##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 20-F







| ̈ |  | 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, 2009

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, 2009, the Registrant had 3,270,845 shares outstanding, comprised of
2,944,048 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









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##### Table of Contents

TABLE OF CONTENTS



|     |  |          |  |                                                            |  |         
|---- |  | -------- |  | ---------------------------------------------------------- |  | --------
|     |  |          |  |                                                            |  | Page No.
|ITEM |  |          |  |                                                            |  |         
|     |  |          | 
|     |  |          |  | PART I                                                     |  | 1       
|     |  |          | 
|     |  | Item 1.  |  | Identity of Directors, Senior Management and Advisers      |  | 1       
|     |  |          | 
|     |  | Item 2.  |  | Offer Statistics and Expected Timetable                    |  | 1       
|     |  |          | 
|     |  | Item 3.  |  | Key Information                                            |  | 1       
|     |  |          | 
|     |  |          |  | Selected Financial Data                                    |  | 1       
|     |  |          |  | Capitalization and Indebtedness                            |  | 2       
|     |  |          |  | Reasons for the Offer and Use of Proceeds                  |  | 2       
|     |  |          |  | Risk Factors                                               |  | 3       
|     |  |          | 
|     |  | Item 4.  |  | Information on the Company                                 |  | 10      
|     |  |          | 
|     |  |          |  | History and Development of the Company                     |  | 10      
|     |  |          |  | Business Overview                                          |  | 11      
|     |  |          |  | Organizational Structure                                   |  | 17      
|     |  |          |  | Property, Plants and Equipment                             |  | 17      
|     |  |          | 
|     |  | Item 5.  |  | Operating and Financial Review and Prospects               |  | 17      
|     |  |          | 
|     |  |          |  | Overview                                                   |  | 17      
|     |  |          |  | Operating Results                                          |  | 21      
|     |  |          |  | Liquidity and Capital Resources                            |  | 25      
|     |  |          |  | Research and Development, Patents and Licenses, etc.       |  | 26      
|     |  |          |  | Trend Information                                          |  | 27      
|     |  |          |  | Off-balance Sheet Arrangements                             |  | 27      
|     |  |          |  | Tabular Disclosure of Contractual Obligations              |  | 28      
|     |  |          | 
|     |  | Item 6.  |  | Directors, Senior Management and Employees                 |  | 28      
|     |  |          | 
|     |  |          |  | Directors and Senior Management                            |  | 28      
|     |  |          |  | Compensation                                               |  | 29      
|     |  |          |  | Board Practices                                            |  | 30      
|     |  |          |  | External Directors                                         |  | 30      
|     |  |          |  | Employees                                                  |  | 31      
|     |  |          |  | Share Ownership                                            |  | 31      
|     |  |          | 
|     |  | Item 7.  |  | Major Shareholders and Related Party Transactions          |  | 32      
|     |  |          | 
|     |  |          |  | Major Shareholders                                         |  | 32      
|     |  |          |  | Related Party Transactions                                 |  | 34      
|     |  |          |  | Interests of Experts and Counsel                           |  | 34      
|     |  |          | 
|     |  | Item 8.  |  | Financial Information                                      |  | 34      
|     |  |          | 
|     |  |          |  | Consolidated Statements and Other Financial Information    |  | 34      
|     |  |          |  | Significant Changes                                        |  | 35      
|     |  |          | 
|     |  | Item 9.  |  | The Offer and Listing                                      |  | 35      
|     |  |          | 
|     |  |          |  | Market Price Information                                   |  | 35      
|     |  |          |  | Markets on Which our Ordinary Shares Trade                 |  | 35      
|     |  |          | 
|     |  | Item 10. |  | Additional Information                                     |  | 35      
|     |  |          | 
|     |  |          |  | Share Capital                                              |  | 35      
|     |  |          |  | Memorandum and Articles of Association                     |  | 35      
|     |  |          |  | Material Contracts                                         |  | 37      
|     |  |          |  | Exchange Controls                                          |  | 37      
|     |  |          |  | Taxation                                                   |  | 37      
|     |  |          |  | Documents on Display                                       |  | 42      
|     |  |          | 
|     |  | Item 11. |  | Quantitative and Qualitative Disclosures About Market Risk |  | 42      
|     |  |          | 
|     |  | Item 12. |  | Description of Securities Other than Equity Securities     |  | 42      



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| |  |           |  |                                                                              |  |   
| |  | --------- |  | ---------------------------------------------------------------------------- |  | --
| |  |           |  | PART II                                                                      |  | 42
| |  |           | 
| |  | Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 42
| |  |           | 
| |  | Item 14.  |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 42
| |  |           | 
| |  | Item 15T. |  | Controls and Procedures                                                      |  | 42
| |  |           | 
| |  | Item 16A. |  | Audit Committee Financial Expert                                             |  | 43
| |  |           | 
| |  | Item 16B. |  | Code of Ethics                                                               |  | 43
| |  |           | 
| |  | Item 16C. |  | Principal Accountant Fees and Services                                       |  | 43
| |  |           | 
| |  | Item 16D. |  | Exemptions from the Listing Standards for Audit Committees                   |  | 43
| |  |           | 
| |  | Item 16E. |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       |  | 44
| |  |           | 
| |  | Item 16F. |  | Change in Registrants Certifying Accountant                                 |  | 44
| |  |           | 
| |  | Item 16G. |  | Corporate Governance                                                         |  | 44
| |  |           | 
| |  |           |  | PART III                                                                     |  | 44
| |  |           | 
| |  | Item 17.  |  | Financial Statements                                                         |  | 44
| |  |           | 
| |  | Item 18.  |  | Financial Statements                                                         |  | 44
| |  |           | 
| |  | Item 19.  |  | Exhibits                                                                     |  | 45



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##### Table of Contents

Unless the context otherwise requires, all reference in this annual report to
ViryaNet, we, our, us, our company and the Company refer to ViryaNet Ltd. and its consolidated subsidiaries. Reference to dollars or $ are to United
States dollars. All references to NIS are to New Israeli Shekels.

All references to Ordinary Shares and Preferred
A Shares, including related share price, are made on a post reverse stock split basis, taking into account the one (1) for five (5) reverse stock split of ViryaNets Ordinary Shares and Preferred A Shares, which became effective on
January 17, 2007.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Matters discussed in this document may constitute forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their businesses. Forward-looking statements include statements concerning plans, objectives, goals, strategies,
future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and we are including
this cautionary statement in connection with this safe harbor legislation. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to
future events and financial performance. The words believe, expect, anticipate, intend, estimate, forecast, project and similar expressions identify forward-looking
statements.

The forward-looking statements in this document are based upon various assumptions, many of which are based, in
turn, upon further assumptions, including without limitation, managements examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were
reasonable when made, because these assumptions are inherently subject to significant risks, uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or
accomplish these expectations, beliefs or projections. In addition to these important factors and matters discussed elsewhere herein (including in the Risk Factors described in Item 3 below) and in the documents incorporated by reference
herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements, include: whether we are able to achieve anticipated levels of profitability, growth and cost;
whether we are able to timely develop and gain acceptance for our new products; the impact of competitive pricing; the impact of general business and global economic conditions; and other important factors described from time to time in the reports
filed by us with the Securities and Exchange Commission.

Except to the extent required by law, neither we, nor any of our
respective agents, employees or advisors, intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained or incorporated by reference in this document.

PART I



|Item 1. | Identity Of Directors, Senior Management and Advisers
|------- | -----------------------------------------------------

Not applicable.



|Item 2. | Offer Statistics and Expected Timetable
|------- | ---------------------------------------

Not applicable.



|Item 3. | Key Information
|------- | ---------------

Selected Financial Data

The tables that follow present portions of our financial statements and are not complete.
You should read the following selected financial data together with our consolidated financial statements, notes to our consolidated financial statements and the Operating and Financial Review and Prospects section included in this annual report.
Historical results are not necessarily indicative of any results to be expected in any future period.

We derived the selected
consolidated statements of operations data below for the years ended December 31, 2007, 2008 and 2009, and the selected consolidated balance sheet data as of December 31, 2008 and 2009, from our audited consolidated financial statements,
which are included elsewhere in this annual report. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). We derived the consolidated
statements of operations data for the years ended December 31, 2005 and 2006 and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 from audited consolidated financial statements that are not included in
this annual report.



1



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##### Table of Contents

Summary Consolidated Financial Information

U.S. dollars in thousands (except share and per share data)



|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                                                  |  | 2005 |           |   | 2006 |   |           | 2007 |  |   | 2008      |   |  | 2009 |          
|Statement of Operations Data:                                                                     |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Revenues:                                                                                         |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Software licenses                                                                                 |  | $    | 1,720     |   |      | $ | 1,520     |      |  | $ | 1,769     |   |  | $    | 1,380     |   |  | $ | 1,508     |  
|Maintenance and services                                                                          |  |      | 12,487    |   |      |   | 12,340    |      |  |   | 9,390     |   |  |      | 9,990     |   |  |   | 8,919     |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total revenues                                                                                    |  |      | 14,207    |   |      |   | 13,860    |      |  |   | 11,159    |   |  |      | 11,370    |   |  |   | 10,427    |  
|Cost of revenues:                                                                                 |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Software licenses                                                                                 |  |      | 358       |   |      |   | 356       |      |  |   | 358       |   |  |      | 275       |   |  |   | 206       |  
|Maintenance and services                                                                          |  |      | 7,855     |   |      |   | 6,831     |      |  |   | 5,633     |   |  |      | 5,586     |   |  |   | 3,967     |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total cost of revenues                                                                            |  |      | 8,213     |   |      |   | 7,187     |      |  |   | 5,991     |   |  |      | 5,861     |   |  |   | 4,173     |  
|Gross profit                                                                                      |  |      | 5,994     |   |      |   | 6,673     |      |  |   | 5,168     |   |  |      | 5,509     |   |  |   | 6,254     |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Operating expenses:                                                                               |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Research and development, net                                                                     |  |      | 2,504     |   |      |   | 2,121     |      |  |   | 2,290     |   |  |      | 1,753     |   |  |   | 1,076     |  
|Sales and marketing                                                                               |  |      | 5,214     |   |      |   | 3,692     |      |  |   | 3,429     |   |  |      | 3,119     |   |  |   | 2,700     |  
|General and administrative                                                                        |  |      | 3,004     |   |      |   | 2,735     |      |  |   | 2,485     |   |  |      | 2,303     |   |  |   | 1,822     |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total operating expenses                                                                          |  |      | 10,722    |   |      |   | 8,548     |      |  |   | 8,204     |   |  |      | 7,175     |   |  |   | 5,598     |  
|Income (loss) from operations                                                                     |  |      | (4,728    | ) |      |   | (1,875    | )    |  |   | (3,036    | ) |  |      | (1,666    | ) |  |   | 656       |  
|Financial expenses, net                                                                           |  |      | (1,330    | ) |      |   | (44       | )    |  |   | (535      | ) |  |      | (414      | ) |  |   | (160      | )
|Other income (loss)                                                                               |  |      |          |   |      |   |          |      |  |   | (239      | ) |  |      |          |   |  |   |          |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss)                                                                                 |  | $    | (6,058    | ) |      | $ | (1,919    | )    |  | $ | (3,810    | ) |  | $    | (2,080    | ) |  | $ | 496       |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic net income (loss) per share                                                                 |  | $    | (4.68     | ) |      | $ | (1.03     | )    |  | $ | (1.66     | ) |  | $    | (0.70     | ) |  | $ | 0.16      |  
|Weighted average number of shares used in computing basic net income (loss) per Ordinary Share    |  |      | 1,294,834 |   |      |   | 1,857,217 |      |  |   | 2,292,190 |   |  |      | 2,992,752 |   |  |   | 3,176,831 |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Diluted net income (loss) per share                                                               |  | $    | (4.68     | ) |      | $ | (1.03     | )    |  | $ | (1.66     | ) |  | $    | (0.70     | ) |  | $ | 0.14      |  
|Weighted average number of shares used in computing basic and diluted net loss per Ordinary Share |  |      | 1,294,834 |   |      |   | 1,857,217 |      |  |   | 2,292,190 |   |  |      | 2,992,752 |   |  |   | 3,540,467 |  
|Balance Sheet Data:                                                                               |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Cash and cash equivalents                                                                         |  | $    | 2,040     |   |      | $ | 736       |      |  | $ | 413       |   |  | $    | 143       |   |  | $ | 156       |  
|Working capital (deficit)                                                                         |  |      | (4,004    | ) |      |   | (4,520    | )    |  |   | (6,098    | ) |  |      | (5,830    | ) |  |   | (5,611    | )
|Total assets                                                                                      |  |      | 14,456    |   |      |   | 11,919    |      |  |   | 11,190    |   |  |      | 9,802     |   |  |   | 9,241     |  
|Long-term loan, including current maturities                                                      |  |      | 1,991     |   |      |   | 1,292     |      |  |   | 738       |   |  |      | 1,739     |   |  |   | 1,289     |  
|Long-term convertible debt                                                                        |  |      | 3,592     |   |      |   | 568       |      |  |   | 556       |   |  |      | 543       |   |  |   | 530       |  
|Shareholders equity                                                                              |  |      | 183       |   |      |   | 2,534     |      |  |   | 50        |   |  |      | (1,375    | ) |  |   | (606      | )

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.



2



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##### Table of Contents

RISK FACTORS

You should carefully consider the risks described below and in the documents we have incorporated by reference into this annual report before making an
investment decision. The risks described below and in the documents we have incorporated by reference into this annual report are not the only ones facing our company. Our business, financial condition or results of operations could be materially
adversely affected by any of these risks. The trading price of our Ordinary Shares could decline due to any of these risks, and you may lose all or part of your investment.

Risks Related to our Business

We have incurred losses in the past and may incur losses in the future.

Although we had net income of $0.5 million in 2009, we had incurred substantial net losses during each of the four fiscal years prior to
2009 and may not achieve profitability in 2010 or in future years. As of December 31, 2009, we had an accumulated deficit of approximately $121.2 million. In order to maintain profitability we will need to increase our revenues while containing
or reducing our costs. However, a substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of when revenue is generated. Therefore, if our projected revenue does not meet
our expectations, we are likely to experience an even larger shortfall in our operating profit relative to our expectations. Prior to 2009, while our revenues in 2008, 2007, and 2006 were $11.4 million, $11.2 million, and $13.9 million,
respectively, we incurred net losses of $2.1 million, $3.8 million, and $1.9 million, respectively, during these years. Furthermore, while we achieved profitability in 2009, our revenues decreased to $10.4 million. We cannot assure you that we will
be able to increase our revenues once again, or, that even if we are able to increase our revenues we will be able to maintain our profitability on a consistent basis.

Our operating results have fluctuated significantly in the past and may fluctuate significantly in the future, thereby making it
difficult for investors to make reliable period-to-period comparisons of such results, which may contribute to volatility in the market price for our Ordinary Shares and may adversely impact the price of our Ordinary Shares. and.

Our revenues, gross profits and results of operations have fluctuated significantly in the past and we expect them to continue to
fluctuate significantly in the future. The following events or factors may cause fluctuations in our operating results and/or cause our share price to decline:



| |  |  | changes in global economic conditions in general, and conditions in our industry and target markets in particular;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | changes in demand or timing of orders, especially large orders, for our products and services;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the length and unpredictability of our sales cycle;
| | - |  | ---------------------------------------------------



| |  |  | timing of product releases;
| | - |  | ---------------------------



| |  |  | the dollar value of, and the timing of, our contracts;
| | - |  | ------------------------------------------------------



| |  |  | delays in completion of implementation projects with customers;
| | - |  | ---------------------------------------------------------------



| |  |  | the mix of revenue generated by software licenses and professional services;
| | - |  | ----------------------------------------------------------------------------



| |  |  | price and product competition;
| | - |  | ------------------------------



| |  |  | changes in selling and marketing expenses, as well as other operating expenses;
| | - |  | -------------------------------------------------------------------------------



| |  |  | technological changes;
| | - |  | ----------------------



| |  |  | our ability to expand our workforce with qualified personnel, as may be needed;
| | - |  | -------------------------------------------------------------------------------



| |  |  | reductions in the level of our cash balances and our ability to raise cash;
| | - |  | ---------------------------------------------------------------------------



| |  |  | consolidation of our customers;
| | - |  | -------------------------------



| |  |  | fluctuations in the economic factors impacting LIBOR (which is the benchmark rate used to determine the interest expenses incurred by us on our bank
borrowings under our bank arrangement);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the geographic composition of our revenues;
| | - |  | -------------------------------------------



| |  |  | integration and assimilation of management, employees and product lines of acquired companies;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | effectiveness of our customer support, whether provided by our resellers or directly by us; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | foreign currency exchange rate fluctuations , primarily the US dollar against the Israeli shekel.
| | - |  | -------------------------------------------------------------------------------------------------

As a result, we believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful and that
you should not rely on them as indicative of our future performance. Also, it is possible that our results of operations may be below the expectations of public market analysts and investors. If this happens, the price of our Ordinary Shares will
likely decrease.



3



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##### Table of Contents

We may not be able to meet our debt payment obligations in the future.

