ------------------------- |  | - | ---- |  |  | - | -------- | - |  | - | --- |  |  | - | ---- | -
|                                                                  |  | Ordinary Shares |           |  | Preferred Shares |   |       | Additionalpaid-incapital |  |  | Accumulatedothercomprehensiveincome (loss) |  |  | Accumulateddeficit |     |  | Totalcomprehensiveincome (loss) |   |         | Totalshareholders
equity | 
|                                                                  |  | Number          |           |  | Amount           |   |       | Number                   |  |  | Amount                                     |  |  |                    |     |  |                                
|Balance as of January 1, 2010                                     |  |                 | 2,944,048 |  |                  |   | 3,592 |                          |  |  | 326,797                                    |  |  |                    | 369 |  |                                 |   | 116,603 |                           |  |   | 3    |  |  |   | (121,173 | ) |  |   |     |  |  |   | (606 | )
|                                                                  |  |                 |           |  |                  |   |       |                          | 
|Stock based compensation                                          |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   | 95      |                           |  |   |     |  |  |   |         |   |  |   |     |  |  |   | 95   |  
|                                                                  |  |                 |           |  |                  |   |       |                          | 
|Release of restricted shares to employees and directors, net      |  |                 | 172,666   |  |                  |   | 229   |                          |  |  |                                           |  |  |                    |    |  |                                 |   | (193    | )                         |  |   |     |  |  |   |         |   |  |   |     |  |  |   | 36   |  
|                                                                  |  |                 |           |  |                  |   |       |                          | 
|Issuance of shares, in connection with interest expenses          |  |                 | 73,369    |  |                  |   | 98    |                          |  |  |                                            |  |  |                    |     |  |                                 |   | (26     | )                         |  |   |      |  |  |   |          |   |  |   |     |  |  |   | 72   |  
|                                                                  |  |                 |           |  |                  |   |       |                          | 
|Issuance of shares in connection with compensation to consultants |  |                 | 45,000    |  |                  |   | 62    |                          |  |  |                                            |  |  |                    |     |  |                                 |   | (23     | )                         |  |   |      |  |  |   |          |   |  |   |     |  |  |   | 39   |  
|Comprehensive income:                                             |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |  |  |   |          |   |  |   |     |  |  |   |      |  
|Foreign currency translation adjustments                          |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   |        |                           |  |   | 52   |  |  |   |         |   |  | $ | 52  |  |  |   | 52   |  
|Net income                                                        |  |                 |          |  |                  |   |      |                          |  |  |                                           |  |  |                    |    |  |                                 |   |        |                           |  |   |     |  |  |   | 669      |   |  |   | 669 |  |  |   | 669  |  
|                                                                  |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |  |  |   |          |   |  |   |     |  |  |   |      |  
|Total comprehensive income                                        |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |  |  |   |          |   |  | $ | 721 |  |  |   |      |  
|                                                                  |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |  |  |   |          |   |  |   |     |  |  |   |      |  
|Balance as of December 31, 2010                                   |  |                 | 3,235,083 |  |                  | $ | 3,981 |                          |  |  | 326,797                                    |  |  | $                  | 369 |  |                                 | $ | 116,456 |                           |  | $ | *)55 |  |  | $ | (120,504 | ) |  |   |     |  |  | $ | 357  |  
|                                                                  |  |                 |           |  |                  |   |       |                          |  |  |                                            |  |  |                    |     |  |                                 |   |         |                           |  |   |      |  |  |   |          |   |  |   |     |  |  |   |      |  



|*) | All accumulated other comprehensive income (loss) derived from foreign currency translation adjustments.
|-- | --------------------------------------------------------------------------------------------------------

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



9



---

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



U.S. dollars in thousands



|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|--------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                                        |  | Year ended December 31, |       
|                                                                                        |  | 2008                    |        |   | 2009 |   |      | 2010 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                         |        |   |      |   |      |      |  |   |      |  
|Net income (loss)                                                                       |  | $                       | (2,080 | ) |      | $ | 496  |      |  | $ | 669  |  
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |                         |        |   |      |   |      |      |  |   |      |  
|Depreciation and amortization                                                           |  |                         | 482    |   |      |   | 512  |      |  |   | 313  |  
|Amortization of deferred debt issuance cost related to convertible notes                |  |                         | 7      |   |      |   |     |      |  |   |     |  
|Amortization of convertible notes premium, discounts and beneficial conversion feature  |  |                         | (13    | ) |      |   | (13  | )    |  |   | (13  | )
|Accrued severance pay, net                                                              |  |                         | 12     |   |      |   | (121 | )    |  |   | 17   |  
|Stock based compensation related to directors and employees                             |  |                         | 199    |   |      |   | 156  |      |  |   | 95   |  
|Stock based compensation related to restricted shares and shares to a bank and investor |  |                         | 95     |   |      |   |     |      |  |   |     |  
|Stock based compensation related to shares to consultants                               |  |                         | 143    |   |      |   |     |      |  |   | 39   |  
|Interest expenses paid in shares                                                        |  |                         | 27     |   |      |   |     |      |  |   | 72   |  
|Decrease (increase) in trade receivables, net and unbilled receivables                  |  |                         | 308    |   |      |   | 248  |      |  |   | (512 | )
|Decrease in other accounts receivable and prepaid expenses                              |  |                         | 46     |   |      |   | 20   |      |  |   | (63  | )
|Increase (decrease) in trade payables                                                   |  |                         | (88    | ) |      |   | (200 | )    |  |   | (145 | )
|Increase (decrease) in long-term and short-term deferred revenues, net                  |  |                         | 1,087  |   |      |   | (714 | )    |  |   | 39   |  
|Increase (decrease) in other accounts payable and accrued expenses                      |  |                         | (73    | ) |      |   | 48   |      |  |   | (186 | )
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|Net cash provided by operating activities                                               |  |                         | 152    |   |      |   | 432  |      |  |   | 325  |  
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                         |        |   |      |   |      |      |  |   |      |  
|Purchase of property and equipment                                                      |  |                         | (32    | ) |      |   | (7   | )    |  |   | (100 | )
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|Net cash used in investing activities                                                   |  |                         | (32    | ) |      |   | (7   | )    |  |   | (100 | )
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                         |        |   |      |   |      |      |  |   |      |  
|Short-term bank credit                                                                  |  |                         | 18     |   |      |   | 100  |      |  |   | (92  | )
|Repayment of short-term bank credit and long-term loan                                  |  |                         | (599   | ) |      |   | (450 | )    |  |   | (450 | )
|Repayment of loan from related party                                                    |  |                         | 7      |   |      |   |     |      |  |   |     |  
|Proceeds from issuance of share capital and convertible debt                            |  |                         | 186    |   |      |   |     |      |  |   |     |  
|Proceeds from long-term loan                                                            |  |                         |       |   |      |   |     |      |  |   | 250  |  
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|Net cash used in financing activities                                                   |  |                         | (388   | ) |      |   | (350 | )    |  |   | (292 | )
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                 |  |                         | (2     | ) |      |   | (62  | )    |  |   | 8    |  
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    |  |                         | (270   | ) |      |   | 13   |      |  |   | (59  | )
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                                      |  |                         | 413    |   |      |   | 143  |      |  |   | 156  |  
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  
|                                                                                        |  |                         |       
|CASH AND CASH EQUIVALENTS AT THE END OF YEAR                                            |  | $                       | 143    |   |      | $ | 156  |      |  | $ | 97   |  
|                                                                                        |  |                         |        |   |      |   |      |      |  |   |      |  

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



10



---

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



U.S. dollars in thousands

SUPPLEMENTARY DISCLOUSURE OF CASH FLOW INFORMATION:



|                                                                                                                         |  |                         |       |  |      |   |     |      |  |   |     | 
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ----- |  | ---- | - | --- | ---- |  | - | --- | 
|                                                                                                                         |  | Year ended December 31, |      
|                                                                                                                         |  | 2008                    |       |  | 2009 |   |     | 2010 | 
|Supplemental disclosure of cash flow activities:                                                                         |  |                         |       |  |      |   |     |      |  |   |     | 
|Cash paid during the year for:                                                                                           |  |                         |       |  |      |   |     |      |  |   |     | 
|Interest                                                                                                                 |  | $                       | 118   |  |      | $ | 113 |      |  | $ | 103 | 
|                                                                                                                         |  |                         |       |  |      |   |     |      |  |   |     | 
|Income tax                                                                                                               |  | $                       | 17    |  |      | $ | 27  |      |  | $ | 79  | 
|                                                                                                                         |  |                         |       |  |      |   |     |      |  |   |     | 
|                                                                                                                         |  |                         |      
|Supplemental disclosure of non-cash investing and financing activities:                                                  |  |                         |       |  |      |   |     |      |  |   |     | 
|Refinancing of short-term bank loan on a long-term basis                                                                 |  | $                       | 1,589 |  |      | $ |    |      |  | $ |    | 
|                                                                                                                         |  |                         |       |  |      |   |     |      |  |   |     | 
|                                                                                                                         |  |                         |      
|Conversion to shares of accrued interest expenses, waivers and deferred charges related to the convertible debt and
note |  | $                       | 83    |  |      | $ |    |      |  | $ | 72  | 
|                                                                                                                         |  |                         |       |  |      |   |     |      |  |   |     | 
|                                                                                                                         |  |                         |      
|Classification of payments on account of convertible note to equity                                                      |  | $                       | 239   |  |      | $ |    |      |  | $ |    | 
|                                                                                                                         |  |                         |       |  |      |   |     |      |  |   |     | 

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



11



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

NOTE 1:- GENERAL



| | a) | ViryaNet Ltd. (the Company), an Israeli corporation, was established in 1988. The Company develops, markets and supports integrated mobile and Web-based
software applications for workforce management and the automation of field service delivery. The Company also provides additional software applications.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | The Company has five wholly-owned subsidiaries: three in the United States (ViryaNet Inc. and its subsidiaries iMedeon Inc which is not
active and Utility Partners Inc., collectively ViryaNet U.S.), one in Australia (ViryaNet Australia), which is a subsidiary of ViryaNet Inc., and one in the United Kingdom (ViryaNet U.K.) which is not
active.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | The Companys sales are generated in North America, Europe, and Asia-Pacific. As for major customers, see Note 13.
| | -- | ------------------------------------------------------------------------------------------------------------------



| | d) | The Company devotes substantial efforts towards activities such as research and development, and marketing and selling its products. In the course of such activities,
the Company and its subsidiaries have not achieved operating income and net income prior to fiscal year 2009, have generated variable levels of revenues over the past several years and have not achieved positive working capital. Although the Company
achieved net operating income and net income for each year of the two year period ended December 31, 2010 and positive cash flows from operations for each year of the three year period ended December 31, 2010, there is no assurance that
profitable operations or positive cash flows from operations can be sustained on a continuing basis.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES

Basis of presentation:

The consolidated financial statements include the accounts of ViryaNet Ltd. and its subsidiaries. All intercompany balances and
transactions have been eliminated. The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). In the opinion of management, these financial statements
include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented.