We have $480,000 face value of convertible debt outstanding that is owed to LibertyView Special Opportunities Fund,
L.P. (LibertyView), for which LibertyView has the option to request payment in full at any time in July 2011. Our ability to meet our obligations under the convertible debt and our other debt obligations will depend on whether we can
successfully implement our strategy, as well as on financial, competitive, and other factors, including some factors that are beyond our control. If we are unable to generate sufficient cash from operations to meet principal and interest payments on
our debt, we may have to refinance all or part of our indebtedness. In addition, cash flows from our operations may be insufficient to repay our convertible debt in full at maturity, in which case we may need to refinance the convertible debt. Our
ability to refinance our indebtedness, including the convertible debt, will depend upon, among other things: our financial condition at the time; restrictions in agreements governing our debt; and, other factors, including market conditions.

We cannot ensure you that any such refinancing would be possible on terms that we could accept, or that we could obtain
additional financing at all. If refinancing will not be possible or if additional financing will not be available, that would have a material adverse effect on our business.

We may need additional financing and may not be able to raise additional financing on favorable terms or at all.

In 2008 and 2009, we had positive cash flow from operations. However, prior to 2008, we had negative cash flow from
operations for each of the several preceding years. In the past five years, we have had aggregate negative operating cash flow in the amount of $6.9 million. Over the past five years, we have raised approximately $3.5 million in a combination of
convertible debt and equity financings during 2005, approximately $1.4 million from private equity financing transactions during 2006 and approximately $1.2 million in a combination of equity and convertible debt financings during 2007 and 2008, .
However, we expect that we may need additional financing to fund our business operations. Any additional financing that is structured as a secured debt financing may require the consent of our main current creditors, Bank Hapoalim and LibertyView.
Our ability to raise additional financing from third parties may be impacted by the limited liquidity of our Ordinary Shares on the Over-The-Counter Bulletin Board (OTCBB). We cannot assure you that additional financing will be available
on terms favorable to us, or at all. In the event that the market price of our Ordinary Shares does not appreciate or declines, we may not be able to consummate a private equity financing transaction to raise additional capital. If adequate funds
are not available or are not available on acceptable terms, our ability to fund our day to day operations, expand our research and development, and marketing and sales, efforts, pursue potential acquisitions, take advantage of unanticipated
opportunities, develop or enhance our website content, features, services, or otherwise respond to competitive pressures would be severely constrained. If we raise additional funds through the issuance of equity or convertible debt securities, the
percentage ownership of our existing shareholders will be reduced, and any newly issued securities may have rights, preferences or privileges senior to those of existing shareholders.

We will need sufficient funds to re-pay our loans from Bank Hapoalim, which may be subject to immediate repayment if we do not meet
our repayment schedule or meet specified conditions.

As of May 31, 2010, our aggregate outstanding borrowings
from Bank Hapoalim were approximately $1.6 million, which consisted of (i) short-term borrowings of approximately $0.25 million, of which $0.1 million is drawn in dollars with interest payable quarterly at a rate of 11.5%, and $0.13 million is
drawn in NIS with interest payable quarterly at a rate of prime plus 3.3%, and (ii) long-term loans of approximately $1.1 million with an interest rate of 3 months LIBOR plus 3.25% and $0.25 million with an interest rate of 3 months LIBOR plus
4.3%.

Our overall bank financing arrangement with Bank Hapoalim had historically been subject to financial covenants, and on
August 29, 2007, Bank Hapoalim agreed to modify our bank covenant requirements as part of our overall bank financing arrangement such that on a quarterly basis starting August 1, 2007 (i) our shareholders equity is required to
be at least the higher of (a) 13% of our total assets, or (b) $1.5 million, and (ii) our cash balance is required to be not less than $0.5 million. In addition, Bank Hapoalim provided us with a waiver of these new bank covenant
requirements for the remainder of 2007. In connection with the modification of these waiver and bank covenant requirements, we agreed to pay $10,000 of fees and issue 10,000 Ordinary Shares to the bank.

We were not in compliance with these covenants for each quarterly period during the years ended December 31, 2008 and 2009. However,
on September 28, 2008 we received a waiver of these covenants from Bank Hapoalim for each quarterly period during 2008 and for the first quarter of 2009, and on October 28, 2009 we received from Bank Hapoalim a waiver of these covenants
for the remaining quarters of 2009 and for the first quarter of 2010. In connection with the waivers granted on October 28, 2009 we paid fees of $15,000 to the bank.

On July 15, 2010 we received from Bank Hapoalim a waiver of these covenants for the remaining quarters of 2010 and for the first quarter
of 2011. In connection with this waiver we agreed to pay fees of $15,000 to the bank.

On September 29, 2008, Bank
Hapoalim agreed to convert a $1.6 million short term loan that was due on January 2, 2009 into a long-term loan payable in the following increments: $0.1 million on July 2, 2009; an additional $0.1 million on August 15, 2009; and the
balance of $1.4 million in 14 quarterly installments of $0.1 million each, commencing on October 2, 2009. The interest on our long-term loan is payable quarterly at a rate of LIBOR plus 3.25%. In connection with the waivers granted on
September 28, 2008 and the conversion of the short-term loan to a long-term loan, we agreed to pay fees of $30,000 to the bank.

We may need to obtain funding from third parties to meet the payment obligations under the above-described loan arrangement in a timely
manner, and there is no assurance that Bank Hapoalim will grant us an extension of these payment dates in the future, if requested. Our ability to raise capital via convertible debt or equity financing arrangements with third parties for the
re-payment of our loans with Bank Hapoalim may be impacted by the limited liquidity of our Ordinary Shares on the OTCBB. There can be no assurance that we will meet our covenants to the bank or that the bank will waive non-compliance with any such
covenants in the event that we do not meet them. If we fail to timely effect any repayment of loans to Bank Hapoalim or to meet these covenants, the bank may demand immediate repayment of the outstanding debts and all interest thereon and shall be
entitled to exercise any remedies available to it. That would have a material adverse effect on our business.

We have
substantially reduced the number of our employees during 2005, 2006, 2007, 2008 , and, as a result, may be unable to meet certain revenue objectives and continue to incur losses.

During 2004, we substantially increased our overall headcount from 86 at the beginning of the year to 126 at the end of the year. Part of
such increase was related to the assumption of 25 employees as a result of our acquisition of Utility Partners. In June 2005, we added another 22 employees via the acquisition of e-Wise Solutions, raising our headcount to 148. After the acquisition
of e-Wise, we determined that we had an excess of resources resulting from these acquisitions and took action to reduce headcount. These actions resulted in a reduction of our headcount to 120 at the end of December 2005, 98 at the end of December
2006, and 88 at the end of December 2007. During 2008, we further reduced our headcount to 67 employees,. Although we believe that we currently have sufficient resources available to meet and support our current obligations in relation to our
current staff, we may not be able to maintain this headcount. If we are forced to reduce headcount further, our ability to meet our growth goals, and our business and operations, may be negatively impacted.

We may need to expand our sales, marketing, research and development and professional services organizations but may lack the
resources to attract, train and retain qualified personnel, which may hinder our ability to grow and meet customer demands.

While we have conducted reductions in the number of our employees the past several years, due to operational needs, we may need to reverse
course and expand our headcount beyond our current staff in order to increase market awareness and sales of our products. We may also need to increase our quality assurance, technical



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and customer support staff to support new customers and the expanding needs of existing customers. These positions require training on the use of our products, and we generally expect that the
training period will take a significant amount of time before these personnel can support our customers. In addition, there is competition for qualified personnel (especially senior employees). Competition for qualified professional employees may
lead to increased labor and personnel costs. If we need to hire additional employees and are unable to attract, train, motivate and retain qualified personnel, we may not be able to achieve our objectives, and our business could be harmed.

Competition for senior employees can be intense, especially in a number of our key markets and locations, including Israel.
The process of locating, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. The market for the qualified personnel that we require is very competitive, even in times of economic downturn,
because of the limited number of people available with the necessary technical and sales skills and understanding of our products and technology. This is particularly true in Israel, where competition for qualified personnel is intense. We may not
be able to compete effectively for the personnel that we need. Any loss of members of senior management or key technical personnel, or any failure to attract or retain highly qualified employees as needed, could materially adversely affect our
ability to achieve our research and development and sales objectives.

Historically, our revenues have been concentrated
in a few large orders and a small number of customers. Our business could be adversely affected if we lose a key customer.

A significant portion of our revenues each year has been derived from large orders from a small number of customers which are not
necessarily the same customers each year. In 2007, three customers each accounted for approximately 6% or more of our revenues, and such revenues represented, in the aggregate, 19% of our total revenues. In 2008, four customers each accounted for
approximately 6% or more of our revenues, and such revenues represented, in the aggregate, 32% of our total revenues. In 2009, five customers each accounted for approximately 6% or more of our revenues, and such revenues represented, in the
aggregate, 39% of our total revenues. We do not expect that the five customers accounting for 39% of our revenue during 2009 will generate a substantial percentage of our revenues in the future. However, we do expect that a significant portion of
our future revenues will continue to be derived from a relatively small number of customers. We cannot assure you that we will continue to attract such substantial customers that will purchase our products and services in the future. The failure to
secure new key customers, the loss of key customers or a significant reduction in sales to a key customer would cause our revenues to significantly decrease and make it significantly more difficult for us to be profitable.

Our sales cycle is variable and often long and involves investment of significant resources on our part, but may never result in
actual sales and we may therefore suffer additional losses.

Our sales cycle from our initial contact with a potential
customer to the signing of a license and related agreements has historically been lengthy and variable. We generally must educate our potential customers about the use and benefit of our products and services, which can require the investment of
significant time and resources, causing us to incur most of our product development and selling and marketing expenses in advance of a potential sale. In addition, a number of companies decide which products to buy through a request for proposal
process. In those situations, we also run the risk of investing significant resources in a proposal that results in a competitor obtaining the desired contract from the customer or in a decision by a customer not to proceed. The purchasing decisions
of our customers are subject to the uncertainties and delays of the budgeting, approval and competitive evaluation processes that typically accompany significant capital expenditures. If our sales cycles lengthen further, our quarterly operating
results may become less predictable and may fluctuate more widely than in the past. Due to the relatively large size of some orders, a lost or delayed sale could have a material adverse effect on our revenue and operating results.

If we are unable to accurately predict and respond to market developments or demands, our business may be adversely affected.

The market for mobile workforce management software solutions is evolving. This makes it difficult to predict demand
and market acceptance for our products. Changes in technologies, industry standards, customer requirements and new product introductions by existing or future competitors could render our existing products obsolete and unmarketable, or require us to
develop new products. We have limited development resources to expend on product development. Therefore, we may be unable to timely develop products that meet the markets future needs. If we were to experience a significant increase in the
number of customers, or were to decide to effect a significant increase in our development of new product offerings, or both, we would need to expend significant amounts of money, time and other resources. This could strain our personnel and
financial resources.

During the past few years, we have experienced fluctuation in the mix of our revenues from
software licenses and services, and a reduction in the overall amount of our services revenues. If either or both of these trends continue, it may adversely affect our gross margins and profitability.

Our revenues from the sale of software licenses have fluctuated over the past three years, declining to approximately $1.4 million in 2008
from approximately $1.8 million in 2007, and rising back up to approximately $1.5 million in 2009. Our revenues from services have also fluctuated over the past three years, increasing to approximately $10 million in 2008 from approximately $9.4
million in 2007, and then declining to approximately $8.9 million in 2009. Both of these trends have had a direct impact on our gross margins and profitability. Our gross margin from software licenses is substantially higher than our gross margin
from services, since our cost of services, which includes expenses of salaries and related benefits of the employees engaged in providing the services, is substantially higher than our cost of software licenses. However, a decline in the volume of
services revenues that we generate (regardless of such services relative lesser profitability) may in any case have an adverse direct impact on our overall gross margins and profitability if not accompanied by a countervailing increase in the
amount of revenue from software licenses. If software license revenues should once again decline, or if services revenues continue to decline and are not again accompanied by a countervailing increase in software license revenues, our gross margins
and profitability may be adversely affected.

If we fail to stabilize or improve our margins on service revenues in the
future, our results of operations could suffer.

Our margins on service revenues have not been consistent. In 2009, our
margins on services revenues were 56% compared to 44% in 2008 and 40% in 2007. In order to maintain or continue to improve our margins on services revenues, we will need to maintain or increase the efficiency and utilization of our services
personnel, consistently control our costs, and increase the volume of our services revenues. There is no assurance that we will be able to maintain or continue to improve our services margins, or, that they will not decline in the future.

Our ability to maintain or increase our revenues may depend on our ability to make sales through third parties.

We are becoming more dependent upon resellers and channel partners to generate a substantial portion of our revenues.
We expect this dependence to continue and potentially increase due to our limited internal sales and marketing resources in existing markets and to furthermore increase due to our desire to penetrate new vertical markets for our products in North
America and expand into new geographic markets for our products outside of North America. As a result of the limited resources and capacities of many resellers and channel partners, even if we manage to maintain and expand our relationship with such
resellers and channel partners, we may be unable to attain sufficient focus and resources from them so as to meet all of our customers needs. If anticipated orders from these resellers and channel partners fail to materialize, or if our
current business agreements with them are terminated, our business, operating results and financial condition will be materially adversely affected.



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Our channel and strategic partner strategy may expose us to additional risks relating
to intellectual property infringement.

Our increased reliance on our channel and strategic partners may increase the
likelihood of the infringement of our intellectual property. As we deepen our ties with our channel and strategic partners, the number of people who are exposed to, and interact with, our software and other intellectual property will increase.
Despite our best efforts to protect our intellectual property, our channel or strategic partners, or their employees or customers, may copy some portions of our products or otherwise obtain and use information and technology that we regard as
proprietary. Our channel or strategic partners might also improperly incorporate portions of our technology into their own products or otherwise exceed the authorized scope of their licenses to our technology. If we are unable to successfully detect
and prevent infringement and/or to enforce our rights to our technology, our revenues may be negatively impacted and we may lose competitive position in the market.

If we are unable to maintain or expand our relationships with third party providers of implementation and consulting services, we
may be unable to increase our revenues.

To focus more effectively on our core business of developing and licensing
software solutions, we need to establish and maintain additional relationships with third parties that can provide implementation and consulting services to our customers. Third-party implementation and consulting firms can also be influential in
the choice of mobile workforce management solutions by new customers. If we cannot establish and maintain effective, long-term relationships with implementation and consulting providers, or if these providers do not meet the needs or expectations of
our customers, we may be unable to increase our revenues and our business could be seriously harmed. As a result of the limited resources and capacities of many third-party implementation providers, we may be unable to attain sufficient focus and
resources from the third-party providers to meet all of our customers needs, even if we establish relationships with these third parties. If sufficient resources are unavailable, we will be required to provide these services internally, which
could limit our ability to expand our base of customers. Even if we succeed at developing strong relationships with third-party implementation and consulting providers, we will still be subject to significant risk due to the fact that we cannot
control the level and quality of service provided by these third parties.

Undetected defects may increase our costs and
impair the market acceptance of our products and technology.

Our software products are complex and contain undetected
defects, particularly when first introduced or when new versions or enhancements are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of customer environments in several geographic
markets into which our products are deployed. Despite testing conducted by us and our customers, we have in the past shipped product releases with some defects, some customers have cited possible defects, and we have otherwise discovered other
defects in our products after their commercial shipment. Our products are frequently more critical to our customers operations compared to other software solutions used by such customers, and, as a result, our customers may have a greater
sensitivity to product defects relating to our products.

Defects may be found in current or future products and versions
after the start of commercial shipment. This could result in:



| |  |  | a delay or failure of our products to achieve market acceptance;
| | - |  | ----------------------------------------------------------------



| |  |  | adverse customer reactions;
| | - |  | ---------------------------



| |  |  | negative publicity and damage to our reputation;
| | - |  | ------------------------------------------------



| |  |  | diversion of resources; and
| | - |  | ---------------------------



| |  |  | increased service and maintenance costs.
| | - |  | ----------------------------------------

Defects could also subject us to legal claims. Although our license agreements contain limitation of liability provisions, these
provisions may not be sufficient to protect us against these legal claims. The sale and support of our products, as well as our professional services, may also expose us to product liability claims.

Greater market acceptance of our competitors products or decisions by potential or actual customers to develop their own
service management solutions could result in reduced revenues and reduced gross margins.

The markets for mobile
workforce management applications and the automation of field service delivery are highly competitive, yet fragmented and stratified, although a number of our traditional competitors have been acquired by larger companies. We compete for the
business of global or nationwide organizations that seek to support complex and sophisticated products across a variety of industries. We compete in the utilities and telecommunications segments of our markets against companies like Service Power
Technologies, plc, Vista Equity Partners (via its acquisition of our competitors MDSI and Indus International), ClickSoftware, Ltd., Telcordia, and Intergraph Corporation. Our primary competitors in commercial and other general field service markets
include enterprise application solution providers such as Astea International Inc. and Metrix Inc., along with traditional ERP and CRM software application vendors such as Oracle Corporation and SAP A.G.

Many of our competitors may have significant competitive advantages over us. These advantages may include greater technical and financial
resources, more developed marketing and service organizations, greater expertise, and broader customer bases and name recognition than us. Our competitors may also be in a better position to devote significant resources to the development, promotion
and sale of their products, and to respond more quickly to new or emerging technologies and changes in customer requirements. Current and potential competitors have established or may establish cooperative relationships among themselves or with
third parties to increase their ability to successfully market their products. We also expect that competition will increase as a result of consolidations in the industry. To the extent that we develop new products, we may begin to compete with
companies with which we have not previously competed. We cannot assure you that competition will not result in price reductions for our products and services, fewer customer orders, deferred payment terms, reduced gross margins or loss of market
share, any of which could materially adversely affect our business, financial condition and results of operations. In addition, a number of potential customers have the ability to develop, in conjunction with systems integrators, software solutions
internally, thereby eliminating the need for suppliers like us. This could result in reduced revenues or lost business for us.

We rely upon software from third parties. If we cannot continue using that software, we would have to spend additional capital to
redesign our existing software and may not be able to compete in our markets.

We utilize third-party software products
to enhance the functionality of our products. Our business would be disrupted if functional versions of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be
required to spend additional capital to either redesign our software to function with alternate third-party software or develop these components ourselves. If functional versions of third-party software were either no longer available to us or no
longer offered to us on commercially reasonable terms, we might be forced to limit the features available in our current or future product offerings, and the commercial release of our products could be delayed, which could materially adversely
affect our business, financial condition and results of operations.

We may be unable to adequately protect our
proprietary rights, which may limit our ability to compete effectively.

Our success and ability to compete are
substantially dependent upon our internally developed technology. Other than our trademarks, most of our intellectual property consists of proprietary or confidential information that is not subject to patent or similar protection. In general, we
have relied on a combination of technical leadership, trade secret, copyright and trademark law and nondisclosure agreements to protect our proprietary know-how. Unauthorized third parties may attempt to copy or obtain and use the technology
protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Policing unauthorized use of our products is difficult and costly,
particularly in countries where the laws may not protect our proprietary rights as fully as in the United States.



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In connection with some of our licensing agreements, we have placed, and in the future may
place, our software in escrow. The software may, under specified circumstances, be made available to our customers and resellers and this may increase the likelihood of misappropriation or other misuse of our software.

Substantial litigation over intellectual property rights exists in the software industry. We expect that software products may be
increasingly subject to third-party infringement claims as the functionality of products in different industry segments overlaps. We believe that many industry participants have filed or intend to file patent and trademark applications covering
aspects of their technology. We cannot be certain that they will not make a claim of infringement against us based on our products and technology. Any claims, with or without merit, could:



| |  |  | be expensive and time-consuming to defend;
| | - |  | ------------------------------------------



| |  |  | cause product shipment and installation delays;
| | - |  | -----------------------------------------------



| |  |  | divert managements attention and resources; or
| | - |  | -----------------------------------------------



| |  |  | require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all, and even if available on acceptable
terms, shall increase our expenses and may materially affect our results of operations adversely. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could have a material
adverse effect on our business, financial condition and results of operations.

Marketing and distributing our products
outside of the United States and other international operations may require increased expenses and greater exposure to risks that we may not be able to successfully address.

We market and sell our products and services in the United States, Europe, the Middle East, Asia and Australia. We received 21% of our
total revenue in 2007, 15% of our total revenue in 2008 and 13% of our total revenue in 2009 from sales to customers located outside of the United States. In addition to our operations in the United States, we have sales and support facilities and
offices in Israel and Australia. These operations require, and the expansion of our existing operations and entry into additional international markets will require, significant management attention and financial resources. In addition, since our
financial results are reported in dollars, decreases in the rate of exchange of non-dollar currencies in which we make sales relative to the dollar will decrease the dollar-based reported value of those sales. To the extent that decreases in
exchange rates are not offset by a reduction in our costs, they may materially adversely affect our results of operation. Historically, we have not hedged our foreign currency-denominated account receivables and expense risks.

We are also subject to a number of risks customary for international operations that are described below in the risk factor titled,
Our business may become increasingly susceptible to numerous risks associated with international operations.

We depend on key personnel. The loss of any key personnel could affect our ability to compete, and our ability to attract
additional key personnel may also be impaired as a result.

Our future success depends on the continued service of our
executive officers and other key personnel. All of our key management and technical personnel have expertise. The loss of any of these individuals could harm our business significantly. We have employment agreements with our executive officers.
Although these agreements generally require notification prior to departure, relationships with these officers and key employees are at will. The loss of any of our key personnel could harm our ability to execute our business or financial strategy
and compete successfully in the marketplace.

Any future acquisitions of companies or technologies may distract our
management and disrupt our business.

On February 25, 2002 we completed the acquisition of all of the outstanding
shares of iMedeon, Inc. (iMedeon), a provider of mobile workforce management solutions to the utilities sector, and on July 29, 2004, we completed the acquisition of all of the outstanding shares of Utility Partners, Inc. On
June 15, 2005, we completed the acquisition of substantially all of the assets of e-Wise Solutions of Melbourne, Australia. We may, in the future, acquire or make investments in other complementary businesses, technologies, services or products
if appropriate opportunities arise, and we may engage in discussions and negotiations with companies about our acquiring or investing in those companies businesses, products, services or technologies. We cannot provide assurances that we will
be able to identify future suitable acquisition or investment candidates, or, if we do identify suitable candidates, that we will have sufficient resources to complete such acquisitions or investments, will be able to make the acquisitions or
investments on commercially acceptable terms or will be able to complete such acquisitions or investments at all. If we acquire or invest in another company, we could have difficulty assimilating that companys personnel, operations, customers,
technology or products and service offerings into our own. The key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses,
consume cash resources, and adversely affect our results of operations. We may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing shareholders. We may
also incur impairment charges for goodwill and other assets acquired related to acquired companies.

Our business may
become increasingly susceptible to numerous risks associated with international operations.

Our facilities are located
in North America, Israel, and Australia. This geographic dispersion consumes significant management resources that may place us at a disadvantage compared to our locally based competitors. In addition, our international operations are generally
subject to a number of risks, including:



| |  |  | differing technology standards and language requirements;
| | - |  | ---------------------------------------------------------



| |  |  | changing product and service requirements in response to the formation of economic and marketing unions, including the European Economic Union;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | economic or political changes in international markets;
| | - |  | -------------------------------------------------------



| |  |  | the uncertainty of protection for intellectual property rights in some countries; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | multiple and possibly overlapping tax structures.
| | - |  | -------------------------------------------------



| |  |  | foreign currency exchange rate fluctuations;
| | - |  | --------------------------------------------



| |  |  | longer sales cycles;
| | - |  | --------------------



| |  |  | multiple, conflicting and changing governmental laws and regulations;
| | - |  | ---------------------------------------------------------------------



| |  |  | greater dependency on partners;
| | - |  | -------------------------------



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| |  |  | time zone and cultural differences;
| | - |  | -----------------------------------



| |  |  | protectionist laws and business practices that favor local competition;
| | - |  | -----------------------------------------------------------------------



| |  |  | difficulties in collecting accounts receivables and longer collection; and
| | - |  | --------------------------------------------------------------------------



| |  |  | political and economic instability.
| | - |  | -----------------------------------

We expect international revenue to increase as a percentage of total revenue, and we believe that we must continue to expand our
international sales and professional services activities in order to be successful. Our international sales growth will be limited if we are unable to expand our international sales management and professional services organizations either through a
direct presence in local markets or through channel partners. If we fail to manage our geographically dispersed organization, we may fail to execute our business plan, and our revenues may decline.

Risks Related to the Ownership of our Ordinary Shares

Our Ordinary Shares are quoted on the Over the Counter Bulletin Board and previously were quoted on the Pink Sheets, which has
adversely affected, and may continue to adversely affect, the market price of, and trading market for, our Ordinary Shares.

On June 12, 2007 our Ordinary Shares were delisted from NASDAQ SmallCap Market (now known as the NASDAQ Capital Market) and became
eligible for quotation and trading on the Pink Sheets. On December 14, 2007, our Ordinary Shares became eligible for quotation and trading on the OTCBB under the ticker symbol VRYAF.OB. On September 11, 2008, due to our delinquency with
respect to the filing of our annual report on Form 20-F for the year ended December 31, 2007, our Ordinary Shares ceased to be eligible for quotation on the OTCBB and were removed from the OTCBB. Following the removal from the OTCBB, our
Ordinary Shares became immediately eligible for quotation and trading on the Pink Sheets. On March 4, 2010, our Ordinary Shares became eligible once again for quotation and trading on the OTCBB.

The limited volume of trading in our Ordinary Shares on the OTCBB and the Pink Sheets has materially impaired, and may continue to
materially impair, the ability of our shareholders to buy and sell our Ordinary Shares, and has had, and could continue to have, an adverse effect on the market price and the trading market for our Ordinary Shares. Such factors could also
significantly impair our ability to raise capital should we desire to do so in the future or to utilize our Ordinary Shares as consideration in acquisitions. Furthermore, should we once again fail to remain current with our Exchange Act reporting,
our Ordinary Shares could once again be removed from the OTCBB and be quoted on the Pink Sheets, which would exacerbate the above-identified problems related to liquidity, market price and trading market for our Ordinary Shares.

The market price of our Ordinary Shares may be volatile and you may not be able to resell your shares at or above the price you
paid, or at all.

The stock market in general has recently experienced extreme price and volume fluctuations. The
market prices of securities of technology companies have been extremely volatile, and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations
could adversely affect the market price of our Ordinary Shares. The market price of our Ordinary Shares increased significantly during the last year, from $0.21 on December 31, 2008 to $1.20 on December 31, 2009, but declined during the
first five months of 2010, to $0.95 on May 31, 2010, and may continue to fluctuate substantially due to a variety of factors, including:



| |  |  | the limited volume of trading in our Ordinary Shares on the OTCBB;
| | - |  | ------------------------------------------------------------------



| |  |  | any anticipated or actual fluctuations in our financial condition and operating results;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our inability to meet any guidance or forward looking information, if provided;
| | - |  | -------------------------------------------------------------------------------



| |  |  | public announcements concerning us or our competitors;
| | - |  | ------------------------------------------------------



| |  |  | the introduction or market acceptance of new service offerings by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | changes in security analysts financial estimates for us or other companies;
| | - |  | ----------------------------------------------------------------------------



| |  |  | changes in generally accepted accounting principles that impact how we calculate our financial results;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | sales of our Ordinary Shares by existing shareholders;
| | - |  | ------------------------------------------------------



| |  |  | the limited market for our shares;
| | - |  | ----------------------------------



| |  |  | the use of our Ordinary Shares for the acquisition of the outstanding shares or assets of other companies;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | our need to raise additional capital through private or public debt or equity financings;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | changes in political conditions in Israel; and
| | - |  | ----------------------------------------------



| |  |  | the current economic uncertainty in the U.S. and globally.
| | - |  | ----------------------------------------------------------

In the past, securities class action litigation has often been brought against companies following periods of volatility in the market
prices of their securities. We may be the target of such litigation in the future. Securities litigation could result in substantial costs and divert our managements attention and resources, which could cause serious harm to our business.

We have never paid cash dividends and have no intention to pay cash dividends in the foreseeable future.

We have never paid cash dividends on our Ordinary Shares and do not anticipate paying any cash dividends in the
foreseeable future. We intend to retain earnings, if any, for use in financing our operations and expanding our business, in particular to fund our research and development and sales and marketing activities, which enable us to capitalize on
technological changes and new market opportunities. Any future dividend distributions are subject to the discretion of our board of directors and will depend on various factors, including our operating results, future earnings, capital requirements,
financial condition, tax impact of dividend distributions on our income, future prospects and any other factors deemed relevant by our board of directors. The distribution of dividends also may be limited by Israeli law, which allows the
distribution of dividends out of retained earnings only upon the permission of the court. You should not rely upon an investment in our Ordinary Shares if you require dividend income from your investment.

Future sales of our Ordinary Shares in the public market or issuances of additional securities could cause the market price for our
Ordinary Shares to fall.

Since August 4, 2003, which marked the initial point at which we needed to raise
additional capital after our IPO, the number of shares that we have outstanding has increased substantially. The increase in the number of our outstanding shares has been primarily due to (i) private equity and convertible debt financings which
have raised approximately $13.6 million (excluding transaction-related expenses) from 2003 to the present time (see Liquidity and Capital Resources section under Item 5 



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How We Have Financed Our Business; Source of Cash), (ii) our acquisition of Utility Partners, Inc. in July 2004, which resulted in the issuance of 179,697 Ordinary Shares, and (iii) our
acquisition of e-Wise Solutions in June of 2005, which resulted in the issuance of an aggregate of 111,156 Ordinary Shares.

As of June 1, 2010, there were also outstanding warrants to purchase an additional 663,604 of our Ordinary Shares at exercise prices
ranging from $1.25 to $10.50 per share, and we have reserved up to 828,000 Ordinary Shares for issuance under our share option plans, under which 36,534 options have been exercised and the restrictions on 400,353 restricted shares have lapsed as of
June 1, 2010. In addition, the balance of our convertible debt owed to LibertyView, in a principal amount of $480,000, may be converted by LibertyView at any time into our Ordinary Shares at an exercise price of $11.025 per share. The sale, or
availability for sale, of such substantial quantities of our Ordinary Shares may have the effect of further depressing the market price of our stock. In addition, a large number of our Ordinary Shares that were previously subject to resale
restrictions are currently eligible or shall soon be eligible for resale into the public market.

We may continue to issue
equity or convertible securities, and the issuance of such securities could be dilutive to our shareholders. Certain warrants and options, when issued, may be valued at fair value, and we may therefore be required to reflect appropriate charges to
our income in our financial statements as of the time of issuance. We have provided registration rights in the past to certain shareholders and may continue to do so in the future, which would ease the resale of Ordinary Shares that would otherwise
be subject to securities law resale restrictions, thereby potentially contributing to the depression of the market price of our Ordinary Shares.

Our executive officers, directors and affiliated entities will be able to influence matters requiring shareholder approval and they
may disapprove actions that you vote to approve.

As of June 1, 2010, our executive officers and directors serving
as of such date, and entities affiliated with them, in the aggregate, beneficially owned approximately 52.3% of our outstanding Ordinary Shares, which includes Ordinary Shares issuable under options and warrants to purchase Ordinary Shares which are
exercisable or will become exercisable within 60 days of June 1, 2010 and all Ordinary Shares which may be issued upon conversion of Preferred A Shares. Such percentage does not take into account restricted Ordinary Shares that have been
granted to executive officers and directors, the restrictions related to which will lapse more than 60 days after June 1, 2010. These shareholders, if acting together, will be able to significantly influence all matters requiring approval by
our shareholders, including the election of directors and the approval of mergers or other business combination transactions.

Risks Related to Our Location in Israel

It may be difficult to effect service of process and enforce judgments against directors, officers and experts in Israel.

We are organized under the laws of the State of Israel. Several of our executives, directors, certain research and development
employees, and some of the experts upon whom we rely for key services, are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside of the United States. Therefore, it may be
difficult to enforce a judgment obtained in the United States against us or any of those persons. It may also be difficult to enforce civil liabilities under United States federal securities laws in actions instituted in Israel.

Political, economic and military conditions in Israel could negatively impact our business.

Our principal research and development facilities are located in Israel. We are directly influenced by the political, economic and
military conditions affecting Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, which varies in degree and intensity, has
caused security and economic problems in Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. We cannot assure you that
ongoing or revived hostilities related to Israel will not have a material adverse effect on us or our business and on our share price. Several Arab countries still restrict business with Israeli companies and these restrictions may have an adverse
impact on our operating results, financial condition or the expansion of our business. We could be adversely affected by restrictive laws or policies directed towards Israel and Israeli businesses. Despite the progress towards peace between Israel
and its Arab neighbors, the future of these peace efforts is uncertain and although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began
in September 2000 and has continued with varying levels of severity into 2010. Recently, there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities in December 2008 and
January 2009 along Israels border with the Gaza Strip, which resulted from missiles being fired from the Gaza Strip into Southern Israel. There were also extensive hostilities along Israels northern border with Lebanon in the summer of
2006. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and cause our revenues to decrease.

In addition, Israeli companies and some companies doing business with Israel have been the subject of an economic boycott by Arab
countries and their close allies since Israels establishment. To date, these matters have not had any material effect on our business and results of operations, but there can be no assurance that they will not have any impact in the future.

Generally, all male adult citizens and permanent residents of Israel, under the age of 45 in some cases, are, unless exempt,
obligated to perform up to 36-45 days of military reserve duty annually. Additionally, all Israeli residents of such ages are subject to being called to active duty at any time under emergency circumstances. Many of our employees are currently
obligated to perform annual reserve duty. Although we have operated effectively under these requirements since we began operations, we cannot assess the full impact that these requirements may have on our workforce or business if political and
military conditions should change, neither can we predict the effect on us that may result from any expansion or reduction of these obligations.

We may be adversely affected if the NIS appreciates against the dollar or if the rate of devaluation of the NIS against the dollar
is exceeded by the rate of inflation in Israel.

Most of our revenues are in U.S. dollars or are linked to the U.S.
dollar, while a portion of our expenses, principally salaries and the related expenses for our Israeli operations, are incurred in NIS. We do not utilize hedging to manage currency risk, and, therefore, are exposed to the 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 such rate of devaluation or that the timing of such devaluation will lag behind inflation in
Israel. Any of such scenarios would result in increased dollar cost of our operations. In 2008 and 2009, the NIS appreciated relative to the dollar by approximately 1.1% and 0.7% respectively, and the Israeli consumer price index furthermore
increased at the rate of 3.8% and 3.9% respectively, thereby further escalating the increase in the dollar cost of our Israeli operations. NIS-linked balance sheet items may create foreign exchange gains or losses, depending upon the relative dollar
values of the NIS at the beginning and end of the reporting period, thereby affecting our net income and earnings per share. We cannot predict any future trends in the rate of inflation in Israel or the rate of appreciation or devaluation of the NIS
against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected.