Use of estimates:

The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, collectibility of accounts receivable, stock-based compensation, income tax accruals and the value of deferred tax assets.
Estimates are also used to determine the remaining economic lives and carrying value of fixed assets, goodwill and intangible assets. Actual results could differ from those estimates.



12



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



Functional currency:

Substantially all of the revenues of the Company and ViryaNet U.S. are generated in U.S. dollars (dollar or
dollars). In addition, a substantial portion of the costs of the Company and certain costs of its subsidiaries are incurred in dollars. Financing and investment activities are effected in dollars. Management believes that the dollar is
the primary currency in the economic environment in which the Company and certain of its subsidiaries operate; therefore, the dollar is the functional and reporting currency. Transactions and balances originally denominated in dollars are presented
at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items (stated below)
reflected in the statements of income (loss), the following exchange rates are used: (i) for transactions  exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items
such as depreciation and amortization, etc.)  historical exchange rates. Currency transaction gains or losses are carried to financial income or expenses, as appropriate.

For those subsidiaries whose functional currency has been determined to be their local currency, assets and liabilities are translated at year-end exchange rates and statement of operations items are
translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in shareholders equity.

Cash equivalents:

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

Property and equipment:

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



|                                             |  |                                                                
|-------------------------------------------- |  | ---------------------------------------------------------------
|                                             |  | %                                                              
|                                             | 
|Computers, peripheral equipment and software |  | 33                                                             
|Office furniture and equipment               |  | 6 - 25                                                         
|Leasehold improvements                       |  | By the shorter of the term of the leaseor the life of the asset

Goodwill and acquisition-related intangible assets:

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired
in each business combination.

Acquisition related intangible assets result from the Companys acquisitions of businesses.
Intangible assets subject to amortization are initially recognized based on fair value allocated to them, and subsequently stated at amortized cost. Identifiable intangible assets other than goodwill are amortized using a method of amortization that
reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.



13



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



The amortization periods for the Companys finite-lived intangible assets are as
follows:



|                      |  |                            
|--------------------- |  | ---------------------------
|                      |  | Amortization periodin
years
|                      | 
|Technology            |  | 3-5                        
|Customer relationship |  | 5-6                        

The Company tests its goodwill for impairment annually on the last day of its fourth fiscal quarter, or
more frequently if certain events or certain changes in circumstances indicate that they may be impaired. In assessing the recoverability of goodwill, the Company must make a series of assumptions about such things as the estimated future cash flows
and other factors to determine the fair value of these assets. There are inherent uncertainties related to these factors and managements judgment in applying these factors.

Goodwill impairment testing is a two-step process. The first step is a comparison of the fair values of the Companys reporting units
to their respective carrying amounts. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. The
Company has determined that it represents a single reporting unit, which is equivalent to the consolidated Company. Since the Companys equity carrying value was negative until the third quarter of 2010, management believes that a step-one test
performed on an enterprise value basis (equity value plus debt, less cash and cash equivalents) would provide a better indication as to whether a potential impairment of goodwill exists and whether a step-two test should be performed.

As the consolidated company represents a single reporting unit, the Companys estimated fair value is compared to the Companys
enterprise book value as a whole. If the reporting units estimated fair value is equal to or greater than that reporting units enterprise book value, no impairment of goodwill exists and the testing is complete at the first step.
However, if the reporting units enterprise book value is greater than the estimated fair value, the second step must be completed to measure the amount of impairment of goodwill, if any. The second step of the goodwill impairment test compares
the implied fair value of a reporting units goodwill with its carrying amount to measure the amount of impairment loss, if any. If the implied fair value of goodwill is less than the carrying value of goodwill, then impairment exists and an
impairment loss is recorded for the amount of the difference.

The estimated fair value of goodwill is determined by using an
income approach. The income approach estimates fair value based on the Companys estimated future cash flows of the reporting unit, discounted by an estimated weighted-average cost of capital that reflects current market conditions, which
reflect the overall level of inherent risk of that reporting unit. The income approach also requires the Company to make a series of assumptions, such as discount rates, revenue projections, profit margin projections and terminal value multiples.
The Company estimated its discount rates on a blended rate of return considering both debt and equity for comparable publicly-traded companies engaged in internet software services or application software.

These comparable publicly traded companies are operating in the same or similar industry as the Company and have similar operating
characteristics to the Company. The Company estimated its revenue projections and profit margin projections based on internal forecasts about future performance.



14



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



The estimated fair value of the income approach is compared to a market approach for
reasonableness. The market approach estimates fair value by applying sales, earnings and cash flow multiples to the reporting units operating performance. The multiples are derived from comparable publicly-traded companies with similar
operating and investment characteristics to the Companys reporting unit. The market approach requires the Company to make a series of assumptions, such as selecting comparable companies and comparable transactions and transaction premiums.

The estimated fair value of the Company as a reporting unit as of December 31, 2010 was substantially in excess of its
enterprise book value. Therefore, no impairment of goodwill was recorded.

Long-Lived Assets:

The Company reviews long-lived assets, such as property and equipment and intangible assets, for impairment whenever events indicate that
the carrying amounts might not be recoverable. Recoverability of property and equipment and other intangible assets is measured by comparing the projected undiscounted net cash flows associated with those assets to their carrying values. If an asset
is considered impaired, it is written down to fair value, which is determined based on the assets projected discounted cash flows or appraised value, depending on the nature of the asset. During 2008, 2009 and 2010, no impairment losses were
recorded. All other intangible assets (excluding goodwill) were fully amortized as of December 31, 2010.

Income
taxes:

The Company accounts for income taxes, in accordance with the provisions of ASC 740 (Income Taxes)
using the liability method of accounting, whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be
realized.

The Company accounts for uncertain tax positions in accordance with the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of ASC 740, using a two-step approach. The first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which
is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast
actual outcomes.

As of December 31, 2009 and December 31, 2010, the Company recognized approximately $60 and $59 for
unrecognized tax benefits, interest and penalties, which are included in other accounts payable and accrued expenses in the accompanying balance sheets.

The Companys practice is to recognize interest and/or penalties related to income tax matters in income tax expense.



15



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



Revenue recognition:

The Company generates revenues from licensing the rights to use its software products directly to end-users. The Company also enters into
license arrangements with indirect channels such as resellers and systems integrators whereby revenues are recognized upon sale through to the end user by the reseller or the system integrator.

The Company also generates revenues from rendering professional services, including consulting, customization, implementation, training
and post-contract maintenance and support.

Revenues from software license agreements are recognized in accordance with ASC
985-605-15 (Software Revenue Recognition).

ASC 985-605-15 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. ASC 985-605-15 requires that revenue be recognized under the residual method when vendor specific objective
evidence (VSOE) of fair value exists for all undelivered elements and VSOE does not exist for all of the delivered elements. Under the residual method, any discount in the arrangement is allocated to the delivered elements. The VSOE of
fair value of the undelivered elements is determined based on the price charged for the undelivered element when sold separately. For post-contract customer support, the Company determines the VSOE based on the renewal price charged. For other
services, such as consulting and training, the Company determines the VSOE based on the fixed daily rate charged in stand-alone service transactions. If VSOE of fair value does not exist for all elements to support the allocation of the total fee
among all delivered and undelivered elements of the arrangement, revenue is deferred until such evidence exists for the undelivered elements, or until all elements are delivered, whichever is earlier.

Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the license
fee is fixed or determinable, collectability is probable and VSOE of the fair value of undelivered elements exists.

Post-contract maintenance and support arrangements provide technical support and the right to unspecified updates on an if-and-when
available basis. Maintenance and support revenue is deferred and recognized on a straight-line basis over the term of the agreement, which is, in most cases, one year. Revenue from rendering services such as consulting, implementation and training
are recognized as work is performed.

Multiple element arrangements that include services are evaluated to determine whether
those services are essential to the functionality of other elements of the arrangement. Services that are considered essential consist primarily of significant production, customization or modification. When such services are provided, revenues
under the arrangement are recognized using contract accounting on a percentage of completion method, based on the relationship of actual labor days incurred to total labor days estimated to be incurred over the duration of the contract, in
accordance with ASC 605-35-05 (Construction-Type and Production-Type Contracts,). Amounts of revenue recognized in advance of contractual billing are recorded as an unbilled receivable.



16



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



The Company classifies revenue as either software license revenue or services revenue.
The Company allocates revenue to each of these items based on the VSOE established for elements in each revenue arrangement and applies the residual method in arrangements in which VSOE was established for all undelivered elements. If the Company is
unable to establish the VSOE for all undelivered elements, the Company first allocates revenue to any undelivered elements for which the VSOE has been established and then allocates revenue to the undelivered element for which the VSOE has not been
established based on the residual method.

Provisions for estimated losses on uncompleted contracts are made in the period in
which such losses are first determined, in the amount of the estimated loss on the entire contract. As of December 31, 2008, 2009 and 2010, no such losses were identified.

Deferred revenues include unearned fees received under maintenance and support contracts, and other amounts received from customers but not recognized as revenues in the current period.

The Company does not grant right-of-return to its customers. The Company generally provides a warranty period of three months. As of
December 31, 2010 and 2009, the provision for warranty cost was immaterial.

Advertising Costs:

The Company records advertising expenses as incurred, which amounted to approximately $33, $14, and $23 in the years ended
December 31, 2010, 2009, and 2008, respectively, and which have been included as part of selling and marketing expenses.