Tax benefits that are available to us from the Investment Center of the Israeli Ministry of Industry, Trade and Labor require us to
meet several conditions and may be terminated or reduced in the future, which would increase our future tax expenses.

We receive tax benefits under Israeli law for capital investments that are designated as approved enterprises. To maintain our eligibility
for these tax benefits, we must continue to meet conditions stipulated in applicable law and in our specific approvals, including making specified investments in fixed assets and employing minimum number of skilled employees. If we fail to comply
with these conditions, in whole or in part, with respect to any approved enterprise program we establish, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates, and we would
likely be denied these benefits in the future. We may submit requests for new programs to be designated as approved enterprises. These requests might not be approved, particularly in light of



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difficult economic conditions in Israel. In addition, in March 2005, the law governing these tax benefits was amended to revise the criteria for an investment that qualifies for tax benefits as
an approved enterprise. We cannot assure you that we will, in the future, be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits could seriously harm our financial condition and results of
operations.

Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be
unable to prevent our competitors from benefiting from the expertise of some of our former employees.

We currently
have non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors. Israeli courts have in the past required employers seeking to
enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the
secrecy of a companys confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former
employees.

The government grants we have received for research and development expenditures restrict our ability to
manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions.

From
time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel (OCS) under the Encouragement of Industrial Research and Development, 1984, or
the Research and Development Law, and the regulations promulgated thereunder. The terms of these grants prohibit us from manufacturing more than 10% of the products developed using these grants outside of Israel without special approvals. There is
no assurance that we will receive such OCS approval. Even if we receive approval to manufacture these products outside of Israel, we may be required to pay increased royalties, up to 300% of the grant amount plus interest, depending on the portion
of the total manufacturing volume that is performed outside of Israel. A recent amendment to the Research and Development Law further permits the OCS, among other things, to approve the transfer of manufacturing rights to outside of Israel in
exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The Research and Development Law also allows for the approval of grants in cases in which the applicant declares that part of the
manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of
the OCS whether to approve a program and the amount and other terms of benefits to be granted. For example, the increased royalty rate and repayment amount will be required in such cases. If we elect to transfer more than an insubstantial portion of
our manufacturing processes to contractors outside of Israel, we may be required to obtain the consent of the OCS and pay higher royalties to the OCS.

The Research and Development Law also provides that the technology and know-how developed under an approved research and development
program may not be transferred to third parties inside or outside of Israel without the approval of the OCS (and, in the case of a transfer outside of Israel, absent certain circumstances). Such approval is not required for the sale or export of any
products resulting from such research or development. Even if we receive approval to a transfer of technology outside of Israel, a percentage of the consideration paid for such transfer equal to the ratio of the aggregate amount of OCS grants
received by us to the aggregate amount of all cash investments made in such technology, including the OCS grants, must be paid to the OCS.

These restrictions may impair our ability to outsource manufacturing or engage in similar arrangements for those products or
technologies. In addition, if we fail to comply with any of the conditions imposed by the OCS, we may be required to refund any grants previously received, together with interest and penalties, and we may be subject to criminal charges.

Our United States investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Although we believe that we will not be treated as a passive foreign investment company in 2009, we cannot assure our
shareholders that we will not be treated as a passive foreign investment company in 2010 or in future years. We would be a passive foreign investment company if (i) 75% or more of our gross income in a taxable year, including the pro rata share
of the gross income of any company, US or foreign, in which we are considered to own 25% of the shares by value, is passive income, or (ii) at least 50% of the average value of our assets (or possibly the adjusted bases of our assets in
particular circumstances), including the pro rata share of the assets of any company in which we are considered to own 25% of the shares by value, in a taxable year produce, or are held for the production of, passive income. Passive income includes
interest, dividends, royalties, rents and annuities. If we are or become a passive foreign investment company, many of our shareholders will be subject to adverse tax consequences, including:



| |  |  | taxation at the highest ordinary income tax rates in effect during a shareholders holding period on some distributions on our Ordinary Shares and
gain from the sale or other disposition of our Ordinary Shares;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the obligation to pay interest on taxes allocable to prior periods; and
| | - |  | -----------------------------------------------------------------------



| |  |  | no increase in the tax basis for our Ordinary Shares to fair market value at the date of a shareholders death.
| | - |  | ---------------------------------------------------------------------------------------------------------------



|Item 4. | Information on the Company
|------- | --------------------------

History and Development of the Company

Both our legal and commercial name is ViryaNet Ltd. We were incorporated and registered in Israel on March 13, 1988 under the name
R.T.S. Relational Technology Systems Ltd. We changed our name to RTS Business Systems Ltd. on September 7, 1997 and to RTS Software Ltd. on February 1, 1998. On April 12, 2000, we changed our name to ViryaNet Ltd. The principal
legislation under which we operate is the Israeli Companies Law, 5759-1999, as amended, which we refer to as the Companies Law.

Our registered office is located at 8 HaMarpe Street, Science Based Industries Campus, P.O. Box 45041, Har Hotzvim, Jerusalem, 91450,
Israel, and our telephone number is 972-2-584-1000. We have appointed our United States subsidiary, ViryaNet, Inc., located at 2 Willow Street, Southborough, Massachusetts 01745-1027, as our agent for service of process.

Over the past 22 years, we have developed, marketed, and supported field service software applications that have provided companies with
solutions that improve the quality and efficiency of complex service business processes. During this period of time, numerous customers around the world have deployed our solutions.

On September 19, 2000, we completed our initial public offering, or IPO, and our Ordinary Shares began trading on the Nasdaq
National Market (now known as the NASDAQ Global Market). Pursuant to the IPO, we issued and sold 80,000 Ordinary Shares for net proceeds of approximately $25.6 million.

On October 29, 2001 our Ordinary Shares began trading on the Tel Aviv Stock Exchange in Israel and we became a dual listed company.
On March 4, 2004, we requested to be delisted from the Tel Aviv Stock Exchange, and following such request, we received the confirmation of the Tel Aviv Stock Exchange that our Ordinary Shares were delisted on June 3, 2004.



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On February 25, 2002, we acquired the outstanding shares of iMedeon, a provider of
mobile workforce management solutions to the utilities sector. iMedeon was a privately held company, headquartered in Alpharetta, Georgia. As a result of the acquisition, iMedeon became a wholly-owned subsidiary of ViryaNet, Inc., which is a
wholly-owned subsidiary of ViryaNet Ltd.

On May 1, 2002, we effected a one (1) for ten (10) reverse share
split, issuing one new Ordinary Share, of NIS 1.0 par value per share, in exchange for every ten Ordinary Shares, of NIS 0.1 par value per share, that were then outstanding.

On September 5, 2002, we were notified by the Nasdaq National Market (now known as the NASDAQ Global Market) that we were not in
compliance with then Nasdaq Marketplace Rule 4450(a)(2) (currently Nasdaq Listing Rule 5450(b)(1)(C)) since we were unable to maintain a minimum market value of $5,000,000 for our publicly held shares, and were informed that we had until
December 4, 2002 to regain compliance. Due to the economic and market conditions affecting our valuation, we concluded that we would request a transfer of our securities listing from the Nasdaq National Market to the Nasdaq SmallCap Market
(which later became known as the Nasdaq Capital Market). The transfer was approved on December 20, 2002 and the trading of our Ordinary Shares on the Nasdaq SmallCap Market began on December 31, 2002.

On July 29, 2004, we acquired the outstanding shares of Utility Partners, a provider of mobile workforce management solutions to the
utilities sector. Utility Partners was a privately held company, headquartered in Tampa, Florida. As a result of the acquisition, Utility Partners became a wholly-owned subsidiary of ViryaNet, Inc., which is a wholly-owned subsidiary of ViryaNet
Ltd.

On June 15, 2005, we acquired, through our newly formed Australian subsidiary ViryaNet Pty Ltd, substantially all
of the assets of e-Wise Solutions of Australia, a provider of front-office automation solutions to the utilities sector. e-Wise was a privately held business, headquartered in Melbourne, Australia. ViryaNet Pty Ltd is a wholly-owned subsidiary of
ViryaNet, Inc.

On January 17, 2007, we effected a one (1) for five (5) reverse share split, issuing one new
Ordinary Share, of NIS 5.0 par value, in exchange for every five Ordinary Shares, of NIS 1.0 par value, then outstanding, and issuing one (1) new Preferred A Share, of NIS 5.0 par value, in exchange for every five (5) Preferred A Shares,
of NIS 1.0 par value then outstanding.

On April 23, 2007, we dissolved our Japanese subsidiary, ViryaNet Japan K.K., and
replaced our direct presence in Japan with a reseller arrangement with a firm based in Tokyo, Japan, Octpark Ltd., led by the former general manager for ViryaNet Japan. Octpark Ltd. provides sales and support activities for ViryaNet products to our
existing customers and new customers in the Japanese market. Prior to the dissolution, our office lease expired on November 30, 2006 and we terminated the remainder of our full-time employees in Japan effective December 31, 2006.

On June 4, 2007, we voluntarily requested from the NASDAQ Stock Market that our Ordinary Shares be delisted from the
NASDAQ Capital Market on June 11, 2007. We were subsequently advised by Nasdaq that our Ordinary Shares would be delisted from the NASDAQ Capital Market on June 12, 2007, at which time our Ordinary Shares became immediately eligible for
quotation and trading on the Pink Sheets. On December 14, 2007, our Ordinary Shares began to be quoted and traded on the OTCBB under the trading symbol VRYAF.OB.

On September 11, 2008, due to our delinquency with respect to the filing of our annual report on Form 20-F for the period ended
December 31, 2007, our Ordinary Shares ceased to be eligible for quotation on the OTCBB and were removed from quotation on the OTCBB. Following the removal from the OTCBB, our Ordinary Shares became immediately eligible for quotation and
trading on the Pink Sheets.

On March 4, 2010, our Ordinary Shares became eligible again for quotation and trading on the
OTCBB.

Our cash used towards capital expenditures (i.e., for the purchase of property and equipment) has been $7,000, $32,000
and $194,000 for the years ended December 31, 2009, December 31, 2008, and December 31, 2007, respectively. We believe that our capital expenditure program is sufficient to maintain our current level and quality of operations. We
review our capital expenditure program periodically and modify it as required to meet current needs. For 2010, we anticipate spending approximately $75,000 towards capital expenditures.

Business Overview

We are a provider of packaged software applications that automate business processes for mobile workforce management and field service
delivery. Optimizing both simple and complex field service work, our solutions schedule and dispatch resources, enable mobile field communication, and provide visibility and operational guidance. Our mission is to provide companies with solutions
that improve the quality and efficiency of their service business processes and achieve new levels of operational excellence through automation, agility, and visibility of the Plan-Execute-Monitor business processes. We also provide professional
services required to implement and support our software solutions. We have approximately 60 customers worldwide, whom we service from our support offices in the United States, Israel, and Australia.

We target companies in the utility, telecommunications, retail, auto insurance and general service industries that have distributed
mobile workforces, strong commitments to customer satisfaction, extensive service agreements, and a need to improve their service operations. We believe that these industries provide substantial growth opportunities for our products and services.

Our historical growth has occurred organically as well as through acquisitions. In February 2002, we acquired Alpharetta,
Georgia-based iMedeon, Inc. In July 2004, we acquired another mobile workforce management company, Tampa, Florida-based Utility Partners, and in June 2005, we acquired substantially all of the assets of e-Wise Solutions of Australia, a provider of
front-office automation solutions to the utilities sector. These acquisitions have provided us with domain expertise, an installed base of customers in the utilities market, our primary market focus, and significant partnerships, and have
furthermore enabled us to incorporate additional features, functions and technology into our advanced product platform.

Business Strategy

Our goal is to become the leader in the mobile workforce management software market. We intend to achieve this goal by increasing our
sales and marketing efforts in North America, growing our business in target sectors through our partner network as well as through our direct sales force; increasing our revenues from Europe and Asia/Pacific by expanding our partner network, adding
resources in support of international activities, establishing a local presence in certain targeted geographic markets where a subsidiary structure is warranted; and intensifying our focus on account management and customer support to enable
follow-on sales into our installed base.

Markets

We deliver state-of-the-art solutions specific to the needs of key markets, including utilities, telecommunications and cable/broadband
companies, retail/grocery companies, insurance companies, and general service providers. We reach prospects within each of these markets through our direct sales force, supported by marketing campaigns, as well as through our partner network,
including, among others, GE Energy, Mitchell International, Telvent, Amdocs and Vodafone.



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Utilities. The utilities market targeted by us consists of electric, gas and water
companies. We see substantial opportunities within this market, as companies have a need to (i) add new technology to improve their service offering, (ii) replace their old technology in favor of an Internet and wireless-based solution
model, and (iii) continue with the initial build-out of their systems infrastructure, especially in developing geographies.

Telecommunications and Cable/Broadband. We target companies within the following segments of the telecommunications sector: cable and
satellite, data services, fixed line services, and wireless communications services providers.

Auto insurance. We sell into
the auto insurance market exclusively through our partner, Mitchell International.

Retail. Within the retail sector, we
target grocery companies, drug stores and pharmacies, retail marketing companies, and consumer packaged goods companies.

General Field Service. This includes heating, ventilation, and air conditioning; property maintenance; office and home
appliance/equipment maintenance; and security companies  many of which require mobile workforce management solutions. We evaluate these companies on a case-by-case business in the context of their size, business processes, as well as our
domain understanding and products fit.

Our revenues are derived mainly from the sale of software licenses
and from maintenance and services that we provide in support of our software. The following table describes, for the periods indicated, the percentage of revenues represented by each of the items on our consolidated statements of operations:



|                         |  |                         |   |  |       |   |  |       |  
|------------------------ |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                         |  | Year Ended December 31, |  
|                         |  | 2007                    |   |  | 2008  |   |  | 2009  |  
|Category of Revenues:    |  |                         |   |  |       |   |  |       |  
|Software licenses        |  | 15.9                    | % |  | 12.1  | % |  | 14.5  | %
|Maintenance and services |  | 84.1                    | % |  | 87.9  | % |  | 85.5  | %
|                         |  |                         |   |  |       |   |  |       |  
|Total Revenues           |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %

The following table
breaks down the revenues from our products and services by geographic market, stated as a percentage of total revenues for the periods indicated:



|              |  |                         |   |  |       |   |  |       |  
|------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|              |  | Year Ended December 31, |  
|Country       |  | 2007                    |   |  | 2008  |   |  | 2009  |  
|United States |  | 78.9                    |   |  | 84.9  |   |  | 86.9  |  
|Europe        |  | 9.0                     |   |  | 3.9   |   |  | 4.1   |  
|Asia Pacific  |  | 12.1                    |   |  | 11.2  |   |  | 9.0   |  
|              |  |                         |   |  |       |   |  |       |  
|Total         |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %

The majority of our
sales personnel operates through our United States subsidiary and covers North America, Europe and portions of Asia Pacific, and the rest operate through our subsidiary in Australia. Our sales and marketing staff consists of professionals in a
variety of fields, including marketing and media relations, direct sales, technical sales consultants, product management, and business development. As of December 31, 2009, we employed 11 sales, marketing, product management and business
development personnel.

We intend to expand our marketing and implementation capacity through the use of third parties,
including systems integrators, vendors of complementary products and providers of service applications. By employing third parties in the marketing and implementation process, we expect to enhance sales by taking advantage of the market presence of
these third parties.

Our North American strategy utilizes a direct sales model, supplemented by key partners like GE Energy
and Mitchell International. Our international strategy uses a combination of direct and indirect sales channels in order to sell effectively into local markets and perform certain implementation activities on our behalf. We expect to benefit from
marketing programs and leads generated by these partners, as well as from cooperation from the sales forces of these partners in sales opportunities. In certain targeted geographic markets where growth opportunities in our key vertical markets
support a local presence, such as Australia, we may determine that the investment in a subsidiary structure is warranted. Otherwise, we will continue to explore and establish indirect sales channels through relationships with agents, local resellers
who offer complementary products and solutions, global systems integrators, and application service providers.

In Europe, we
continue to utilize our global partners GE Energy, Telvent and Amdocs, along with our partner Vodafone, which has developed a specialized practice dedicated to the implementation of ViryaNets solutions and providing post-contract maintenance
and support. All of our partners and their customers are supported by our business development, customer care, and professional services organizations in the United States, Israel, and Australia.

Application service providers are used to provide our product to customers who wish to avoid the initial cost of our product combined
with the required hardware platforms and infrastructure investments. Through an application service provider, customers will be billed a monthly rental or subscription fee. We have three partners that have hosting capability, offering our products
in software as a service (SaaS) model: Vodafone, Mitchell International, and Vertex Group.

ViryaNet G4 Product Suite

ViryaNets fourth generation product suite, G4, provides web-based solutions which optimize the full life cycle
of field service operations, including the creation of work orders, scheduling and dispatching field personnel, tracking equipment under warranty, managing spare parts inventory and receiving real-time reports from the field. ViryaNet typically
issues one major version release of ViryaNet G4 every one to two years.

ViryaNet currently packages G4 for specific
industries by seeking to capture best business practices and embedding those functions into the G4 components, incorporating processes, workflows, reports, and screens appropriate for companies in ViryaNets target industries. These best
practices, coupled with powerful features, allow ViryaNet to package G4 into industry solutions, including:



| |  |  | ViryaNet G4 for Utilities
| | - |  | -------------------------



| |  |  | ViryaNet G4 for Telecommunications
| | - |  | ----------------------------------



| |  |  | ViryaNet G4 for Retail
| | - |  | ----------------------



| |  |  | ViryaNet G4 for Insurance
| | - |  | -------------------------



| |  |  | ViryaNet G4 for General Field Service
| | - |  | -------------------------------------



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ViryaNet G4 is built using open standards (Java, XML), common to Internet, wireless, and
workflow technologies, allowing customers to adapt and easily integrate ViryaNet G4 to their continuously changing conditions. ViryaNet G4 includes an information service portal that provides community access and collaboration; business intelligence
for real-time reporting, analysis, and responsive action; workflow-driven business processes; a powerful integration server and application program interface (API) set that interfaces to other applications, including enterprise resource planning
(ERP) applications, customer relationship management (CRM) applications, data warehouses and other commonly used service applications; and a mobile gateway that allows mobile users to access and communicate service information using a wide variety
of devices over popular wire-line and wireless networks.

With ViryaNet G4, a service organization can quickly transition its
complex business processes into a manageable, scalable Internet operation, with goals of increasing efficiency, quality of service, customer satisfaction, customer retention, and profitability. Using ViryaNet G4, ViryaNets customers can manage
the continuum of their service operations, from ensuring that the right person is in the right place at the right time with the right parts and information about the customer, to automating the repair processes utilizing the Internet and at the
least cost.

ViryaNet G4 Innovation:

Unlike other field service management products, G4 provides solutions that truly work for dynamic and complex workforce scheduling and
dispatch environments by providing:



| |  |  | The industrys only auto calibration, priority-based optimization technology for scheduling and dispatching resources that allow organizations to
continually meet their SLA requirements in highly dynamic environments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The industrys only platform that provides a Business Process Management (BPM) methodology for exception management that allows complex scheduling
and dispatching processes to be automatically adapted to real time exceptions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The industrys only extensible and open application architecture platform that allows organizations to lower their overall cost of ownership and
utilize best of breed enterprise applications.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Modular ViryaNet G4

ViryaNets modular G4 offering allows customers to leverage G4s advanced components integrated with their
existing solutions. G4s modules include:



| |  |  | The Planning Module for strategic, tactical, and operational work order and resource planning.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | The Execution Module for the office and field workforces.
| | - |  | ---------------------------------------------------------



| |  |  | The Monitoring Module for executive and operational management to stay in the know.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | The Infrastructure Module to deploy, integrate, and configure G4 and model a specific environment.
| | - |  | --------------------------------------------------------------------------------------------------

ViryaNet G4 Execution Module

The ViryaNet G4 Execution Module provides ViryaNets customers with the appropriate solutions to automate dispatch, field and
inventory functions in their business process. Appropriate levels of automation reduce the routine demands on ViryaNets customers staff, allowing them to proactively focus on exceptions to the plan.

The Execution Module contains specific components providing customers the dispatch, field and inventory functions for operational
excellence. These components are:



| |  |  | Dispatch Component
| | - |  | ------------------



| |  |  | Field Component
| | - |  | ---------------



| |  |  | Inventory Component
| | - |  | -------------------

ViryaNet G4 Dispatch

ViryaNet Dispatch provides a number of configurable dashboards that allow the dispatcher to manage exceptions to the work being scheduled.
The dispatch boards show all work for a configured group of regions and resources; allow the dispatcher to monitor the status; highlight exceptions that require attention; and provide several means to assign unscheduled work.

Key features of ViryaNet Dispatch include:



| |  |  | Resource Management
| | - |  | -------------------



| |  |  | Work Order Management
| | - |  | ---------------------



| |  |  | Dispatch Management
| | - |  | -------------------

ViryaNet G4 Field

ViryaNet Field provides world class enterprise level functionality configured to ensure productivity of ViryaNets customers
workforce. ViryaNet Field can be accessed through various platforms, including the world class Mobile Computing Platform tool (MCP) that supports both on-line and off-line management of work in the field. MCP supports many devices, from ruggedized
laptops to mobile phones. These different devices can be deployed in tandem and configured based on the work type and the needs in the field.

Key features of ViryaNet Field include:



| |  |  | Work
| | - |  | ----



| |  |  | Time
| | - |  | ----



| |  |  | Resource
| | - |  | --------



| |  |  | Alerts & Messages
| | - |  | -----------------



| |  |  | Connectivity
| | - |  | ------------



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ViryaNet G4 Inventory

ViryaNet Inventory supports full inventory tracking, including the maintenance of van stock in the field; reporting of parts usage and
returns by the mobile technician; centralized and local warehouses; and full replenishment based on a configurable replenishment path.

ViryaNet Inventory also includes capabilities for purchasing parts both centrally and in the field; tracking of serialized parts; the
tracking of returned and faulty equipment; and the costing of both used and stored inventory.

Key features of ViryaNet
Inventory include:



| |  |  | Part Request
| | - |  | ------------



| |  |  | Asset Management
| | - |  | ----------------



| |  |  | Inventory Controls
| | - |  | ------------------



| |  |  | Supplies
| | - |  | --------

ViryaNet G4 Planning Module

The Planning Module contains specific components to build the optimal organization for ViryaNets customers to achieve operational
excellence. These components are:



| |  |  | Strategic Planning Component
| | - |  | ----------------------------



| |  |  | Tactical Planning Component
| | - |  | ---------------------------



| |  |  | Optimizer Component
| | - |  | -------------------

ViryaNet G4 Strategic Planning Component

ViryaNet Strategic Planning provides the capability to forecast future demand for work and plan the appropriate resource response to that
forecasted level. These capabilities are an integral step in optimizing service operations schedules for today, tomorrow, and the future.

Key features of ViryaNet Strategic Planning include:



| |  |  | Statistical Calculations
| | - |  | ------------------------



| |  |  | Workforce Analysis
| | - |  | ------------------



| |  |  | Plan Monitoring
| | - |  | ---------------

ViryaNet G4 Tactical Planning Component

ViryaNet Tactical Planning provides a short term planning of the known workload based on partially completed or future planned/known
activities, and the solution is based on scheduling, appointment booking and accompanying business processes.

The key feature
of ViryaNet Tactical Planning is:



| |  |  | Backlog Management
| | - |  | ------------------

ViryaNet G4 Optimizer Component

ViryaNet Optimizer, based upon heuristic algorithms, provides high-volume and project-based optimized work order scheduling unsurpassed in
the industry. With a range of scheduling options, the automation available in this cutting-edge component frees up dispatch staff, allowing them to proactively resolve exceptions to the plan using other integrated ViryaNet components, like the
ViryaNet Dispatch Component.

Key features of ViryaNet Optimizer include:



| |  |  | Schedule Optimization
| | - |  | ---------------------



| |  |  | Appointment Booking
| | - |  | -------------------

ViryaNet G4 Monitoring Module

The Monitoring Module contains components providing ViryaNets customers with appropriate automation to monitor their business
processes automated by the ViryaNet G4 solution. These components are:



| |  |  | Executive Dashboard Component
| | - |  | -----------------------------



| |  |  | Operational Dashboard Component
| | - |  | -------------------------------



| |  |  | Datamart Component
| | - |  | ------------------

ViryaNet G4 Executive Dashboard Component

The key goal of the ViryaNet G4 Executive Dashboard is to aid ViryaNets customers staff and executives in understanding what
happened in order to improve what will happen.

The ViryaNet Executive Dashboard produces historical analytical
reports and views. Data that is collected as a result of completing the work is extracted to a star-schema database. The information is formatted for easier reporting. The on-line views and reports provide executives the key analytical data to
support decisions about the efficiency of the work being completed.

The key feature of the ViryaNet Executive Dashboard is
Reporting.

ViryaNet G4 Operational Dashboard Component

The key goal of the ViryaNet G4 Operational Dashboard is to provide ViryaNets customers staff the automation necessary to
monitor what is happening right now in their organizations automated by ViryaNet G4 in order to speed their response to adversity.



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ViryaNet Operational Dashboard provides a real-time view that shows the status of work to be
scheduled; how technicians are performing in the field compared to plan; how the day is going based on meeting appointment commitments; and how emergency orders are being processed, and furthermore provides alerts that can highlight areas to take
action against. This tool is designed to allow the user to react to a problem now rather than after-the-fact and thereby reduce the impact on the users customers.

Key features of ViryaNet Operational Dashboard include:



| |  |  | Application Connector
| | - |  | ---------------------



| |  |  | Business Activity Monitoring
| | - |  | ----------------------------

ViryaNet G4 Datamart Component

The ViryaNet Datamart detects and extracts changed records, in batch, using ETL, from the ViryaNet G4 operational database. The Datamart
transforms the extracted data using Metadata defined mappings, groupings and business rules, and stores the data as defined by the Datamart Schema.

The ViryaNet Datamart is an optional component of ViryaNet G4, but is required for use of the ViryaNet G4 Operational Dashboard and
ViryaNet G4 Strategic Planning Components.

Key features of ViryaNet Datamart include:



| |  |  | ETL
| | - |  | ---



| |  |  | Metadata
| | - |  | --------



| |  |  | Schema
| | - |  | ------

ViryaNet G4 Infrastructure Module

The ViryaNet G4 Infrastructure Module simplifies the implementation and eases the operation of the ViryaNet G4 functional components.
Using user-friendly tools, the solution is fit perfectly into ViryaNets customers environment. Operations are a snap with the delivery of a quality solution and the right technology tools for ViryaNets customers IT staff to
support it.

The Infrastructure Module contains specific components as tools to implement, configure, and maintain the G4
solution. These components are:



| |  |  | Model Component
| | - |  | ---------------



| |  |  | Configure Component
| | - |  | -------------------



| |  |  | Integrate Component
| | - |  | -------------------



| |  |  | Deploy Component
| | - |  | ----------------

ViryaNet G4 Model Component

ViryaNet Model allows each customer to define its unique environment with respect to all of the powerful functions in the ViryaNet G4
Product Suite.

Key features of ViryaNet Model include:



| |  |  | Resource Model
| | - |  | --------------



| |  |  | Work Order Model
| | - |  | ----------------



| |  |  | Stock Model
| | - |  | -----------



| |  |  | Customer Model
| | - |  | --------------



| |  |  | Service Model
| | - |  | -------------

ViryaNet G4 Configure Component

ViryaNet Configure provides the tools to make the ViryaNet G4 Product Suite perform to match specified business processes. This includes
the ability to add unique data elements using G4s user-defined fields functions and non-proprietary forms tool.

Key
features of ViryaNet Configure include:



| |  |  | Administration
| | - |  | --------------



| |  |  | Configuration
| | - |  | -------------



| |  |  | Extensibility
| | - |  | -------------

ViryaNet G4 Integrate Component

ViryaNet Integrate allows ViryaNets customers to put ViryaNets best-of-breed solution into any environment with standard
interfaces to todays popular applications as well as easy-to-use tools for their one-off applications.

Key features of
ViryaNet Integrate include:



| |  |  | Adaptors
| | - |  | --------



| |  |  | Tools
| | - |  | -----

ViryaNet G4 Deploy Component

ViryaNet Deploy ensures that ViryaNet G4 fits into existing environments and that ViryaNets customers can lock down access to only
their authorized users.



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##### Table of Contents

Key features of ViryaNet Deploy include:



| |  |  | Platforms
| | - |  | ---------



| |  |  | Security
| | - |  | --------

ViryaNet Partnerships

The unique strength of the ViryaNet G4 platform, combined with our broad and modular service applications, has allowed us to form
strategic alliances with world-class systems integrators (SIs) and value-added resellers (VARs), including:



| |  |  | Amdocsa high technology company that offers integrated customer management solutions, enabling the worlds leading service providers
to build stronger, more profitable customer relationships. ViryaNet is a member of the Amdocs OSS ecosystem, selected as its primary mobile workforce management provider.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vodafonea European eBusiness solution provider, specializing in front-office applications for sales, marketing and customer service that
positions ViryaNet G4 and mobile workforce management applications in the UK, with vast reach into continental Europe. Vodafone acquired Aspective, our partner in the UK, in 2007.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | GE Energya business unit of GE Power Systems and leading global supplier of strategic network solutions to the utilities industry. GE has
integrated ViryaNet G4 and mobile workforce management application into its existing portfolio, and positions the ViryaNet offering to the utilities and telecommunications industry.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vertex Groupa provider of business process outsourcing services for companies across a number of vertical markets, including
utilities. Vertex offers, through its technologically advanced and highly secure data centers, the ViryaNet products to its customers who contract with Vertex to manage their applications and/or run their business processes in an outsourced
capacity. Vertex had acquired the utility services business of Alliance Data Systems in 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mitchell Internationala high technology provider that operates primarily within the United States, incorporates ViryaNet G4 and
application technology within its product offering intended exclusively for use in the auto insurance vertical market.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Telventthe information technology subsidiary for Abengoa, S.A. of Spain and an affiliate of ViryaNets shareholder, Telvent markets,
sells, and services ViryaNet solutions in the utilities, oil and gas, and telecommunications markets in Spain, Portugal and Latin America
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Competition

The markets for mobile workforce management applications and the automation of field service delivery are highly competitive, yet
fragmented and stratified, although a number of our traditional competitors have been acquired by larger companies. We compete for the business of global or nationwide organizations that seek to support complex and sophisticated products across a
variety of industries. We compete in the utilities and telecommunications segments of our markets against companies like Service Power Technologies, plc. Vista Equity Partners (via its acquisition of our competitors MDSI and Indus International),
ClickSoftware Ltd., Telcordia, and Intergraph Corporation. Our primary competitors in commercial and other general field service markets include enterprise application solution providers such as Astea International Inc. and Metrix Inc., along with
traditional ERP and CRM software application vendors such as Oracle Corporation and SAP A.G.

Many of our competitors may have
significant competitive advantages over us. These advantages may include greater technical and financial resources, more developed marketing and service organizations, greater expertise, and broader customer bases and name recognition than us. Our
competitors may also be in a better position to devote significant resources to the development, promotion and sale of their products, and to respond more quickly to new or emerging technologies and changes in customer requirements. Current and
potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase their ability to successfully market their products. We also expect that competition will increase as a result of
consolidations in the industry. To the extent that we develop new products, we may begin to compete with companies with which we have not previously competed. We cannot assure you that competition will not result in price reductions for our products
and services, fewer customer orders, deferred payment terms, reduced gross margins or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. A number of potential customers
have the ability to develop, in conjunction with systems integrators, software solutions internally, thereby eliminating the need for suppliers like us. This could result in reduced revenues or lost business for us.

Intellectual Property Rights

We rely primarily on a combination of trademarks, trade secret laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights, as well as limiting access to the distribution of proprietary information. We cannot assure you that the steps taken to protect our intellectual property rights will be adequate to prevent misappropriation of our
technology or to preclude competitors from independently developing such technology. Furthermore, we cannot assure you that, in the future, third parties will not assert infringement claims against us or with respect to our products.

As a general matter, the software industry is characterized by substantial litigation regarding patent and other intellectual property
rights. Third parties may claim that we are infringing their intellectual property rights. We have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products. There
can be no assurance that infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be
true, will not materially adversely affect our business, financial condition or operating results. In the event of any adverse ruling in any such matter, we could be required to pay substantial damages, which could include treble damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third-party claiming infringement. There can be no assurance that a license would be
available on reasonable terms or at all. Any limitations on our ability to market our products, any delays and costs associated with redesigning our products or payments of license fees to third parties or any failure by us to develop or license a
substitute technology on commercially reasonable terms could have a material adverse effect on our business, financial condition and operating results.

There can be no assurance that others will not develop technologies that are similar or superior to our technology, or design around any
licensing arrangements issued to us. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products or obtain and use information that we regard as proprietary. Policing any of such unauthorized uses of
our products is difficult, and although we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect
proprietary rights as fully as do the laws of the United States or Israel. There can be no assurance that our efforts to protect our proprietary rights will be adequate or that our competitors will not independently develop similar technology.



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Regulatory Framework

Government regulations have not had a material impact on our business.

Organizational Structure

We are organized under the laws of the State of Israel. We are the parent company of our direct and indirect wholly owned subsidiaries,
all of which are specified in the table below.



|                           |  |                                                    
|-------------------------- |  | ---------------------------------------------------
|Name of Subsidiary         |  | Country (and State, if applicable) of Incorporation
|ViryaNet, Inc.             |  | Delaware, USA                                      
|Utility Partners, Inc. (*) |  | Delaware, USA                                      
|iMedeon, Inc. (*)(**)      |  | Georgia, USA                                       
|ViryaNet Pty Ltd. (*)      |  | Australia                                          
|ViryaNet Europe Ltd.(**)   |  | United Kingdom                                     



|(*) | Wholly-owned subsidiary of ViryaNet, Inc.
|--- | -----------------------------------------

|(**) | Inactive
|---- | --------

Note: On April 23, 2007, we
formally dissolved our Japanese subsidiary, ViryaNet Japan KK.