Research and development costs:

Research and development expenses include salaries, employee benefits and other costs associated with product development and are charged to income as incurred. Participations and grants in respect of
research and development expenses are recognized as a reduction of research and development expenses as the related costs are incurred, or as the related milestone is met. Upfront fees received in connection with cooperation agreements are deferred
and recognized over the period of the applicable agreements as a reduction of research and development expenses.

Capitalization of internally developed computer software costs begins upon the establishment of technological feasibility based on a
working model. Due to the relatively short time between the date the products achieve technological feasibility and the date they generally become available to customers, costs subject to capitalization have been immaterial and have been expensed as
incurred.

Concentrations of credit risk:

Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of
cash and cash equivalents, and trade receivables.

The majority of the Companys cash and cash equivalents are invested in
dollar instruments with major banks in the United States, Israel, and Australia. Such cash and cash equivalents may be in excess of insured limits or may not be insured at all in some jurisdictions. Management believes that the financial
institutions that hold the Companys and its subsidiaries cash and cash equivalents are financially sound and accordingly, minimal credit risk exists with respect to these assets.



17



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



The Companys and its subsidiaries trade receivables are derived from sales
to customers located primarily in North America, Europe, Australia and the Far East. The Company and its subsidiaries perform ongoing credit evaluations of their customers and insure certain trade receivables under foreign trade risks insurance.

The Company and its subsidiaries had no off-balance-sheet concentration of credit risk, such as foreign exchange contracts,
option contracts or other foreign hedging arrangements.

Allowance for doubtful accounts:

The allowance for doubtful accounts is determined on the basis of analysis of specific debts which are doubtful of collection. In
determining the allowance for doubtful accounts, the Company considers, among other things, its past experience with such customers, the economic environment, the industry in which such customers operate, financial information available on such
customers, etc. In managements opinion, the allowance for doubtful accounts adequately covers anticipated losses with respect to the Companys accounts receivable. No allowance for doubtful accounts was required for the years ended
December 31, 2010 and 2009.

Long term convertible debt:

The Company presents the outstanding principal amount of its long term convertible debts as a long-term liability, in accordance with ASC
Topic 470-20, Debt with Conversion and Other Options. The debt is classified as a long-term liability until the date of conversion on which it would be reclassified to equity, or at the first contractual redemption date, on which it would be
reclassified as a short-term liability (see also Note 9). Accrued interest on the convertible debt is included in other accounts payable and accrued expenses. Since the first contractual redemption date is July 15, 2011, which is
less than twelve months from the balance sheet date, the convertible debt is reclassified as a short-term liability as of December 31, 2010.

Convertible note:

The Company presents the outstanding principal
amount of the convertible note (see Note 11b) as a separate component in shareholders equity in accordance with ASC Topic 815, Derivatives and Hedging and ASC 480 Topic, Distinguishing Liabilities from Equity. The convertible note is classified as
an equity component since it has no repayment date, does not bear any interest, and may be converted only to the Companys Ordinary Shares. The convertible note is classified as paid-in capital in shareholders equity until the date of actual
conversion.

Earnings (loss) per share:

Basic net earnings or loss per share is computed by dividing net income or loss by the weighted average number of Ordinary Shares outstanding during the applicable period. Diluted net earnings or loss per
share is computed by dividing net income or loss by the weighted average number of Ordinary Shares



18



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



outstanding and potentially dilutive securities, as calculated using the treasury stock method, outstanding during the period. Potentially dilutive securities include shares issuable upon
conversion of the convertible debt represented by the convertible note.

Outstanding stock options and non vested restricted
shares, warrants and shares issuable upon conversion of the long-term convertible debt have been excluded from the calculation of basic and diluted net earnings or loss per share to the extent that such securities are anti-dilutive. The total
weighted-average number of shares excluded from the calculations of diluted net earnings or loss per share, were 1,235,675, 828,030 and 719,666 for the years ended December 31, 2008, 2009 and 2010, respectively.

The following table summarizes information related to the computation of basic and diluted net earnings (loss) per share for the years
indicated.



|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           | 
|------------------------------------------------------------------------------------------------------------ |  | ---------------------- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | 
|                                                                                                             |  | Year ended December 31 |          
|                                                                                                             |  | 2008                   |           |   | 2009 |  |           | 2010 | 
|                                                                                                             |  |                        |          
|Net income (loss) attributable to ordinary shares (US$ thousands)                                            |  |                        | (2,080    | ) |      |  | 496       |      |  |  | 669       | 
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           | 
|                                                                                                             |  |                        |          
|Weighted average number of shares outstanding used in basic earnings (loss) per share calculation            |  |                        | 2,992,752 |   |      |  | 3,176,831 |      |  |  | 3,467,302 | 
|                                                                                                             |  |                        |          
|Add assumed conversion of convertible note dilutive potential shares                                         |  |                        |          |   |      |  | 363,636   |      |  |  | 363,636   | 
|                                                                                                             |  |                        |          
|Add nonvested stock                                                                                          |  |                        |          |   |      |  |          |      |  |  | 53,263    | 
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           | 
|                                                                                                             |  |                        |          
|Weighted average number of ordinary shares outstanding used in diluted earnings (loss) per share calculation |  |                        | 2,992,752 |   |      |  | 3,540,467 |      |  |  | 3,884,201 | 
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           | 
|                                                                                                             |  |                        |          
|Basic earnings (loss) per shares (US$)                                                                       |  |                        | (0.70     | ) |      |  | 0.16      |      |  |  | 0.19      | 
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           | 
|                                                                                                             |  |                        |          
|Diluted earnings (loss) per shares (US$)                                                                     |  |                        | (0.70     | ) |      |  | 0.14      |      |  |  | 0.17      | 
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           | 

Accounting for stock-based compensation:

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation  Stock Compensation (ASC
718) which establishes accounting for stock-based awards exchanged for employee services. ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Companys consolidated income statements.



19



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



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

The
Company accounts for equity instruments issued to third party service providers (non-employees) in accordance with fair value based on an option-pricing model, pursuant to the guidance in ASC Topic 505-50, Equity-Based Payments to Non-Employees.

The following table summarizes the effects of share-based compensation resulting from the application of ASC 718:



|                                       |  |      |     |  |      |   |     |      |  |   |    | 
|-------------------------------------- |  | ---- | --- |  | ---- | - | --- | ---- |  | - | -- | 
|                                       |  | 2008 |     |  | 2009 |   |     | 2010 | 
|                                       |  |      |    
|Cost of revenues                       |  | $    | 17  |  |      | $ | 14  |      |  | $ | 4  | 
|Research and development cost          |  |      | 7   |  |      |   | 5   |      |  |   | 2  | 
|Selling and marketing expenses         |  |      | 18  |  |      |   | 5   |      |  |   | 39 | 
|General and administrative expenses    |  |      | 157 |  |      |   | 132 |      |  |   | 50 | 
|                                       |  |      |     |  |      |   |     |      |  |   |    | 
|                                       |  |      |    
|Total stock-based compensation expense |  | $    | 199 |  |      | $ | 156 |      |  | $ | 95 | 
|                                       |  |      |     |  |      |   |     |      |  |   |    | 

The Company selected the Black-Scholes option pricing model as the most appropriate fair value method for
its stock options awards and values restricted stock based on the market value of the underlying shares at the date of grant. No stock options were granted in 2010, 2009 and 2008.

All restricted shares to employees granted in 2010, 2009 and 2008 were granted for no consideration; therefore their fair value was equal
to the share price at the date of grant. The weighted average grant date fair value of shares granted during the years 2010, 2009 and 2008 was $0.72, $0.40 and $1.52, respectively.

Severance pay:

The Companys liability for severance pay to its Israeli employees is calculated pursuant to Israels Severance Pay Law based on the most recent salary of the employees multiplied by the number
of years of employment as of the balance sheet date. Employees are entitled to one months salary for each year of employment or a portion thereof. The Companys liability for all of its employees in Israel is fully provided for by monthly
deposits with insurance policies and by the Companys severance pay accrual. The value of these policies is recorded as an asset on the Companys balance sheet.

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

Severance expenses for the years ended December 31, 2008, 2009 and 2010 amounted to approximately $126, $83 and $97 respectively.



20



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



Sale of receivables:

From time to time, the Company sells certain of its accounts receivable to financial institutions, within the normal course of business.
Where receivables are sold without recourse to the Company and such sales constitute a true sale, as determined in ASC Topic 860, Transfers and Servicing, the relevant receivable is de-recognized and cash recorded. Where receivables are sold and the
transfer of the rights to future cash receipts are related to underlying sales transactions for which the revenue has not been recognized but is ultimately expected to be recognized as revenue, the receivable is not de-recognized and a liability is
recorded as deferred revenue until the liability is discharged through the recognition of the revenue.

The balance of sold
receivables amounted to approximately $156 and $93 as of December 31, 2009 and 2010, respectively. Sales of accounts receivable, related to transactions for which revenue has been recognized, amounted to $156 and $45 as of December 31,
2009 and 2010, respectively, and sales of accounts receivable, related to an annual renewal of support and maintenance transactions for which the revenue has been recorded as deferred revenue and is ultimately expected to be recognized as revenue,
amounted to $0 and $48 as of December 31, 2009 and 2010, respectively.

The Company pays factoring fees associated with
the sale of receivables based on the dollar value of the receivables sold. Such fees, which are considered to be primarily related to the Companys financing activities, are immaterial and included in financial expenses, net in the statements
of operations.

Fair value of financial instruments:

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

The carrying amount reported in the balance sheet for cash and cash equivalents, trade receivables,
unbilled receivables, other accounts receivable, short-term bank credit, current portion of debt, trade payables and other accounts payable approximates their fair values due to the short-term maturity of such instruments.

The carrying amount of the Companys borrowings under the long- term debt and convertible debt approximates fair value because the
interest rates on the instruments fluctuate with variable rate of interest or represent borrowing rates available with similar terms.

Reclassification:

Certain prior period amounts have been
reclassified to conform to the current period presentation.

Impact of recently issued accounting standards:

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, (Fair Value
Measurements and Disclosures), that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation,
inputs, and valuation techniques. The



21



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



new and revised disclosures are required to be implemented in interim or annual periods beginning after December 15, 2009, except for the gross presentation of the Level 3 roll-forward,
which is required for annual reporting periods beginning after December 15, 2010. The adoption of this update did not have any effect on the Companys financial position and results of operations.