Property, Plants and Equipment

We do not own any real property. We lease approximately 6,000 square feet of space in Jerusalem, Israel, used
primarily for research and development, with an annual rent of approximately $116,000. The lease agreement for these premises expires on October 31, 2010. Currently, we intend to seek to renew this lease agreement on similar terms or to seek
similar office space at approximately the same annual cost, if available.

ViryaNet, Inc., our subsidiary located in
Massachusetts, leases 10,007 square feet of office space in Southborough, Massachusetts, that is utilized primarily for administrative, marketing, sales, service and technical support purposes, with an annual rent of approximately $185,000. The
lease agreement for these premises expires on June 30, 2011.

Utility Partners, Inc., the subsidiary of ViryaNet, Inc.
located in Tampa, Florida, leases approximately 250 square feet of office space used primarily for services and technical support purposes. The lease agreement is renewable every six months upon mutual consent of the two parties with an annual rent
of approximately $20,000.

ViryaNet Pty Ltd., our subsidiary in Australia, leases approximately 1,700 square feet of office
space in Melbourne, Australia on a monthly basis with a total annual rent of approximately $21,000.



|Item 5. | Operating and Financial Review and Prospects
|------- | --------------------------------------------

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH YOUR REVIEW OF OUR SELECTED FINANCIAL DATA IN
ITEM 3 ABOVE AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN
AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. SEE CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS IMMEDIATELY PRIOR TO ITEM 1 ABOVE.

Overview

We are a provider of integrated mobile and Web-based software applications for workforce management and the automation of field service
delivery. In addition, we provide software applications for spare parts logistics, contract management, and depot repair operations. Our mission is to provide companies with solutions that improve the quality and efficiency of their complex service
business processes. With ViryaNet Service Hub, our principal product, a service organization can quickly transition its complex field service business processes into a manageable, scalable Internet operation, with goals of increasing efficiency,
quality of service, customer satisfaction, customer retention, and profitability. Using ViryaNet Service Hub, our customers can manage the continuum of their service operations, from ensuring that the right person is in the right place at the right
time with the right parts and information about the customer, to automating the repair processes utilizing the Web and at the least cost.

Overview of Revenues

We derive revenues from licenses of our software products and from the provision of related services. Our operating history shows that a
significant percentage of our quarterly software revenue results from orders placed toward the end of a quarter. Software license revenues are comprised of perpetual software license fees primarily derived from contracts with our direct sales
clients and indirect partner channels. We recognize revenues in accordance with FASB Accounting Standards Codification (ASC) 985-605-15 (originally issued as AICPA Statement of Position 97-2, Software Revenue Recognition, or
SOP 97-2, as amended), and ASC 605-35-05 (originally issued as AICPA Statement of Position 81-1, Accounting for Performance of ConstructionType and Certain ProductionType Contracts) and also adopted Staff Accounting Bulletin
(SAB) No. 104 Revenue Recognition (See Critical Accounting Policies and notes to our consolidated financial statements).

Services revenues are comprised of revenues from the performance of implementation, consulting, integration, customization, post-contract
maintenance support and training services. Implementation, consulting, integration, customization and training services are billed at an agreed-upon price plus incurred expenses. Customers that license our products generally purchase these services
from us or from our resellers and systems integrators. Post-contract maintenance support provides technical support and the right to unspecified software upgrades when and if available. Post-contract maintenance support revenues are charged to
customers as a percentage of license fees depending upon the level of support coverage desired by the customer.



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We sell our products through our direct sales force and through relationships with system
integrators, application service providers and resellers. Our sales cycle from our initial contact with a potential customer to the signing of a license and related agreements has historically been lengthy and variable. We generally must educate our
potential customers about the use and benefit of our products and services, which can require the investment of significant time and resources, causing us to incur most of our product development and selling and marketing expenses in advance of a
potential sale. In addition, a number of companies decide which products to buy through a request for proposal process. In those situations, we also run the risk of investing significant resources in a proposal that results in a competitor obtaining
the desired contract from the customer or in a decision by a customer not to proceed.

The majority of our revenues are
derived from customers in the United States, with the balance generated by customers in the European and Asia Pacific regions. The percentage of revenue derived from the Asia Pacific region decreased from 11.2% of total revenue in 2008 to 9% of
total revenue in 2009, due to completion of several projects in 2008. The percentage of revenue derived from Europe was similar in 2008 and 2009 at approximately 4%. Future growth in the percentage of revenue derived from Europe and Asia Pacific
will depend upon the degree of success of our partners in Europe, principally GE Energy and Vodafone, and of our direct sales force in Australia, in closing license sales with new customers. We price our products based on market conditions in each
jurisdiction where we operate. Historically, a significant portion of our revenues has been derived from a small number of relatively large customers and we expect this trend to continue. See, among the above Risk Factors,
Historically, our revenues have been concentrated in a few large orders and a small number of customers. Our business could be adversely affected if we lose a key customer.

Overview of Cost of Revenues

Our cost of revenues consists of the cost of software license revenues and cost of maintenance and services. The cost of software license
revenues consists mostly of (i) costs of third-party software that is either embedded in our software or licensed for resale from third-party software providers to enhance the functionality of our software and (ii) amortization of acquired
technology. The cost of acquired technology is established as part of the purchase price allocation related to the acquisitions of Utility Partners, Inc. and e-Wise Solutions and is 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 in accordance with ASC 350 (originally issued as SFAS No. 142, Goodwill and Other Intangible Assets). Cost of maintenance and services
consists of (i) salaries and related expenses of our professional services organization employees, third-party consultants and contractors, (ii) third party software support, (iii) amortization of stock-based compensation,
(iv) depreciation of fixed assets and (v) other administrative expenses incurred in support of these personnel. We expect the annual increase in the cost of services to approximate the growth of professional services revenue, if such
revenues grow, on an annual basis.

Overview of Operating Expenses

Operating expenses are categorized into research and development expenses, sales and marketing expenses, and general and administrative
expenses.

Research and development expenses include costs relating to the development of our products. These costs consist
primarily of (i) salaries and benefits for research and development employees, (ii) facilities and other administrative expenses, (iii) the cost of consulting development resources that supplement our internal development team,
(iv) amortization of stock-based compensation and (v) depreciation of fixed assets. These expenses are presented net of any governmental or other grants and funded expenses. Due to the relatively short time between the date on which our
products achieve technological feasibility and the date on which they generally become available to customers, costs subject to capitalization under ASC 985-20 (originally issued as SFAS No. 86) have been immaterial and have been expensed as
incurred.

Sales and marketing expenses consist of (i) salaries and commissions for sales and marketing employees and
consultants, (ii) amortization of acquired customer relationship, (iii) office expenses, (iv) travel costs, (v) printing and distribution expenses, (vi) market research expenses, (vii) advertising and promotional
expenses, (viii) other administrative expenses and (ix) amortization of stock-based compensation. The cost of customer relationship is established as part of the purchase price allocation related to the acquisitions of Utility Partners,
Inc. and e-Wise Solutions, and 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 in accordance with ASC 350 (originally issued as SFAS
No. 142).

General and administrative expenses consist of (i) salaries for administrative, executive and finance
personnel, (ii) information system costs, (iii) insurance costs, (iv) accounting expenses, (v) legal expenses, (vi) professional fees, (vii) other administrative expenses and (viii) amortization of stock-based
compensation.

Amortization of stock-based compensation includes the amortization of stock-based compensation and expenses for
stock -based awards granted to employees, directors and consultants in exchange for services. Stock-based compensation expense is amortized over the vesting schedule of the stock options or restricted shares using the straight-line approach, or,
over the term of the services provided. These expenses are reported in the statement of operations under the applicable operating expense categories (i.e., cost of services, sales and marketing, research and development, and general and
administrative) and not as a separate line item.

Our Reporting Currency

Our reporting currency is the United States dollar. Transactions and balances of subsidiaries whose functional currency is not the dollar
have been translated to dollars under the principles described in ASC 830 (originally issued as SFAS No. 52). Under this standard, assets and liabilities have been translated at period-end exchange rates and results of operations have been
translated at average exchange rates. The exchange gains and losses arising from these translations are recorded as a separate component of accumulated other comprehensive losses in the shareholders equity section of our balance sheet.

Our Location in Israel

We are incorporated under the laws of the State of Israel, and our principal executive offices and principal research and development
facilities are located in Israel. See Item 3D Risk Factors  Risks Related to Our Location in Israel for a description of Israel-related governmental, economic, fiscal, monetary or political polices or factors that have
materially affected or could materially affect our operations.

Impact of Currency Fluctuation and Inflation

Since our revenues are generated in United States dollars and currencies other than New Israeli Shekels (NIS), and a
significant portion of our expenses (mainly personnel costs) is incurred and will continue to be incurred in NIS, our NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate between the U.S. dollar and the NIS. We do not
utilize hedging to manage currency risk, and, therefore, are exposed to the 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 such rate of devaluation or that the timing of such devaluation will lag behind inflation in Israel. Any of such scenarios would result in increased dollar cost of our Israeli operations and could thereby have a material adverse impact on our
operating results and share price. 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 2008 and 2009, the NIS appreciated relative to the dollar by approximately 1.1% and 0.7% respectively,
and the Israeli consumer price index furthermore increased at the rate of 3.8% and 3.9% respectively, thereby further escalating the increase in the dollar cost of our Israeli operations. Also, NIS linked balance sheet items may create foreign
exchange gains or losses, depending upon the relative U.S. dollar values of the NIS at the beginning and end of the reporting period, affecting our net income and earnings per share. The caption Financial and other income (expenses), net
in our consolidated financial statements includes the impact of these factors as well as traditional interest income or expense.



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##### Table of Contents

The costs of our operations in Australia, mainly personnel, are also incurred in foreign
currency, the Australian dollar (AUD) and are therefore impacted, though to a lesser extent than the NIS impact described above, by the exchange rate between the U.S. dollar and the AUD. During 2008, the AUD depreciated by approximately 20% against
the U.S. Dollar, which resulted in a decrease in the U.S. Dollar cost of our operations in Australia. This trend was reversed during 2009, as the AUD appreciated by approximately 29% against the U.S. dollar.

Seasonality

Our operating results are generally not characterized by a seasonal pattern.

Recently Issued Accounting Standards

In May 2009, the FASB issued new accounting guidance, under ASU 2010-09, Subsequent Events (Topic 855), which sets forth
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is effective for interim and annual periods ending after
June 15, 2009. The adoption of this guidance did not have a material impact on the Companys consolidated financial position or results of operations. Refer to Note 17, Subsequent Events for the required disclosures in
accordance with ASC 855.

In June 2009, the FASB issued SFAS No. 166, (ASC Topic 860) Accounting for Transfers of
Financial Assetsan amendment of FASB Statement No. 140 (SFAS 166). The provisions of SFAS 166, in part, amend the derecognition guidance in FASB Statement No. 140, eliminate the exemption from consolidation for
qualifying special-purpose entities and require additional disclosures. SFAS 166 is effective for financial asset transfers occurring after the beginning of an entitys first fiscal year that begins after November 15, 2009. We do not
expect the provisions of SFAS 166 to have a material effect on the financial position, results of operations or cash flows of the Company.

In July 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162 (SFAS 168) now incorporated in ASC 105 Generally Accepted Accounting Principles. SFAS 168 establishes the FASB Accounting Standards Codification to
become the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. SFAS 168, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. We have modified all earlier
references to accounting standards to reflect the adoption of SFAS 168.

In October 2009, the FASB issued Accounting Standards
Update (ASU) 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Arrangements. ASU 2009-13 amends the guidance that in the absence of vendor-specific objective and third-party evidence for deliverables in multiple-deliverable
arrangements, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangements consideration using the relative selling price method. ASU 2009-13 expands the disclosure requirements for
multiple-deliverable revenue arrangements. The guidance will be effective for financial statements issued for fiscal years beginning after June 15, 2010. Early adoption is permitted. We do not expect the adoption of the update to have a
material impact on our consolidated financial statements.

In October 2009, the FASB issued ASU 2009-14, Software (Topic 985),
Certain Revenue Arrangements that Include Software Elements. ASU 2009-14 amends the guidance to exclude for the scope of software revenue accounting requirements tangible products if the product contains both software and non-software components
that function together to deliver a products essential functionality and factors to consider in determining whether a product is within the scope of the guidance. The guidance will be effective for financial statements issued for fiscal years
beginning after June 15, 2010. Early adoption is permitted. We do not expect the adoption of the update to have a material impact on its consolidated financial statements.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. We evaluate these estimates on an ongoing basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that application of the following critical accounting policies entails the more significant judgments and estimates used in
the preparation of our consolidated financial statements:

Revenue Recognition

Revenue results are difficult to predict, and any shortfall in revenues or delay in recognizing revenues could cause our operating results
to vary significantly from period to period and could result in future operating losses. In addition, the timing of our revenue recognition influences the timing of certain expenses, such as commissions and royalties, which could cause our expenses
to fluctuate from period to period. We follow very specific and detailed guidelines in measuring revenues. However, certain judgments affect the application of our revenue policy.

We generate revenues from licensing the rights to use our software products directly to end-users. We also enter into license
arrangements with indirect channels such as resellers and systems integrators resellers whereby revenues are recognized upon sale to the end user by the reseller or the system integrator.

We also generate revenues from rendering professional services, including consulting, customization, implementation, training and
post-contract maintenance and support.

Revenues from software product license agreements that do not involve significant
customization and modification of the software product are recognized, under ASC 985-605-15 . Under ASC 985-605-15 Revenue from software license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed and determinable and collectability is probable. We do not grant a right of return to our customers. ASC 985-605-15 generally requires that revenues earned from software arrangements involving multiple elements that
typically consist of license, professional services, and post-contract maintenance and support, be recognized under the residual method and allocated to each element. Under the residual method, revenue is recognized for the delivered elements when
(1) there is vendor-specific objective evidence (VSOE) of the fair values of all of the undelivered elements, (2) VSOE of fair value does not exist for one or more of the delivered elements in the arrangement, and (3) all
revenue recognition criteria of ASC 985-605-15 are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. Our VSOE used to allocate the sales price to professional services and maintenance is
based on the price charged when the undelivered elements are sold separately. For post-contract customer support, we determine the VSOE based on the renewal price charged. For other services, such as consulting and training, we determine the VSOE
based on the fixed daily rate charged in stand-alone service transactions. In the event that VSOE of fair value does not exist for all undelivered elements to support the allocation of the total fee among all delivered and undelivered elements of
the arrangement, revenue would be deferred until such evidence exists for the undelivered elements, or until all elements are delivered, whichever occurs earlier.



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In judging the probability of collection of software license fees, we continuously monitor
collection and payments from our customers and evaluate the need for a provision for estimated credit losses, based upon our historical experience and any specific customer collection issues that we have identified. In connection with customers with
whom we have no previous experience, we may utilize independent resources to evaluate the creditworthiness of those customers. From time to time, we may perform credit evaluations of our customers. If the financial situation of any of our customers
were to deteriorate, resulting in an impairment of their ability to pay amounts owed to us, additional allowances may be required.

Arrangement that include services are evaluated to determine if those services are considered essential to the functionality of the other
elements of the arrangement, Services that are considered essential consist primarily of significant production, customization or modification of the software product. When such services are provided, revenues under the arrangement are recognized
using contract accounting in accordance with Statement of Position No. 81-1 Accounting for Performance of ConstructionType and Certain ProductionType Contracts (SOP No. 81-1), using the
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 recognizing revenues based on the percentage-of-completion method, we
estimate time to completion with revisions to estimates made in the period in which the basis of such revisions becomes known. If we do not accurately estimate the resources required or scope of work to be performed, manage our projects properly
within the planned periods of time or satisfy our obligations under the contracts, then future services margins may be negatively affected, or a provision for estimated contract losses on existing contracts may need to be recognized in the period in
which the loss becomes probable and can be reasonably estimated. When services are not considered essential, the revenues from the services are recognized as the services are performed.

Service revenues from professional services include primarily implementation and consulting, and post-contract maintenance support and
training. Implementation and consulting services revenues are generally recognized on a time and material basis or as these services are performed. Post-contract maintenance support agreements provide technical support and the right to unspecified
software updates, if and when available. Revenues from post-contract maintenance support services are recognized ratably over the contractual support term, generally one year. Amounts collected from customers in excess of revenues recognized are
recorded as deferred revenue.

We do not grant right-of-return to our customers. We generally provide a warranty period for
three months. As of December 31, 2009 and 2008, the provision for warranty cost was immaterial.

Allowance for
Doubtful Accounts

We evaluate the collectability of accounts receivable based on a combination of factors related to
our customers. In circumstances where we are aware of a specific customers inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial down-grading of credit ratings), we may record a specific reserve for bad debts
against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we may recognize reserves for doubtful accounts based on the length of time the receivables are past due and
on our historical experience in collecting such receivables. During 2008 and 2009, no reserve for bad debts was required.

Goodwill and Other 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. We recorded goodwill of approximately $2.8 million related to our acquisition of iMedeon on February 25, 2002, $3.7 million related to our acquisition of Utility Partners, Inc. on July 29, 2004, and $0.6
million related to our acquisition of substantially all of the assets of e-Wise Solutions on June 15, 2005.

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 in accordance with ASC 350 (originally issued as
FAS 142).

We test 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 they may be impaired. In assessing the recoverability of goodwill, we 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. We
have determined that the Company represents a single reporting unit, which is equivalent to the consolidated Company. Since the Companys equity carrying value is negative as of the testing date, we believe 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 of whether a potential impairment of goodwill exists and 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 each 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 us to make a series of assumptions, such as discount rates, revenue projections, profit margin projections and terminal value multiples. We
estimated the Companys 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. We estimated the Companys revenue projections and profit margin projections based on internal forecasts about
future performance. There are inherent uncertainties related to these factors and managements judgment in applying these factors.

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 us 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, 2009 was substantially in excess of its enterprise
book value. Therefore, no impairment of goodwill was recorded.



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Long-lived Assets other than Goodwill

We are required to assess the impairment of long-lived assets (other than goodwill), tangible and intangible, under ASC
360-10 (originally issued as SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,) on a periodic basis, when events or changes in circumstances indicate that the carrying value thereof may 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, The determination of the value of such intangible assets requires management to make
assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If these estimates or the related assumptions change in the future, we could be required to record impairment charges. We have performed
impairment tests and determined that the unamortized portion of our long-lived assets, other than goodwill of approximately $0.3 million, is not subject to an impairment charge as of year-end 2009.

Contingencies

From time to time, we are defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required
to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is
made after careful and considered analysis of each individual action together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement
strategy. A change in the required reserves would affect our earnings in the period during which the change is made.

Equity-Based Compensation Expense

We account for equity-based compensation in accordance with ASC 718-10 (originally issued as SFAS No. 123(R), Share-Based
Payment.). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods.
Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual results differ from these estimates, equity-based
compensation expense and our results of operations could be impacted.

We did not grant any stock options during 2007, 2008
and 2009. During 2007, 2008 and 2009, we granted restricted shares to employees, directors and consultants. All restricted shares were granted for no consideration. In accordance with ASC 718-10, restricted shares are measured at their fair value as
if they were vested and issued on the grant date; therefore, their fair value was equal to the share price at the date of grant. We recognize compensation expenses for the value of the awards granted based on the straight line method over the
requisite service period of each of the awards, net of estimated forfeitures. ASC 718-10 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.

Accounting for Income Tax

We account for income taxes in accordance with ASC 740 (originally issued as SFAS 109), using the liability
method 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 recoverability of deferred tax assets ultimately depends on the existence of sufficient taxable income of an appropriate character
and we record a valuation allowance to reduce the deferred tax assets to an amount that is more likely than not to be recoverable. A change in our ability to continue to generate future taxable income could affect our ability to recover the deferred
tax assets and requires re-assessment of the valuation allowance. Such changes, if significant, could have a material impact on our effective tax rate, results of operations and cash flows.

ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

Operating Results

The following table describes, for the periods indicated, the percentage of revenues represented by each of the items on our consolidated
statements of operations:



|                                      |  |                         |   |  |       |   |  |       |  
|------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                      |  | Year Ended December 31, |  
|                                      |  | 2007                    |   |  | 2008  |   |  | 2009  |  
|Revenues:                             |  |                         |   |  |       |   |  |       |  
|Software license                      |  | 15.9                    | % |  | 12.1  | % |  | 14.5  | %
|Maintenance and services              |  | 84.1                    |   |  | 87.9  |   |  | 85.5  |  
|                                      |  |                         |   |  |       |   |  |       |  
|Total revenues:                       |  | 100.0                   |   |  | 100.0 |   |  | 100.0 |  
|Cost of revenues:                     |  |                         |   |  |       |   |  |       |  
|Software licenses                     |  | 3.2                     |   |  | 2.4   |   |  | 2.0   |  
|Maintenance and services              |  | 50.5                    |   |  | 49.1  |   |  | 38.0  |  
|                                      |  |                         |   |  |       |   |  |       |  
|Total costs of revenues               |  | 53.7                    |   |  | 51.5  |   |  | 40.0  |  
|Gross profit                          |  | 46.3                    |   |  | 48.5  |   |  | 60.0  |  
|                                      |  |                         |   |  |       |   |  |       |  
|Operating expenses:                   |  |                         |   |  |       |   |  |       |  
|Research and development              |  | 20.5                    |   |  | 15.4  |   |  | 10.3  |  
|Sales and marketing                   |  | 30.7                    |   |  | 27.4  |   |  | 25.9  |  
|General and administrative            |  | 22.3                    |   |  | 20.3  |   |  | 17.5  |  
|                                      |  |                         |   |  |       |   |  |       |  
|Total operating expenses              |  | 73.5                    |   |  | 63.1  |   |  | 53.7  |  
|Income (loss) from operations         |  | (27.2                   | ) |  | (14.6 | ) |  | 6.3   |  
|Financial expenses, net               |  | (4.8                    | ) |  | (3.6  | ) |  | (1.5  | )
|Loss from liquidation of a subsidiary |  | (2.1                    | ) |  |      |   |  |      |  
|Net income (loss)                     |  | (34.1                   | ) |  | (18.2 | ) |  | 4.8   |  



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The following table sets forth financial data for the years ended December 31, 2007,
2008 and 2009 (in thousands):



|                              |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                              |  | 2007 |        |   | 2008 |   |        | 2009 | 
|Statement of Operations Data: |  |      |        |   |      |   |        |      |  |   |        |  
|Revenues:                     |  |      |        |   |      |   |        |      |  |   |        |  
|Software licenses             |  | $    | 1,769  |   |      | $ | 1,380  |      |  | $ | 1,508  |  
|Maintenance and services      |  |      | 9,390  |   |      |   | 9,990  |      |  |   | 8,919  |  
|                              |  |      |        |   |      |   |        |      |  |   |        |  
|Total revenues                |  |      | 11,159 |   |      |   | 11,370 |      |  |   | 10,427 |  
|Cost of revenues:             |  |      |        |   |      |   |        |      |  |   |        |  
|Software licenses             |  |      | 358    |   |      |   | 275    |      |  |   | 206    |  
|Maintenance and services      |  |      | 5,633  |   |      |   | 5,586  |      |  |   | 3,967  |  
|                              |  |      |        |   |      |   |        |      |  |   |        |  
|Total cost of revenues        |  |      | 5,991  |   |      |   | 5,861  |      |  |   | 4,173  |  
|Gross profit                  |  |      | 5,168  |   |      |   | 5,509  |      |  |   | 6,254  |  
|                              |  |      |        |   |      |   |        |      |  |   |        |  
|Operating expenses:           |  |      |        |   |      |   |        |      |  |   |        |  
|Research and development, net |  |      | 2,290  |   |      |   | 1,753  |      |  |   | 1,076  |  
|Sales and marketing           |  |      | 3,429  |   |      |   | 3,119  |      |  |   | 2,700  |  
|General and administrative    |  |      | 2,485  |   |      |   | 2,303  |      |  |   | 1,822  |  
|                              |  |      |        |   |      |   |        |      |  |   |        |  
|Total operating expenses      |  |      | 8,204  |   |      |   | 7,175  |      |  |   | 5,598  |  
|Income (loss) from operations |  |      | (3,036 | ) |      |   | (1,666 | )    |  |   | 656    |  
|Financial expenses, net       |  |      | (535   | ) |      |   | (414   | )    |  |   | (160   | )
|Other income (loss)           |  |      | (239   | ) |      |   |       |      |  |   |       |  
|                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net income (loss)             |  | $    | (3,810 | ) |      | $ | (2,080 | )    |  | $ | 496    |  
|                              |  |      |        |   |      |   |        |      |  |   |        |  

Geographic Distribution

The following table summarizes the revenues from our products and services by country/region, stated as a percentage of total revenues for
the periods indicated.



|               |  |                         |   |  |       |   |  |       |  
|-------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|               |  | Year Ended December 31, |  
|Country/Region |  | 2007                    |   |  | 2008  |   |  | 2009  |  
|United States  |  | 78.9                    |   |  | 84.9  |   |  | 86.9  |  
|Europe         |  | 9.0                     |   |  | 3.9   |   |  | 4.1   |  
|Asia Pacific   |  | 12.1                    |   |  | 11.2  |   |  | 9.0   |  
|               |  |                         |   |  |       |   |  |       |  
|Total          |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %



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Comparison of Fiscal Years Ended December 31, 2008 and 2009

Revenues

Our total revenues fell by approximately $1.0 million or 8.3% from $11.4 million in 2008 to $10.4 million in 2009. Revenues from
maintenance and services declined by approximately $1.1 million, from $10.0 million to $8.9 million, offset in part by an increase in revenues from software licenses of $0.1 million, from $1.4 million in 2008 to $1.5 million in 2009. From a
geographic perspective, our revenues in North America decreased by $0.6 million, from $9.7 million to $9.1 million, due to several large implementation projects that were started and conducted mostly in 2008 and completed in 2009. Our revenues from
the Asia Pacific region decreased by $0.3 million, from $1.2 million in 2008 to $0.9 million in 2009, due to two implementation projects that were completed in 2008. Revenues in Europe were similar in 2009 and 2008 $0.4 million each year. From
a channels perspective, the contribution of revenue from direct sales and indirect sales was the same in 2009 as in 2008, at 71% and 29%, respectively, and the volume of direct sales and indirect sales decreased each year by $0.6 million and $0.4
million respectively, relative to the prior year.

Software License Revenues

As alluded to above, software license revenues increased by 9.3% in 2009, from $1.4 million in 2008 to $1.5 million in 2009. This increase
of $0.1 million was attributable to larger license deals closed during 2009.

As a percentage of total revenue, software
licenses increased from 12.1% of revenue in 2008 to 14.5% of revenue in 2009. The increase in the percentage of revenue provided by software licenses is attributable to the 9.3% increase in our software license revenues, as mentioned above, and the
10.7% decrease in maintenance and services revenues from new and existing customers. There were no rate changes in our license fees that had a material impact on our revenues.

Maintenance and Services Revenues

As alluded to above, our maintenance and services revenues decreased by 10.7% in 2009, from $10.0 million in 2008 to $8.9 million in 2009.
Our maintenance and services revenues decreased in 2008 by $1.1 million as a result of several large implementation projects with existing customers that started in 2008 and completed in 2009 with a lower revenue impact.

As a percentage of total revenue, maintenance and services revenue decreased from 87.9% of revenue in 2008 to 85.5% of revenue in 2009 as
a result of the 10.7% decline in maintenance and services revenues and the 9.3% increase in our software license revenues, in each case as described above. There were no rate changes in our maintenance and services fees that had a material impact on
our revenues.

Cost of Revenues

Total cost of revenues decreased by 28.8% from $5.9 million in 2008 to $4.2 million in 2009, as further explained below.

Cost of Software Licenses

The cost of software licenses declined from $0.3 million in 2008 to $0.2 million in 2009, and the cost of software licenses as a percent
of software license revenue decreased as well from 19.9% in 2008 to 13.7% in 2009. The decrease in the cost of software licenses was attributable to the increase in software license revenues containing lower third party software component costs.

Cost of Maintenance and Services

The cost of maintenance and services decreased by 29% or $1.6 million, from 2008 to 2009, primarily as a result of (i) $1.0 million
reduction in payroll and related administrative costs related to elimination of eleven (11) maintenance and service personnel in 2008, (ii) $0.3 million of base salary reductions in 2009, (iii) $0.1 million related to the depreciation
in the average value of the New Israeli Shekel against the US dollar in 2009, (iv) a decrease of $0.1 million in third party maintenance costs and (v) allocation of several services personnel to aid product marketing activities during
2009, at a cost of $0.1 million. Maintenance and services costs as a percentage of maintenance and services revenues decreased from 56% in 2008 to 44% in 2009. The decrease of 12% in the cost of maintenance and services as a percentage of
maintenance and services revenues resulted primarily from the significant reductions in services costs described above.

Operating Expenses

Research and Development Expenses

Our net research and development expenses decreased by 38.6% or $0.7 million, from $1.8 million in 2008 to $1.1 million in 2009, and
decreased also as a percentage of revenue, from 15.4% of revenue in 2008 to 10.3% in 2009. The decrease in the amount of research and development expenses in 2009 of approximately $0.7 million was attributable to (i) $0.6 million of savings
from the elimination of three (3) research and development personnel during 2008, (ii) $0.1 million of base salary reductions in 2009, (iii) $0.1 million of savings due to reduction in office space, (vi) allocation of several
research and development personnel to product marketing activity during 2009, at a cost of $0.1 million, offset, in part, by (v) a decrease of $0.2 million from 2008 to 2009 in funding for a research and development project by one of our
customers, which effectively increased our research and development expenses in 2009.

We expect that we will continue to
devote a portion of our revenues to research and development to enhance our existing products, merge certain features and functionality of WorkUP and FOCUS with ViryaNet Service Hub, add enhancements to improve the quality and configurability
of our software, and develop new features and functionality that will benefit all of our customers.

Sales and Marketing
Expenses

Our sales and marketing expenses were $2.7 million, or 25.9% of revenue, in 2009, compared to $3.1 million,
or 27.4% of revenue, in 2008, a year over year decrease of $0.4 million or 13.4%. This decrease was primarily attributable to (i) elimination of two (2) sales and marketing personnel, which resulted in $0.3 million of savings,
(ii) $0.1 million of base salary reductions in 2009, (iii) reduction in commissions of $0.1 million due to lower sales, (iv) decrease in marketing programs and related travel expenses of $0.1 million, and was offset in part by $0.2
million of additional expense due to the allocation of personnel from other departments to a product marketing activity, as mentioned above.

General and Administrative Expenses

Our general and administrative expenses were $1.8 million, or 17.5% of revenue, in 2008 compared to $2.3 million, or 20.3% of revenue, in
2008, a year over year decrease of $0.5 million or 20.8%. This decrease was attributable primarily to (i) elimination of three (3) general and administrative personnel, which resulted in $0.4 million of savings and (ii) $0.1 million
of base salary reductions in 2009.

Financial Expenses, net

Financial expenses, net, declined from $0.4 million in 2008 to $0.2 million in 2009. The decline is primarily attributable to the decrease
in interest expenses resulting from reduction of the Companys long-term bank loans and a decline in the interest rates on the Companys short and long-term debt.



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Comparison of Fiscal Years Ended December 31, 2007 and 2008

Revenues

Our total revenues increased by $0.2 million or 1.9% from $11.2 million in 2007 to $11.4 million in 2008. Revenues from maintenance and
services grew by approximately $0.6 million, from $9.4 million to $10.0 million, offset in part by a decrease in revenues from software licenses of $0.4 million, from $1.8 million to $1.4 million. From a geographic perspective, our revenues in North
America increased by $0.9 million, from $8.8 million to $9.7 million, and our revenues from Asia Pacific were similar in 2008 and 2007 $1.3 million each year, while revenues in Europe declined by approximately $0.6 million in 2008. From a
channels perspective, the contributions of revenue from direct sales and indirect sales were 71% and 29%, respectively, the same in 2008 as in 2007, and the volume of direct sales and indirect sales increased each year by $0.1 million relative to
the prior year.

Software License Revenues

As alluded to above, software license revenues decreased by 21.9% in 2008, from $1.8 million in 2007 to $1.4 million in 2008. This
decrease of $0.4 million was attributable to a smaller number of license deals closed during 2008.

As a percentage of total
revenue, software licenses decreased from 15.9% of revenue in 2007 to 12.1% of revenue in 2008. The decrease in the percentage of revenue provided by software licenses is attributable to the 21.9.% decrease in the volume of our software licenses, as
mentioned above, and the 6.4% increase in maintenance and services revenues from new and existing customers. There were no rate changes in our license fees that had a material impact on our revenues.

Maintenance and Services Revenues

As alluded to above, our maintenance and services revenues increased by 6.4% in 2008, from $9.4 million in 2007 to $10.0 million in 2008.
Our maintenance and services revenues increased in 2008 by $0.6 million as a result of our obtaining several new customers in 2007 who, in turn, contributed to our undertaking in 2008 of certain additional services projects and a concomitant rise in
maintenance revenues. In North America, our maintenance and services revenues increased by approximately $1.1 million. In Asia Pacific and Europe, our maintenance and services revenues declined by approximately $0.2 million and $0.3 million,
respectively.

As a percentage of total revenue, maintenance and services revenue increased from 84.1% of revenue in 2007 to
87.9% of revenue in 2008 as a result of the 21.9% decline in sales of software licenses and 6.4% growth in maintenance and services revenues, in each case, as described above. There were no rate changes in our maintenance and services fees that had
a material impact on our revenues.

Cost of Revenues

Total cost of revenues decreased by 2.2% from $6.0 million in 2007 to $5.9 million in 2008, as further explained below.

Cost of Software Licenses

The cost of software licenses declined from $0.4 million in 2007 to $0.3 million in 2008, while the cost of software licenses as a percent
of software license revenue decreased slightly from 20.2% in 2007 to 19.9% in 2008. The decrease in the cost of software licenses was attributable to the expiration of amortization costs related to acquired technology assets from the acquisition of
Utility Partners in July 2004.