On February 24, 2010, the FASB issued ASU 2010-09, which amends ASC 855 (Subsequent Events) to address certain
implementation issues related to an entitys requirement to perform and disclose subsequent-events procedures. The ASU adds a definition of the term SEC filer to the ASC Master Glossary and requires (1) SEC filers and
(2) conduit debt obligors for conduit debt securities that are traded in a public market to evaluate subsequent events through the date the financial statements are issued. All other entities are required to evaluate
subsequent events through the date the financial statements are available to be issued. In addition the ASU exempts SEC filers from disclosing the date through which subsequent events have been evaluated, removes the definition of public
entity from the ASC 855 Glossary and adds a definition of the term revised financial statements to the ASC Master Glossary. All of the amendments in this Update are effective immediately and shall be applied prospectively. The
adoption of this update did not have a material impact on the Companys consolidated financial statements.

In April 2010,
the FASB issued (Revenue Recognition-Milestone Method) (Topic 605): Milestone Method of Revenue Recognition (a consensus of the FASB Emerging Issues Task Force). The amendments in this update provide guidance on the criteria that should
be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is
achieved only if the milestone meets all criteria to be considered substantive as defined in the ASU. A vendors decision to use the milestone method of revenue recognition for transactions within the scope of the amendments in this update is a
policy election. Other proportional revenue recognition methods also may be applied as long as the application of those other methods does not result in the recognition of consideration in its entirety in the period the milestone is achieved. The
update is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of this update did not have an impact on the Companys
consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29 (Business Combinations) (Topic
805): Disclosure of Supplementary Pro Forma Information for Business Combinations to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in
this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as
of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro
forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The ASU is not expected to have an impact on the Companys results of operations.

In December 2010, the FASB issued ASU 2010-28 (Intangibles-Goodwill and Other) (Topic 350): When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative



22



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)



Carrying Amounts to address questions about entities with reporting units with zero or negative carrying amounts. Under Topic 350 on goodwill and other intangible assets, testing for goodwill
impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must
perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). Because some entities concluded that Step 1 of the test is passed in circumstances of zero or negative carrying
amounts, because the fair value of their reporting unit will generally be greater than zero, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this
Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.

For those
reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely

than not that a
goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. For public entities, the
amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010 (January 15, 2011 for a calendar-year public company). Early adoption is not permitted. Upon adoption of the
amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units goodwill is impaired. If the entity determines that it is more
likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a
cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. The Company
cannot estimate the impact of the adoption of this ASU on the Companys financial statements.

In October 2009, the FASB
issued ASU 2009-13, Multiple Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (formerly topic 08-1), an amendment to ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25 for
separating consideration in multiple-deliverable arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The
amendments in this update will also replace the term fair value in the revenue allocation guidance with the term selling price in order to clarify that the allocation of revenue is based on entity-specific assumptions rather
than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative
selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverables selling price. The update is effective for revenue arrangements entered into
or modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. The adoption of this update is not expected to have a material impact on the Companys consolidated financial statements.



23



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

Other account receivable and prepaid expenses consisted of the following:



|                       |  |              |    |  |      |   |     | 
|---------------------- |  | ------------ | -- |  | ---- | - | --- | 
|                       |  | December 31, |   
|                       |  | 2009         |    |  | 2010 |  
|                       |  |             
|Prepaid expenses       |  | $            | 95 |  |      | $ | 195 | 
|Government authorities |  |              | 2  |  |      |   | 5   | 
|                       |  |              |    |  |      |   |     | 
|                       |  |             
|                       |  | $            | 97 |  |      | $ | 200 | 
|                       |  |              |    |  |      |   |     | 

NOTE 4:- PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:



| | a. | Composition:
| | -- | ------------



|                                             |  |              |       |  |      |   |       | 
|-------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                             |  | December 31, |      
|                                             |  | 2009         |       |  | 2010 |  
|                                             |  |             
|Cost:                                        |  |              |       |  |      |   |       | 
|Computers, peripheral equipment and software |  | $            | 1,657 |  |      | $ | 1,733 | 
|Office furniture and equipment               |  |              | 336   |  |      |   | 338   | 
|Leasehold improvements                       |  |              | 314   |  |      |   | 314   | 
|                                             |  |              |       |  |      |   |       | 
|                                             |  |              | 2,307 |  |      |   | 2,385 | 
|                                             |  |              |       |  |      |   |       | 
|Accumulated depreciation                     |  |              | 2,218 |  |      |   | 2,279 | 
|                                             |  |              |       |  |      |   |       | 
|                                             |  |             
|Depreciated cost                             |  | $            | 89    |  |      | $ | 106   | 
|                                             |  |              |       |  |      |   |       | 

Depreciation expense for the years ended December 31, 2008, 2009 and 2010 were approximately $100,
$89 and $83, respectively.

NOTE 5:- GOODWILL AND INTANGIBLE ASSETS, NET

a. Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2010 are as follows:



|                                         |  |   |       | 
|---------------------------------------- |  | - | ----- | 
|Balance as of January 1, 2009            |  | $ | 7,022 | 
|                                         | 
|Foreign currency translation adjustments |  |   | 147   | 
|                                         |  |   |       | 
|                                         | 
|Balance as of December 31, 2009          |  |   | 7,169 | 
|                                         | 
|Foreign currency translation adjustments |  |   | 84    | 
|                                         |  |   |       | 
|                                         | 
|Balance as of December 31, 2010          |  | $ | 7,253 | 
|                                         |  |   |       | 



24



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 5:- GOODWILL AND INTANGIBLE ASSETS, NET (CONT.)



b. Intangible assets:



| | 1) | The following table presents the components of the Companys acquired intangible assets with definite lives:
| | -- | ------------------------------------------------------------------------------------------------------------



|                               |  |              |       |  |      |   |       | 
|------------------------------ |  | ------------ | ----- |  | ---- | - | ----- | 
|                               |  | December 31, |      
|                               |  | 2009         |       |  | 2010 |  
|Costs:                         |  |              |       |  |      |   |       | 
|Customer relationship          |  | $            | 1,461 |  |      | $ | 1,528 | 
|Technology                     |  |              | 1,585 |  |      |   | 1,715 | 
|Trademark and trade name       |  |              | 110   |  |      |   | 110   | 
|                               |  |              |       |  |      |   |       | 
|                               |  |             
|Total cost                     |  |              | 3,156 |  |      |   | 3,353 | 
|                               |  |              |       |  |      |   |       | 
|                               |  |             
|Accumulated amortization:      |  |              |       |  |      |   |       | 
|Customer relationship          |  |              | 1,323 |  |      |   | 1,528 | 
|Technology                     |  |              | 1,512 |  |      |   | 1,715 | 
|Trademark and trade name       |  |              | 110   |  |      |   | 110   | 
|                               |  |              |       |  |      |   |       | 
|                               |  |             
|Total accumulated amortization |  |              | 2,945 |  |      |   | 3,353 | 
|                               |  |              |       |  |      |   |       | 
|                               |  |             
|Amortized cost                 |  | $            | 211   |  |      | $ |      | 
|                               |  |              |       |  |      |   |       | 



| | 2) | The customer relationship was acquired as part of the acquisitions of certain subsidiaries. Amortization expenses amounted to $238, $252 and $147 for the years ended
December 31, 2008, 2009 and 2010, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Amortization expenses of other intangible assets amounted to $144, $150 and $83 for the years ended December 31, 2008, 2009 and 2010, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | The identifiable intangible assets are fully amortized as of December 31, 2010.
| | -- | -------------------------------------------------------------------------------

NOTE 6:- SHORT-TERM BANK CREDIT



|         |  |                                              |       |  |              |   |     |      |  |   |     | 
|-------- |  | -------------------------------------------- | ----- |  | ------------ | - | --- | ---- |  | - | --- | 
|         |  | Weighted InterestRate as
ofDecember 31, 2010 |       |  | December 31, |  
|Currency |  | %                                            |       |  | 2009         |   |     | 2010 | 
|         |  |                                              |      
|U.S. $   |  |                                              | 11.50 |  |              | $ | 249 |      |  | $ | 150 | 
|NIS      |  |                                              | 6.30  |  |              | $ | 131 |      |  | $ | 138 | 
|         |  |                                              |       |  |              |   |     |      |  |   |     | 
|         |  |                                              |       |  |              | $ | 380 |      |  | $ | 288 | 
|         |  |                                              |       |  |              |   |     |      |  |   |     | 

The Company has two credit facilities with Bank Hapoalim (the Bank) that enable it to borrow
funds under a revolving line of credit. The line of credit denominated in NIS currency accrues interest on the daily outstanding balance at the prime rate plus 3.3% per annum and the line of credit denominated in US dollars accrues interest at
a fixed rate of 11.5%.



25



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 6:- SHORT-TERM BANK CREDIT (CONT.)



The Companys bank covenants as part of its overall bank financing arrangement
require that on a quarterly basis (i) the Companys shareholders equity shall be at least the higher of (a) 13% of its total assets, or (b) $ 1,500, and (ii) its cash balance shall not be less than $500.

On October 28, 2009 the Company received from the Bank a waiver of its bank covenants for the second, third and fourth quarter of
2009 and for the first quarter of 2010. In connection with the waiver the Company paid fees of $15 to the Bank.

On
July 15, 2010 the Company received from the Bank a waiver of its bank covenants for the remainder of 2010 and for the first quarter of 2011. In connection with the waiver the Company paid fees of $15 to the Bank.

The Bank debts are secured in favor of the Bank by a floating charge on all of the Companys assets and by a personal guarantee of
Samuel HaCohen, the Companys Chairman of the Board of Directors.

NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Other accounts payable and accrued expenses consist of the following:



|                               |  |              |       |  |      |   |       | 
|------------------------------ |  | ------------ | ----- |  | ---- | - | ----- | 
|                               |  | December 31, |      
|                               |  | 2009         |       |  | 2010 |  
|                               |  |             
|Employees and payroll accruals |  | $            | 1,256 |  |      | $ | 1,216 | 
|Accrued expenses               |  |              | 805   |  |      |   | 656   | 
|                               |  |              |       |  |      |   |       | 
|                               |  |             
|                               |  | $            | 2,061 |  |      | $ | 1,872 | 
|                               |  |              |       |  |      |   |       | 

NOTE 8:- LONG-TERM BANK LOAN



| | a. | Long-term loans classified by currency of repayment are as follows:
| | -- | -------------------------------------------------------------------



|                          |  |          |  |      |              |  |               |              |  |   |       |  |  |   |     | 
|------------------------- |  | -------- |  | ---- | ------------ |  | ------------- | ------------ |  | - | ----- |  |  | - | --- | 
|                          |  | Currency |  |      | InterestRate |  |               | December 31, | 
|                          |  |          |  | 2009 |              |  | 2010          |             
|                          |  |          |  |     
|Loan from the Bank (1)    |  | U.S. $   |  |      |              |  | LIBOR* + 3.25 |              |  | $ | 1,289 |  |  | $ | 889 | 
|                          |  |          |  |     
|Loan from the Bank (2)    |  | U.S. $   |  |      |              |  | LIBOR* + 4.30 |              |  |   |      |  |  |   | 200 | 
|                          |  |          |  |     
|Less - current maturities |  |          |  |      |              |  |               |              |  |   | 400   |  |  |   | 500 | 
|                          |  |          |  |      |              |  |               |              |  |   |       |  |  |   |     | 
|                          |  |          |  |     
|                          |  |          |  |      |              |  |               |              |  | $ | 889   |  |  | $ | 589 | 
|                          |  |          |  |      |              |  |               |              |  |   |       |  |  |   |     | 



|* | 3 Months LIBOR
|- | --------------



26



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 8:- LONG-TERM BANK LOAN (CONT.)



| | (1) | On January 2, 2008, the Companys short-term bank loan in the amount of $ 1,589 was extended for an additional year. On September 29, 2008 the Bank
agreed to convert the short term loan that was due on January 2, 2009 to a long-term loan, such that $100 was due on July 2, 2009, an additional $100 was due on August 15, 2009 and the balance of $1,389 is to be paid over 14 quarterly
payments starting October 2, 2009.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | On May 20, 2010 the Bank agreed to convert outstanding short term credit in the amount of $250 to a long-term loan payable in 10 quarterly installments commencing
on September 2, 2010.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | The loans (net of current maturities) mature in the following years after the balance sheet date:
| | -- | -------------------------------------------------------------------------------------------------



|      |  |              |       |  |      |   |       | 
|----- |  | ------------ | ----- |  | ---- | - | ----- | 
|      |  | December 31, |      
|      |  | 2009         |       |  | 2010 |  
|2010  |  | $            | 400   |  |      | $ |      | 
|2011  |  |              | 400   |  |      |   | 500   | 
|2012  |  |              | 400   |  |      |   | 500   | 
|2013  |  |              | 89    |  |      |   | 89    | 
|      |  |              |       |  |      |   |       | 
|      |  |             
|Total |  | $            | 1,289 |  |      | $ | 1,089 | 
|      |  |              |       |  |      |   |       | 



| | c. | For details of charges, bank covenants and security interest see Notes 6 and 10c.
| | -- | ---------------------------------------------------------------------------------

NOTE 9:- LONG TERM CONVERTIBLE DEBT

Long  term convertible debt is
as follows:



|                                        |  |              |      |   |              |      |     |  |  |   |     | 
|--------------------------------------- |  | ------------ | ---- | - | ------------ | ---- | --- |  |  | - | --- | 
|                                        |  | Interestrate |      |   | December 31, |     
|                                        |  |              | 2009 |   |              | 2010 |    
|                                        |  |              |     
|Convertible debt:                       |  |              |      |   |              |      |     |  |  |   |     | 
|Par                                     |  |              | 7.5  | % |              | $    | 480 |  |  | $ | 480 | 
|Deemed premium, net *                   |  |              |      |   |              |      | 50  |  |  |   | 37  | 
|                                        |  |              |      |   |              |      |     |  |  |   |     | 
|Reclassification to current liabilities |  |              |      |   |              |      |    |  |  |   | 517 | 
|                                        |  |              |      |   |              |      |     |  |  |   |     | 
|                                        |  |              |      |   |              | $    | 530 |  |  | $ |    | 
|                                        |  |              |      |   |              |      |     |  |  |   |     | 



|* | Amortization of the deemed premium added to income was $13 and $13 annually for 2009 and 2010, respectively.
|- | ------------------------------------------------------------------------------------------------------------



| | a. | The convertible debt is owed to LibertyView Special Opportunities Fund, L.P. (LibertyView), bears interest of 7.5%, payable quarterly, is due on
August 3, 2013 and may be converted to Ordinary Shares at the discretion of LibertyView at any time during the term of the loan at a price of $11.025 per Ordinary Share. LibertyView has the option to request earlier repayment on
July 15, 2011.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 9:- LONG TERM CONVERTIBLE DEBT (CONT.)



| | b. | As of December 31, 2009, the balance of the convertible debt in the amount of $ 530 was classified as a long-term convertible debt in accordance with ASC Topic
470-10 (originally issued as SFAS 78, Classification of Obligations That Are Callable by the Creditor an Amendment of ARB No. 43) since the convertible debt holder, did not exercise its right to call for repayment of the debt on
July 15, 2009, and, as such, the debt can be called for repayment only on the next exit date, which is July 15, 2011. Since the next redemption date of July 15, 2011 is less than twelve months from the December 31, 2010 balance
sheet date, the convertible debt is reclassified as a short-term liability as of December 31, 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 10:-
COMMITMENTS AND CONTINGENT LIABILITIES



| | a. | Royalty commitments:
| | -- | --------------------

The
Company participated in programs sponsored by the Israeli Government for the support of research and development activities, through the Office of the Chief Scientist of Israels Ministry of Industry, Trade and Labor (the OCS). The
Company had obtained aggregate grants from the OCS of $ 372, which were received during fiscal years 2002 and 2003.

Under
the Companys research and development agreement with the OCS, and pursuant to applicable laws, the Company is required to pay royalties at the rate of between 3% to 5% on revenues derived from products developed with royalty-bearing grants
provided by the OCS, in an amount of up to 100% of the grants received from the OCS. The obligation to pay these royalties is contingent on actual sales of the products. In the absence of such sales, no payment is required.

Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest
on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits.

Through December 31, 2010, the Company had paid or accrued royalties to the OCS in the amount of $29. As of December 31, 2010,
the total contingent liability to the OCS amounted to $396.



| | b. | Lease commitments:
| | -- | ------------------

The
Companys facilities, its subsidiaries facilities and its motor vehicles are leased under various operating lease agreements, which expire on various dates, the latest of which is in 2016.

Future minimum rental payments under non-cancelable operating leases are as follows:



|                        |  |            |     | 
|----------------------- |  | ---------- | --- | 
|Year ended December 31, |  | Facilities |    
|2011                    |  |            | 239 | 
|2012                    |  |            | 135 | 
|2013                    |  |            | 153 | 
|2014                    |  |            | 133 | 
|                        |  |            |     | 
|                        | 
|Total                   |  | $          | 660 | 
|                        |  |            |     | 



28



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)



Lease expenses in respect of facilities for the years ended December 31, 2008, 2009
and 2010 were approximately $442, $349 and $349, respectively.

Lease expenses in respect of motor vehicles for the years ended
December 31, 2008, 2009 and 2010 were approximately $265, $163 and $165, respectively. In addition, as of December 31, 2010, future minimum rental payments in connection with motor vehicles leased for the years 2011, 2012 and 2013 are
$167, $72 and $34, respectively.



| | c. | Charges and guarantees:
| | -- | -----------------------



| | 1. | The Company has a floating charge on all of its assets in favor of the Bank.
| | -- | ----------------------------------------------------------------------------



| | 2. | The Company obtained a bank guarantee in an amount of $73, in order to secure an office lease agreement.
| | -- | --------------------------------------------------------------------------------------------------------

NOTE 11:- SHAREHOLDERS EQUITY

The Ordinary shares of the Company ceased to be eligible for quotation and trading on the OTC Bulletin Board (OTCBB) on September 3, 2008 and became eligible for quotation and trading on
the Pink Sheets. On March 4, 2010, the Companys Ordinary Shares became eligible once again for quotation and trading on the OTC Bulletin Board (OTCBB) and, in April 2010, with the creation by Pink OTC Markets, Inc. of its new
OTCQB marketplace for reporting issuers who are current in their reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Companys Ordinary Shares are quoted in that marketplace as well.

The Companys Preferred A Shares are not publicly traded.

General:



| | a. | The Ordinary Shares and the Preferred A shares confer upon the holders the right to receive notice to participate and vote in general meetings of the Company, the right
to receive dividends, if declared, and the right to receive any remaining assets of the Company upon liquidation, if any, after full payment is made to any creditors.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Preferred A Shares have all rights and privileges that are possessed by the Companys Ordinary Shares, including, without
limitation, voting rights on an as-converted basis, and have preference over the Ordinary shares in any distribution to the Companys shareholders. The Preferred A Shares may be converted into Ordinary Shares at any time on a one-to-one basis.



| | b. | In December 19, 2007, the Company issued to a group of new financial investors 363,636 Ordinary Shares at a price of $1.65 per share for a total consideration of
$600. The transaction included also the issuance by the Company of a non interest bearing convertible note of $600 at a conversion price of $1.65 per Ordinary share and warrants to purchase an aggregate of up to 600,000 Ordinary Shares at an
exercise price of $2.00 per Ordinary Share, which expired on December 19, 2010. The convertible note does not have any maturity, does not bear any interest, is not subject to repayment in any event including liquidation, and can only be
converted into Ordinary Shares at any time at the holders discretion.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.)



As of December 31, 2009 and 2010 the total amount of Convertible Note of $ 600 was
classified as equity in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities and ASC 480, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.



| | c. | On January 31, 2008, the Companys shareholders approved an increase in the authorized share capital of the Company by NIS 10,000,000 (consisting of
2,000,000 Ordinary shares of NIS 5.0 per share).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | During 2008 the Company issued 40,335 Ordinary Shares to service providers in consideration of consulting services, out of which 15,200 shares were issued under the
Companys 2005 Share Options Plans (as defined below).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | During 2008, the Company issued to consultants 56,757 Ordinary Shares in consideration for finders fees related to the December 2007 investment, as described in
Note 11b above.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f. | During 2008 the Company issued 76,181 Ordinary Shares to investors in payment of interest expenses.
| | -- | ---------------------------------------------------------------------------------------------------



| | g. | During 2010 the Company issued 45,000 Ordinary Shares to service providers in consideration for consulting services.
| | -- | --------------------------------------------------------------------------------------------------------------------



| | h. | During 2010 the Company issued 73,369 Ordinary Shares to investors in payment of interest expenses.
| | -- | ---------------------------------------------------------------------------------------------------

Stock  based compensation:



| | a. | The Companys previous stock options plans, the 1996, 1997, 1998 and 1999 Stock Option Plans (the Plans), expired prior to December 31, 2009.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------

In November 2005, the Company adopted a new Israeli share option and restricted share plan and a new
international share option and restricted share plan (the 2005 Share Option Plans) which superseded and replaced all previous plans and provide the Company with the ability to grant restricted shares in addition to options under various
tax regimes.

Under the 2005 Share Option Plans, options, restricted shares and other share-based awards may be granted to
employees, directors, office holders, service providers, consultants and any other person or entity whose services shall be determined by the Companys board of directors to be valuable to the Company and/or its affiliated companies. The
exercise price of the options granted under the 2005 Share Option Plans is to be determined by the directors at the time of grant. The options granted expire no later than ten years from the date of grant. The 2005 Share Option Plans expire in 2015.
Any options which are canceled or forfeited before expiration become available for future grants. The options vest ratably over a period of two to four years, with the first portion vesting not earlier than one year after the grant of the options.



30



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.)



Any options that remain available for grants under any of the Companys prior stock
option plans shall be available for subsequent grants of awards under the 2005 Share Option Plans. In addition, if any outstanding award under the Companys existing option plans should for any reason expire, be canceled or
be forfeited without having been exercised in full, the shares subject to the unexercised, canceled or terminated portion of such award shall become available for subsequent grants of awards under the 2005 Share Option Plans.

As of December 31, 2010, an aggregate of 186,934 Ordinary Shares of the Company were available for future grant.



| | b. | During the year ended December 31, 2008, the Company granted to the Companys employees, directors and consultants 203,200 restricted ordinary shares, for no
consideration (Restricted Shares). 15,200 Restricted Shares that were granted to consultants were released in 2008 and 188,000 Restricted Shares are released ratably on an annual basis over a two-year period (release period),
starting from the date of grant, and some of them are subject to acceleration upon certain events such as a merger or acquisition. The Company has accounted for this award in accordance with ASC 718-10. The total grant date fair value of $284,
reflecting the quoted market price of the Companys Ordinary Shares as of the date of grant over the purchase price of $0, is recorded as compensation expense ratably over the release period of the Restricted Shares. Compensation expenses of
approximately $135, $101 and $44 were recognized during the years ended December 31, 2008, 2009 and 2010, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | During the year ended December 31, 2009, the Company granted to the Companys employees 66,000 Restricted Shares, which were released from restriction in
2009. The Company has accounted for this award in accordance with ASC 718-10. The total grant date fair value was $26, reflecting the quoted market price of the Companys Ordinary Shares as of the date of grant over the purchase price of $0.
Compensation expenses of approximately $26 were recognized during the year ended December 31, 2009.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | During the year ended December 31, 2010, the Company granted to the Companys employees and directors 229,582 Restricted Shares. Of the Restricted Shares that
were granted, 83,000 shares were released in 2010 and 146,582 shares are released ratably on an annual basis over a three-year release period, starting from the date of grant. Some of Restricted Shares are subject to acceleration upon certain events
such as a merger or acquisition. The Company has accounted for this award in accordance with ASC 718-10. The total grant date fair value of $165, reflecting the quoted market price of the Companys Ordinary Shares as of the date of grant over
the purchase price of $0, is recorded as compensation expense ratably over the release period of the Restricted Shares. Compensation expenses of approximately $51 were recognized during the year ended December 31, 2010.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.)



| | e. | The following is a summary of the Companys stock option activity under the 2005 Plans, as well as related information:
| | -- | -----------------------------------------------------------------------------------------------------------------------



|                                    |  |                              |        |   |                                                 |  |      |                         |  |  |                               |  |  |   |       | 
|----------------------------------- |  | ---------------------------- | ------ | - | ----------------------------------------------- |  | ---- | ----------------------- |  |  | ----------------------------- |  |  | - | ----- | 
|                                    |  | Year ended December 31, 2010 |       
|                                    |  | Numberofoptions              |        |   | Weightedaverageremainingcontractualterm (years) |  |      | Aggregateintrinsicvalue |  |  | Weightedaverageexercise price | 
|                                    |  |                              |        |  
|Outstanding - beginning of the year |  |                              | 12,525 |   |                                                 |  |      |                         |  |  |                               |  |  | $ | 8.38  | 
|                                    |  |                              |        |  
|Expired                             |  |                              | (9,925 | ) |                                                 |  |      |                         |  |  |                               |  |  | $ | 7.95  | 
|                                    |  |                              |        |  
|Outstanding - end of the year       |  |                              | 2,600  |   |                                                 |  | 0.70 |                         |  |  |                              |  |  | $ | 10.02 | 
|                                    |  |                              |        |   |                                                 |  |      |                         |  |  |                               |  |  |   |       | 
|                                    |  |                              |        |  
|Vested and exercisable              |  |                              | 2,600  |   |                                                 |  | 0.70 |                         |  |  |                              |  |  | $ | 10.02 | 
|                                    |  |                              |        |   |                                                 |  |      |                         |  |  |                               |  |  |   |       | 

No options were exercised in 2008, 2009 and 2010.

The options outstanding as of December 31, 2010, under the 2005 Plans, have been separated into ranges of exercise price, as follows:



|                        |  |                                                        |       |  |                                                 |  |      |                              |  |   |       | 
|----------------------- |  | ------------------------------------------------------ | ----- |  | ----------------------------------------------- |  | ---- | ---------------------------- |  | - | ----- | 
|Range of exercise price |  | Optionsoutstandingand exercisableas ofDecember 31,2010 |       |  | Weightedaverageremainingcontractuallife (years) |  |      | Weightedaverageexerciseprice | 
|                        |  |                                                        |      
|$ 10.00-10.30           |  |                                                        | 2,600 |  |                                                 |  | 0.70 |                              |  | $ | 10.02 | 
|                        |  |                                                        |       |  |                                                 |  |      |                              |  |   |       | 

No compensation expenses related to options were recognized during the years ended December 31, 2008,
2009 and 2010.



| | f. | A summary of the status of the Companys Restricted Shares as of December 31, 2010, and changes during the year ended December 31, 2010, is presented
below:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                |  |        |          |   |                                       |   |      | 
|------------------------------- |  | ------ | -------- | - | ------------------------------------- | - | ---- | 
|Restricted shares               |  | Shares |          |   | Weightedaverage grant-date fair value |  
|Restricted at January 1, 2010   |  |        | 89,664   |   |                                       | $ | 1.62 | 
|Granted                         |  |        | 229,582  |   |                                       | $ | 0.72 | 
|Vested                          |  |        | (172,666 | ) |                                       | $ | 1.19 | 
|                                |  |        |          |   |                                       |   |      | 
|Restricted at December 31, 2010 |  |        | 146,580  |   |                                       | $ | 0.72 | 
|                                |  |        |          |   |                                       |   |      | 



32



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.)



As of December 31, 2010, there was $78 of total unrecognized compensation cost
related to restricted shares compensation arrangements granted under the 2005 Plans. That cost is expected to be recognized over a period of 26 months. The total fair value of Restricted Shares released during the year ended December 31, 2010
was $205.

The weighted average grant date fair value of shares granted during 2008, 2009 and 2010 were $1.52, $0.40 and $0.72,
respectively.



| | g. | Options and shares issued to consultants:
| | -- | -----------------------------------------

The Companys outstanding options that have been issued to consultants are as follows as of December 31, 2010:



|              |  |                           |       |  |                        |   |       |                    |  |  |                    |  |  |            
|------------- |  | ------------------------- | ----- |  | ---------------------- | - | ----- | ------------------ |  |  | ------------------ |  |  | -----------
|Issuance date |  | Options forOrdinaryShares |       |  | Exerciseprice pershare |   |       | Optionsexercisable |  |  | Exercisablethrough
|August 2004   |  |                           | 500   |  |                        | $ | 10.00 |                    |  |  | 500                |  |  | August 2011
|March 2005    |  |                           | 7,000 |  |                        | $ | 10.30 |                    |  |  | 7,000              |  |  | March 2012 
|              |  |                           |       |  |                        |   |       |                    |  |  |                    |  |  |            
|Total         |  |                           | 7,500 |  |                        |   |       |                    |  |  | 7,500              |  |  |            
|              |  |                           |       |  |                        |   |       |                    |  |  |                    |  |  |            

No compensation expenses were recognized during the years ended December 31, 2008, 2009 and 2010.

Warrants:

The Companys outstanding warrants that had been issued to investors and consultants are as follows as of December 31, 2010:



|              |  |                            |       |  |                        |   |      |                     |  |  |                     |  |  |                   
|------------- |  | -------------------------- | ----- |  | ---------------------- | - | ---- | ------------------- |  |  | ------------------- |  |  | ------------------
|Issuance date |  | Warrants forOrdinaryShares |       |  | Exerciseprice pershare |   |      | Warrantsexercisable |  |  | Exercisable through
|April 1998    |  |                            | 578   |  |                        | $ | 1.25 |                     |  |  | 578                 |  |  | No expiration date
|May 2008      |  |                            | 7,152 |  |                        | $ | 1.65 |                     |  |  | 7,152               |  |  | May 2011          
|              |  |                            |       |  |                        |   |      |                     |  |  |                     |  |  |                   
|              |  |                            |       | 
|Total         |  |                            | 7,730 |  |                        |   |      |                     |  |  | 7,730               |  |  |                   
|              |  |                            |       |  |                        |   |      |                     |  |  |                     |  |  |                   



|(*) | See also Note 11b General above.
|--- | --------------------------------

Dividends:

In the event that cash dividends are declared in the future, such dividends will be paid in NIS or in foreign currency subject to any statutory limitations. Dividends paid to shareholders in non-Israeli
currency may be converted into dollars on the basis of the exchange rate prevailing at the time of payment. The Company does not intend to pay cash dividends in the foreseeable future. The Company has decided not to declare dividends out of
tax-exempt earnings.



33



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 12:- TAXES ON INCOME

The Company and its subsidiaries file federal and state income tax returns in the U.S., Israel, Australia and the U.K. ViryaNet Ltd. may
be subject to examination by the Israel tax authorities for fiscal years 2006 through 2010. ViryaNet Inc.s (the U.S. subsidiary) tax returns through 2006 were audited by the U.S. Internal Revenue Service (IRS) which resulted in no
incremental tax liability. ViryaNet Inc. may be subject to examination by the IRS for fiscal years 2007 through 2010. ViryaNet PTY (the Australian subsidiary) may be subject to examination by the Australian tax authorities for fiscal years 2006
through 2010.

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

Reduction in Israeli tax rates:

For tax year 2010, Israeli companies are subject to Corporate Tax on their taxable income at the rate of
25%. Income not eligible for Approved Enterprise benefits was taxed in 2010 at a regular corporate tax rate of 25% (26% in 2009 and 27% in 2008). The tax rate is scheduled to be gradually reduced as follows: 24% in 2011, 23% in 2012, 22%
in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and beyond. Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after
January 1, 2003.

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

The Companys production facilities have been granted Approved Enterprise status
under the Law for Encouragement of Capital Investments, 1959 (the Investment Law), for three separate investment programs, which were approved in February 1989, March 1995 and April 1998.

Generally, Approved Enterprise tax benefits are limited to 12 years from commencement of production or 14 years from the date
of approval, whichever is earlier.

Pursuant to the Investment Law, the Company has elected for its investment program the
alternative benefits track and has waived government grants in return for a tax exemption. The Companys offices and its research and development center are located in Jerusalem, in a region defined as a Priority A Development
Region. Therefore, income derived from this program is tax-exempt for a period of ten years commencing with the year in which the program first earns taxable income, subject to certain conditions.

As the Company currently has no taxable income, the benefits from this program have not been yet utilized.



34



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 12:- TAXES ON INCOME (CONT.)



The entitlement to the above benefits is conditional upon the Company fulfilling the
conditions stipulated by the Investment Law, regulations published thereunder and the letters of approval for the specific investments in Approved Enterprises. In the event of failure to comply with these conditions, the benefits may be
canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest and adjustments in accordance with changes to the Israeli Consumer Price Index (the CPI).

If the retained tax-exempt income were distributed, it would be taxed at the corporate tax rate applicable to such profits as if the
Company had not chosen the alternative tax benefits (rate of 10% -25% based on the percentage of foreign ownership in the Companys shares) on the gross amount distributed. In addition, these dividends will be subject to a 15% withholding tax.
The Companys board of directors has determined that such tax-exempt income will not be distributed as dividends.

The
Investment Law also grants entitlement to accelerated depreciation claim on buildings and equipment used by an Approved Enterprise during the first five tax years in which it uses the assets.

Income from sources other than the Approved Enterprise during the benefit period will be subject to tax at the regular Israeli
corporate tax rate, as described above.

On April 1, 2005, an amendment to the Investment Law came into effect (the
2005 Amendment), which significantly changed the provisions of the Investment Law. The 2005 Amendment limits the scope of enterprises which may be approved by the Israeli Investment Center of the Ministry of Industry and Commerce (the
Investment Center) by setting criteria for the approval of a facility as a Privileged Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprises income will be derived from export.
Additionally, the 2005 Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies who choose the alternative benefits track no longer require Investment Center approval in
order to qualify for tax benefits.

However, the 2005 Amendment provides that terms and benefits included in any letter of
approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore the Companys sole remaining, existing Approved Enterprise will generally not be subject to the
provisions of the 2005 Amendment. As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the amended Investment Law will subject the Company to taxes upon distribution or liquidation and the Company may be required to
record deferred tax liability with respect to such tax-exempt income. As of December 31, 2010, the Company had not generated income under the provisions of the amended Investment Law.

The Approved Enterprise status granted to two of the Companys investment programs in February 1989 and March 1995,
respectively has expired.

The tax benefits period for the April 1998 program has not yet begun and it expires in April
2012. Income derived from this program for which the Company has elected the alternative benefits track is exempted from tax for a period of ten years, starting in the first year in which the Company generates taxable income from the Approved
Enterprise, subject to a condition that the Company will have a certain minimum number of professional employees. The Company has not yet met this condition; and it is uncertain whether it will meet this condition prior to the expiration date for
the program in April 2012. Therefore, it is more likely than not that the Company will lose its entitlement to future benefits under the Investment Law in respect of this program, in the remaining period of 16 months from the balance sheet date.



35



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 12:- TAXES ON INCOME (CONT.)



Tax benefits under Israels Law for the Encouragement of Industry (Taxation),
1969:

The Company currently qualifies as an industrial company under the above law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, and the right to claim public issuance expenses and amortization of patents and other intangible property rights over eight years as a deduction for tax
purposes.

Taxable income under the Inflationary Income Tax (Inflationary Adjustments) Law, 1985:

Results of the Company for tax purposes are measured and reflected in real terms in accordance with the changes in the Israeli Consumer
Price Index, or CPI. As explained in Note 2 above, the Companys financial statements are presented in U.S. dollars. The difference between the rate of change in the CPI and the rate of change in the NIS/U.S. dollar exchange rate causes a
difference between taxable income or loss and the income or loss before taxes reflected in the financial statements. In accordance with ASC 740-10, the Company has not provided deferred income taxes on this difference between the reporting currency
and the tax bases of assets and liabilities.

On February 26, 2008, the Israeli Parliament (the Knesset) enacted the
Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Effective Period), 2008, or the Inflationary Adjustments Amendment. In accordance with the Inflationary Adjustments Amendment, the effective period of the Inflationary
Adjustments Law ceased at the end of the 2007 tax year, and as of the 2008 tax year, the provisions of the law do no longer apply, other than the transitional provisions intended to prevent distortions in tax calculations. In accordance with the
Inflationary Adjustments Amendment, commencing with the 2008 tax year, income for tax purposes is no longer adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax
losses are no longer linked to the CPI.

Net operating losses carryforward:

ViryaNet Ltd. has accumulated losses for income tax purposes as of December 31, 2010, in the amount of approximately $36,054, which
may be carried forward and offset against taxable income and capital gain in the future for an indefinite period.

Through
December 31, 2010, ViryaNet U.K. had accumulated losses for income tax purposes of approximately $14,320, which can be carried forward and offset against taxable income in the future for an indefinite period.

As of December 31, 2010, the Companys U.S. subsidiary had a U.S. federal net operating loss carryforward for income tax
purposes in an amount of approximately $12,090. Net operating loss carryforward arising in taxable years beginning before August 6, 1997 can be carried forward and offset against taxable income for 15 years and expire between 2011 and 2012. Net
operating loss carryforward arising in taxable years beginning after August 6, 1997 can be carried forward and offset against taxable income for 20 years, expiring between 2017 and 2026.

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



36



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 12:- TAXES ON INCOME (CONT.)



Through December 31, 2010, ViryaNet Australia had accumulated losses for income tax
purposes of approximately $918, which can be carried forward and offset against taxable income in the future for an indefinite period.

Deferred income taxes:

Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and deferred tax
liabilities are as follows:



|                                          |  |              |         |   |      |   |         |  
|----------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                          |  | December 31, |        
|                                          |  | 2009         |         |   | 2010 |  
|                                          |  |             
|Deferred tax assets:                      |  |              |         |   |      |   |         |  
|U.S. net operating loss carryforward      |  | $            | 1,804   |   |      | $ | 4,869   |  
|Israeli net operating loss carryforward   |  |              | 6,177   |   |      |   | 6,490   |  
|U.K. net operating loss carryforward      |  |              | 4,331   |   |      |   | 2,864   |  
|Australia net operating loss carryforward |  |              | 148     |   |      |   | 275     |  
|Other reserve and allowances              |  |              | 978     |   |      |   | 723     |  
|                                          |  |              |         |   |      |   |         |  
|Total deferred tax assets                 |  |              | 13,438  |   |      |   | 15,221  |  
|Valuation allowance                       |  |              | (13,438 | ) |      |   | (15,221 | )
|                                          |  |              |         |   |      |   |         |  
|Net deferred tax assets                   |  | $            |        |   |      | $ |        |  
|                                          |  |              |         |   |      |   |         |  

As of December 31, 2010, the Company and its subsidiaries have provided valuation allowances in
respect of deferred tax assets resulting from tax loss carryforward and other temporary differences, due to the history of the Companys operating losses, which raises uncertainty concerning the Companys ability to realize these deferred
tax assets in the future. Management currently believes that it is more likely than not that the deferred tax assets relating to the loss carryforward and other temporary differences will not be realized in the foreseeable future.

Deferred tax asset and valuation allowance in the U.S. was increased in 2010 by $3,065, principally due to adjustments of accumulated net
operating losses available under the Internal Revenue Codes Section 382 limitation. In addition, tax rate changes enacted in the UK were principally responsible for the reduction in the deferred tax assets and corresponding valuation
allowance by $1,467 for the year.



37



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 12:- TAXES ON INCOME (CONT.)



Net income (loss) consists of the following:



|                               |  |                         |        |   |      |   |       |      |  |   |     | 
|------------------------------ |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | --- | 
|                               |  | Year ended December 31, |       
|                               |  | 2008                    |        |   | 2009 |   |       | 2010 | 
|Net income (loss) before taxes |  |                         |        |   |      |   |       |      |  |   |     | 
|Domestic                       |  | $                       | (2,087 | ) |      | $ | (613  | )    |  | $ | 82  | 
|Foreign                        |  |                         | 21     |   |      |   | 1,156 |      |  |   | 656 | 
|                               |  |                         |        |   |      |   |       |      |  |   |     | 
|                               |  |                         |       
|                               |  | $                       | (2,066 | ) |      | $ | 543   |      |  | $ | 738 | 
|                               |  |                         |        |   |      |   |       |      |  |   |     | 
|                               |  |                         |       
|Taxes on income                |  |                         |        |   |      |   |       |      |  |   |     | 
|Domestic                       |  | $                       |       |   |      | $ |      |      |  | $ |    | 
|Foreign                        |  |                         | 14     |   |      |   | 47    |      |  |   | 69  | 
|                               |  |                         |        |   |      |   |       |      |  |   |     | 
|                               |  |                         |       
|                               |  | $                       | (2,080 | ) |      | $ | 496   |      |  | $ | 669 | 
|                               |  |                         |        |   |      |   |       |      |  |   |     | 
|                               |  |                         |       
|Net income (loss) after taxes  |  |                         |        |   |      |   |       |      |  |   |     | 
|Domestic                       |  | $                       | (2,087 | ) |      | $ | (613  | )    |  | $ | 82  | 
|Foreign                        |  |                         | 7      |   |      |   | 1,109 |      |  |   | 587 | 
|                               |  |                         |        |   |      |   |       |      |  |   |     | 
|                               |  |                         |       
|                               |  | $                       | (2,080 | ) |      | $ | 496   |      |  | $ | 669 | 
|                               |  |                         |        |   |      |   |       |      |  |   |     | 

Reconciliation of theoretical tax expense (benefit) to actual tax expense (benefit):

In 2008, 2009 and 2010, the main reconciling item of the statutory tax rate of the Company (27% in 2008, 26% in 2009
and 25% in 2010) to the effective tax rate ((0.68%) in 2008, 8.65% in 2009, and 9.35% in 2010) is tax loss carryforwards and other deferred tax assets, for which a full valuation allowance was provided.

NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION



| | a. | Summary information about geographical areas:
| | -- | ---------------------------------------------

The Company adopted ASC 280 (originally issued as Statement of Financial Accounting Standard No. 131, Disclosures About Segments of an Enterprise and Related Information). The
Companys chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. The Company only has one
operating segment. The Companys total revenues are attributable to geographic areas based on the location of the end customer.

The following table presents total revenues for the years ended December 31, 2008, 2009 and 2010 and long-lived assets as of December 31, 2008, 2009 and 2010:



|                           |  |               |        |  |                  |   |     |               |  |   |                  |  |  |               |     |  |                  |   |        |  |  |   |     | 
|-------------------------- |  | ------------- | ------ |  | ---------------- | - | --- | ------------- |  | - | ---------------- |  |  | ------------- | --- |  | ---------------- | - | ------ |  |  | - | --- | 
|                           |  | 2008          |        |  | 2009             |   |     | 2010          | 
|                           |  | Totalrevenues |        |  | Long-livedassets |   |     | Totalrevenues |  |   | Long-livedassets |  |  | Totalrevenues |     |  | Long-livedassets |  
|North America              |  | $             | 9,655  |  |                  | $ | 381 |               |  | $ | 9,062            |  |  | $             | 156 |  |                  | $ | 8,742  |  |  | $ | 13  | 
|Europe and the Middle East |  |               | 445    |  |                  |   | 28  |               |  |   | 424              |  |  |               | 17  |  |                  |   | 802    |  |  |   | 87  | 
|Asia Pacific               |  |               | 1,270  |  |                  |   | 308 |               |  |   | 941              |  |  |               | 127 |  |                  |   | 1,576  |  |  |   | 6   | 
|                           |  |               |        |  |                  |   |     |               |  |   |                  |  |  |               |     |  |                  |   |        |  |  |   |     | 
|                           |  |               |        |  |                  |  
|                           |  | $             | 11,370 |  |                  | $ | 717 |               |  | $ | 10,427           |  |  | $             | 300 |  |                  | $ | 11,120 |  |  | $ | 106 | 
|                           |  |               |        |  |                  |   |     |               |  |   |                  |  |  |               |     |  |                  |   |        |  |  |   |     | 



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

One customer represented approximately 11% of the Companys total revenues in 2010 and 2009. There were no customers representing 10% or more of revenues in 2008.



38



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 14:- FINANCIAL EXPENSES, NET



|                                                                                                            |  |                         |     |  |      |   |     |      |  |   |     | 
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                                                                                            |  | Year ended December 31, |    
|                                                                                                            |  | 2008                    |     |  | 2009 |   |     | 2010 | 
|Income:                                                                                                     |  |                         |     |  |      |   |     |      |  |   |     | 
|Foreign currency translation adjustments                                                                    |  |                         |     |  |      |   | 5   |      |  |   |    | 
|Other income                                                                                                |  |                         | 7   |  |      |   | 20  |      |  |   | 12  | 
|                                                                                                            |  |                         |     |  |      |   |     |      |  |   |     | 
|Total income                                                                                                |  |                         | 7   |  |      |   | 25  |      |  |   | 12  | 
|                                                                                                            |  |                         |     |  |      |   |     |      |  |   |     | 
|Expenses:                                                                                                   |  |                         |     |  |      |   |     |      |  |   |     | 
|Interest and bank charges                                                                                   |  |                         | 324 |  |      |   | 185 |      |  |   | 174 | 
|Foreign currency translation adjustments                                                                    |  |                         |    |  |      |   |    |      |  |   | 80  | 
|Stock based compensation expenses related to options and shares granted to a Bank and financial consultants |  |                         | 97  |  |      |   |    |      |  |   |    | 
|                                                                                                            |  |                         |     |  |      |   |     |      |  |   |     | 
|                                                                                                            |  |                         |    
|Total expenses                                                                                              |  |                         | 421 |  |      |   | 185 |      |  |   | 254 | 
|                                                                                                            |  |                         |     |  |      |   |     |      |  |   |     | 
|                                                                                                            |  |                         |    
|Financial expenses, net                                                                                     |  | $                       | 414 |  |      | $ | 160 |      |  | $ | 242 | 
|                                                                                                            |  |                         |     |  |      |   |     |      |  |   |     | 

NOTE 15:- RELATED PARTY TRANSACTIONS



| | a) | In June 1999, the Companys board of directors approved the issuance of 3,478 Series C-2 Preferred shares to the Companys Chairman for a purchase price of
$100, which the Chairman paid based on a loan provided to him by the Company. The loan was approved by the Companys shareholders in June 2000 and bears annual interest at the rate of 6.5%. Repayment of the loan is due when the Chairman sells
or otherwise disposes of the shares that were purchased with the proceeds of the loan. In addition, the Company, at its sole discretion, may call for immediate repayment of the loan and the interest thereon in the event that (i) the Chairman
becomes bankrupt or files a motion for bankruptcy, or (ii) the Chairman ceases to remain in the employment of the Company for any reason.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | As part of a prior acquisition in 2005 the Company assumed an amount of approximately $285 in unsecured debt. The note representing such debt bears interest at an
annual rate equal to 5%. The unsecured debt is payable to a major shareholder Mark Hosking of the seller in the acquisition, who became a shareholder and an officer of the Company as a result of the acquisition. As of December 31,
2010, the outstanding amount of the debt is $ 79.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 16:- SUBSEQUENT EVENTS

In March 2011, the Company granted to the Companys directors 75,000 Restricted Shares under the Companys 2005 Share Option
Plans, for no consideration. The Restricted Shares will be released from restriction over a nine month period.



39



---

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 16:- SUBSEQUENT EVENTS (CONT.)



In February and May 2011 the Company issued to the holder of the Companys
long-term convertible debt 18,043 shares in payment of interest expense.

ViryaNet, Inc., the Companys US subsidiary
located in Massachusetts, signed a new office lease agreement in February 2011 and has relocated its facilities in June 2011 to a new location in Westborough, Massachusetts. ViryaNet Inc. leases 10,372 square feet of office space, which is utilized
primarily for administrative, marketing, sales, service and technical support purposes, with an annual rent of approximately $165,000. The lease agreement for these premises expires on December 31, 2016.

On June 30, 2011, the Company entered into a share purchase agreement with Jerusalem Technology Investments Ltd, or the investor, a
company with which two of the Companys directorsSamuel HaCohen and Vladimir Morgenstern and one of the Companys major shareholders (Jerusalem High-tech Founders, Ltd.) ) are affiliated. Pursuant to the agreement, the Company
will issue to the investor 250,000 of its Ordinary Shares for total cash consideration of $250,000. 50,000 of those Ordinary Shares were issued on June 30, 2011, upon an advance payment of $50,000 by the investor, while the remaining 200,000
Ordinary Shares will be issued within 31 days of June 30, 2011, upon payment of the remaining $200,000 of the total purchase price under the agreement. This equity financing constituted an extraordinary transaction with an entity in which two
of the Companys directors possessed a personal interest and was therefore approved by the Companys audit committee and Board of Directors in accordance with the requirements of the Companies Law.

On June 28, 2011 the Company received an approval from the State Guaranteed Medium Business Assistance Fund, or the Fund, for a loan
in the amount of NIS 2,100,000, guaranteed by the Israeli government. The disbursement of the loan to the Company is contingent upon its securing an equity investment of at least NIS 500,000. The required equity investment may be executed in one of
two manners: (i) a restricted shareholders loan payable after five years, or (ii) an equity investment in which the investors receive the Companys shares.

On July 7, 2011, following the receipt by the Company of NIS 170,000, or $50,000, via an equity investment by Jerusalem Technology Investments pursuant to the share purchase agreement dated
June 30, 2011 (as described above), thereby meeting, in part, the condition for disbursement of the loan, the Company received part of the total amount approved to it under the loan NIS 750,000 from the Funds participating
bank, Bank Otsar Hachayal. The loan bears annual interest at the rate of the Israeli prime rate, plus 3.5% (equal to 8.57% as of the time of the initial loan disbursement), and the principal is to be repaid in 49 equal monthly payments of NIS 18,080
each (which includes interest as well), beginning on August 6, 2012. Interest is payable on a monthly basis beginning on August 6, 2011.

The balance of the loan, or NIS 1,350,000, will be disbursed to the Company as soon as it receives an additional investment of $100,000 from Jerusalem Technology Investments under the Companys share
purchase agreement with it.

On July 10, 2011 the Company received from Bank Hapoalim a waiver of its bank covenants (see
Note 6) for the remaining quarters of 2011 and for the first quarter of 2012. In connection with the waiver the Company paid fees of $15,000 to the bank.







40