Cost of Maintenance and Services

The cost of maintenance and services remained almost flat between 2007 and 2008 at $5.6 million. However, the cost of our services
operations in Israel increased by $0.2 million in 2008, primarily as a result of (i) the appreciation in the value of the New Israeli Shekel against the U.S. dollar in 2008 and (ii) the allocation of several R&D personnel to aid
services projects during 2008, at a cost of $0.2 million. This trend was offset by a $0.3 million reduction in costs in 2008 due to the elimination of seven (7) maintenance and service personnel, a reduction in travel expenses during 2008, and
a decrease of $0.1 million in third party maintenance costs. Maintenance and services costs as a percentage of maintenance and services revenues decreased from 60% in 2007 to 56% in 2008. The decrease in the cost of maintenance and services as a
percentage of maintenance and services revenues resulted primarily from the 6.4% increase in maintenance and services revenues and our ability to grow such revenues while containing related costs.

Operating Expenses

Research and Development Expenses

Our net research and development expenses decreased by 23.4% from $2.3 million in 2007 to $1.8 million in 2008, and decreased also as a
percentage of revenue, from 20.5% of revenue in 2007 to 15.4% in 2008. The decrease in the amount of research and development expenses in 2008 of approximately $0.5 million was attributable to (i) $0.2 million of savings from the elimination of
twelve (12) research and development personnel during 2008, (ii) $0.2 million of funding for a research and development project that was received from one of our customers (and therefore did not need to be expended by us), (iii) a
$0.2 million reduction due to allocation of research and development personnel to services projects, as mentioned above, and (iv) a $0.1 million reduction due to allocation of research and development personnel to a product marketing activity,
which was offset, in part, by a $0.2 million increase in our research and development costs at our development facility in Israel related to the appreciation in the value of the New Israeli Shekel against the US dollar.

Sales and Marketing Expenses

Our sales and marketing expenses were $3.1 million, or 27.4% of revenue, in 2008, compared to $3.4 million, or 30.7% of revenue, in 2007,
a year over year decrease of $0.3 million or 9.0%. This decrease was primarily attributable to the elimination of three (3) sales and marketing personnel, which resulted in $0.4 million of savings, and was offset in part by $0.1 million of
additional expense due to the allocation of research and development personnel to a product marketing activity, as mentioned above.

General and Administrative Expenses

Our general and administrative expenses were $2.3 million, or 20.3% of revenue, in 2008 compared to $2.5 million, or 22.3% of revenue, in
2007, a year over year decrease of $0.2 million or 7.3%. This decrease was attributable primarily to a reduction in professional and legal fees.

Financial Expenses, net

Financial expenses, net, declined from $0.5 million in 2007 to $0.4 million in 2008. The decline was attributable to a reduction in 2008
of $0.1 million of costs related to a lesser appreciation of the NIS against the U.S. dollar in 2008 compared to 2007.



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Loss from Liquidation of a Subsidiary

In 2007, we recorded a loss from the liquidation of our Japanese subsidiary in an amount of $0.2 million. The amount of the loss recorded
was related to the accumulation of currency translation adjustments since the inception of the subsidiary, which was removed from the separate component of equity upon the dissolution of our Japanese subsidiary.

Effective Corporate Tax Rate

Our effective corporate tax rate will reflect a mix of the United States, Australian and Israeli statutory tax rates on our United States,
Australian and Israeli income. Israeli companies were subject to corporate tax at the rate of 26% for the year 2009 and are subject to corporate tax at the rate of 25% for the year 2010. The Israeli corporate tax rates, which were reduced from a
rate of 31% for the 2006 tax year, to a rate of 29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year, will further decrease to 24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015
and 18% in 2016 and thereafter.

Notwithstanding these rates, we may be subject to a lower rate with respect to portions of
our income, as described below, due to our participation in certain government incentive programs for our approved enterprises under the Law for the Encouragement of Capital Investments. However, no assurances can be provided to such effect, as we
do not receive prior approval for approved enterprise status following the 2005 amendment to the Law for the Encouragement of Capital Investments. See the discussion in the Taxation section of Item 10.

As of December 31, 2009, we had net operating loss carry forwards for tax reporting purposes of approximately $4.5 million in the
United States, $34.3 million in Israel, $14.4 million in the United Kingdom (inactive), and $0.5 million in Australia. In the United States, the Internal Revenue Code limits the use in any future period of net operating loss carry forwards following
a significant change in ownership interests. In 2007, we dissolved our Japanese subsidiary, ViryaNet Japan KK, and a net operating loss carry forward of approximately $1.2 million was extinguished as a result of the dissolution.

Liquidity and Capital Resources

How We Have Financed Our Business

On September 19, 2000, we completed our IPO. In that offering, we raised gross proceeds of $32.0 million and issued 80,000 Ordinary
Shares at an effective price of $400.00 per Ordinary Share (as adjusted to reflect our one-for-ten reverse share split in May 2002 and our one-for-five reverse share split in January 2007). Since the time of our IPO, we have financed our operations
primarily through additional sales of our Ordinary Shares through private placements or incurrence of convertible debt, bank related financings and sale of receivables. Historically, cash flow from operations has not been sufficient to fund
operations without the use of these additional financing measures.

Sources of Cash

Equity or Convertible Debt Financings

During 2007 and 2008, we raised approximately $1.2 million of cash, excluding transaction related expenses, in a financing transaction
involving our sale of Ordinary Shares, a convertible note and warrants. The transaction consisted of the following:

On
December 19, 2007, we completed a private placement with a group of new financial investors (the Lewis Opportunity Fund Group) that involved our issuance of (i) 363,636 Ordinary Shares at a price of $1.65 per Ordinary Share,
for aggregate consideration of $600,000, (ii) a non-interest bearing convertible note in the amount of $161,000 with a conversion price of $1.65 per Ordinary Share, (iii) a non-interest bearing convertible note in the amount of $439,000
with a conversion price of $1.65 per Ordinary Share, subject to our shareholders approval, and (iv) warrants to purchase an aggregate of 600,000 Ordinary Shares at an exercise price of $2.00 per Ordinary Share, subject to our
shareholders approval. The convertible notes have no maturity date and can only be converted into Ordinary Shares. The warrants have a callable feature whereby we can force the exercise of up to 50% of the warrants when all Ordinary Shares
issued in connection with this investment transaction are registered for resale with the SEC. On January 31, 2008, our shareholders approved the issuance of the $439,000 convertible note and the warrants mentioned above.

Bank Financing

Another important source of our cash has been our financing arrangement with Bank Hapoalim, which we initially entered into in 1999.

On September 29, 2008, Bank Hapoalim agreed to convert a $1.6 million short term loan that was due under the financing
arrangement on January 2, 2009, into a long-term loan payable in the following increments: $0.1 million on July 2, 2009, an additional $0.1 million on August 15, 2009 and the balance of $1.4 million in 14 quarterly installments of
$0.1 million each starting October 2, 2009. Interest on the loan is paid quarterly at a rate of 3 months LIBOR plus 3.25%. In connection with the waivers granted on September 28, 2008 and the conversion of the short-term loan to a
long-term loan, we agreed to pay fees of $30,000 to the bank.

On May 20, 2010, Bank Hapoalim agreed to convert a $0.25
million short term line of credit due under our financing arrangement into a long-term loan payable in ten equal quarterly payments starting September 2, 2010. Interest on the loan is paid quarterly at a rate of 3 months LIBOR plus 4.3%.

As of May 31, 2010, our aggregate outstanding borrowings with Bank Hapoalim was approximately $1.6 million, which
consisted of (i) short-term borrowings of approximately $0.25 million of which $0.1 million is drawn in dollars with interest payable quarterly at a rate of 11.5%, and $0.13 million is drawn in NIS with interest payable quarterly at a rate of
prime plus 3.3%, (ii) the outstanding balances on our above-described long-term loans arrangements of approximately $1.1 million with interest rate of 3 months LIBOR plus 3.25% and $0.25 million with interest rate of 3 months LIBOR plus 4.3%.

The bank debts are secured in favor of the bank by a floating charge on all of our assets and by a personal guarantee of
Samuel Hacohen, the Chairman of our Board of Directors.

Our bank financing arrangement requires us to adhere to certain
financial covenants. On August 29, 2007, Bank Hapoalim agreed to modify such covenant requirements as part of our overall financing arrangement such that on a quarterly basis starting August 1, 2007 (i) our shareholders equity
was to be at least the higher of (a) 13% of our total assets, or (b) $1.5 million, and (ii) our cash balance was not to be less than $0.5 million. In addition, Bank Hapoalim provided us with a waiver of these new bank covenant
requirements for the remainder of 2007. In connection with these waivers and the modification of the bank covenant requirements, we agreed to pay $10,000 of fees and issue 10,000 Ordinary Shares to the bank.

We were not in compliance with these covenants for each quarterly period during the fiscal year ended December 31, 2008 and for the
first three quarters of 2009. However, on September 28, 2008, we received a waiver of these covenants from Bank Hapoalim for each quarterly period during 2008 and for the first quarter of 2009, and on October 28, 2009 we received from Bank
Hapoalim a waiver of these covenants for the second and third quarter of 2009. Bank Hapoalim also provided us with a waiver of these covenants for the fourth quarter of 2009 and for the first quarter of 2010. In connection with the waivers granted
on October 28, 2009 we agreed to pay fees of $15,000 to the bank.



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On July 15, 2010 we received from Bank Hapoalim a waiver of these covenants for the
remaining quarters of 2010 and for the first quarter of 2011. In connection with this waiver we agreed to pay fees of $15,000 to the bank.

To ensure compliance with such above-described bank covenants, we are trying to control our cost structure while maximizing our cash
collection efforts. However, in the event that we are unable to maintain compliance with the bank covenants, we may need to request additional waivers from the bank. If we breach the covenants and are unable to obtain a waiver, the bank may call its
loan or credit line. In such an event, we would need to seek alternate financing for our business operations. However, we cannot provide assurance that any such alternate financing would be available on terms acceptable to us or at all. See the Risk
Factor it Item 3 above entitled We will need sufficient funds to re-pay our loans from Bank Hapoalim, which may be subject to immediate repayment if we do not meet our repayment schedule or meet specified conditions.

Sale of Receivables

From time to time, we sell receivables to financial institutions under arrangements in which a factoring company pays us the amount of the
accounts receivable less an agreed upon commission, and we irrevocably assign to the factoring company the accounts receivable sold without recourse to us. Our ability to sell such receivables in the future to these or other institutions under the
same terms and conditions currently available to us is uncertain and is dependent on the creditworthiness of the customers involved, the credit risks in the specific countries concerned and the institutions policies from time to time.

Cash

As of December 31, 2009, we had cash and cash equivalents of $156,000, compared to $143,000 as of December 31, 2008. In summary,
net cash provided by operating activities of $432,000, was mostly offset by $350,000 of net cash used in financing activities and $62,000 of effect of exchanges rate changes on cash.

In 2009, net cash provided by operating activities was $0.43 million, reflecting primarily our net income from operations of $0.5
million, as adjusted to account for non-cash items, including (i) a decrease of $0.7 million in deferred revenues, (ii) a decrease of $0.2 million in trade payables, and (iii) a decrease of $0.1 million in accrued severance fund, as
offset by the following additional non-cash items: (x) depreciation and amortization of $0.5 million, (y) stock based compensation of $0.2 million and (z) a decrease of $0.2 million in trade and unbilled receivables.

In 2008, net cash provided by operating activities was $0.2 million, reflecting primarily our net loss from operations of $2.1 million,
as adjusted to account for non-cash items, including: (i) an increase in deferred revenues of $1.1 million, (ii) decrease in trade receivables of $0.3 million, (iii) depreciation and amortization of $0.5 million, and (iv) stock
based compensation of $0.4 million.

For 2007, net cash used in operating activities was $1.1 million, reflecting our net loss
from operations of $3.8 million, as adjusted to account for the following non-cash items:(i) depreciation and amortization of $0.7 million, (ii) an increase in deferred revenues of $0.9 million, (iii) a loss from the liquidation of
our Japanese subsidiary of $0.2 million, (iv) stock based compensation of $0.3 million, (v) a decrease in other receivables and prepaid expenses of $0.3 million, (vi) an increase in trade payables and accrued expenses of $0.2 million
and (vii) an increase in accrued severance pay of $0.1 million.

In 2009, 2008 and 2007 net cash used in investing
activities was $7,000, $32,000 and $194,000, respectively, all resulting from purchase of property and equipment.

Net cash
used in financing activities during 2009 was $0.35 million, which included $0.45 million of repayments against short-term and long-term bank loans, offset, in part, by an increase of $0.1 million in short-term bank credit. Net cash used in financing
activities during 2008 was approximately $0.4 million, which included $0.6 million of repayments against short-term and long-term bank loans, offset, in part, by $0.2 million of net proceeds from convertible note financings. Net cash provided by
financing activities during 2007 was approximately $1.0 million, which included $0.6 million of net proceeds raised in equity financing, $0.4 million of net proceeds raised from convertible note financings, and $0.6 million provided by an increase
in short-term bank credit, offset, in part, by $0.6 million of repayments against long-term bank loans.

Future Cash Needs

In addition to our need to continue to meet our payment obligations to Bank Hapoalim under the terms of our debt
arrangement, our capital requirements will depend on numerous factors, including market demand for, and acceptance of, our products, the resources we devote to developing, marketing, selling and supporting our products, and the timing and extent of
establishing additional international operations. We intend to continue investing significant resources in our selling and marketing, and research and development operations in the future. We believe that our cash and cash equivalents and funds
generated from operations will be sufficient to finance our operations for at least until the end of 2010. Our ability to sustain profitability using our currently available cash and cash equivalents and funds generated from operations will depend
on our ability to increase our revenues while continuing to control our expenses. We cannot assure you that we will be able to sustain profitability, particularly given the risk factors outlined earlier in this annual report on Form 20-F. If we are
not successful doing so, we may be required to seek new sources of financing. If additional funds are raised through issuance of equity or debt securities, these securities could have rights, preferences and privileges senior to those of holders of
Ordinary Shares, and the terms of these securities could impose restrictions on our operations, and will result in additional dilution to our shareholders. Our ability to raise additional secured debt may require the consent of Bank Hapoalim and
LibertyView. The limited volume of trading in our Ordinary Shares on the OTCBB could significantly impair our ability to raise capital should we desire to do so in the future, as it may materially impair the market price and trading market for the
Ordinary Shares received by investors in a financing transaction.

Research and Development,
Patents and Licenses, etc.

We believe that our future success depends, on our ability to maintain and extend our
technological leadership through our research and development activities. We employ product managers in our research and development activities. These managers provide a critical interface between our research engineers and customer needs and
industry developments. This interface helps focus our research and development personnel on developing market-driven applications. By using information provided by our product managers, we can also manage our research and development resources to
address perceived market trends.

Our research and development net expenditures for 2007, 2008 and 2009 were $2.3 million,
$1.8 million and $1.1 million, respectively (see the paragraph headed We may need to further expand our sales, marketing, research and development and professional services organizations but may lack the resources to attract, train and
retain qualified personnel, which may hinder our ability to grow and meet customer demands in the Risk Factors set forth in Item 3 above).

Research and Development Grants from the OCS

We conduct our research and development activities primarily at our principal offices in Israel. Our research and development efforts have
been financed in the past, in small part, through grants from the OCS. Under these grants, royalties are payable to the OCS at the rate of 3% to 5% of revenues derived from products developed by us under those programs. The aggregate amount of
royalties we could be obligated to pay would be up to 100% to 150% of the amount of grants received, with annual interest accruing at the rate of LIBOR from the time of the grant.

The State of Israel does not own proprietary rights in technology developed with OCS funding and there is no restriction on the export of
products manufactured using technology developed with OCS funding. The technology is, however, subject to transfer restrictions, as described below. These restrictions may impair our ability to sell our technology assets or to outsource
manufacturing, and the restrictions continue to apply even after we have paid the full amount of royalties, payable for the grants. In addition, the restrictions may impair our ability to consummate a merger or similar transaction in which the
surviving entity is not an Israeli company.



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The transfer to a non-Israeli entity of technology developed with OCS funding, including
pursuant to a merger or similar transaction, and the transfer of rights related to the manufacture of more than ten percent of a product developed with OCS funding are subject to approval by an OCS committee and to the following conditions:



| |  |  | Transfer of Technology. If the OCS committee approves the transfer of OCS-backed technology, such a transfer would be subject to the payment to
the OCS of a portion of the consideration that we receive for such technology. The amount payable would be a fraction of the consideration equal to the relative amount invested by the OCS in the development of such technology compared to our total
investment in the technology, but in no event less than the amount of the grant. However, in the event that in consideration for our transfer of technology out of Israel, we receive technology from a non-Israeli entity for use in Israel, we would
not be required to make payments to the OCS if the approval committee finds that such transfer of non-Israeli technology would significantly increase the future return to the OCS.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transfer of Manufacturing Rights. The OCS committee is authorized to approve transfers of manufacturing rights only if the transfer is
conditioned upon either (1) payment of increased aggregate royalties, ranging from 120% to 300% of the amount of the grant, plus interest, depending on the percentage of foreign manufacture or (2) a transfer of manufacturing rights into
Israel of another product of similar or more advanced technology.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Merger or Acquisition. If the committee approves a merger or similar transaction in which the surviving entity is not an Israeli company, such a
transaction would be subject to the payment to the OCS of a portion of the consideration paid. The amount payable would be a fraction of the consideration equal to the relative amount invested by the OCS in the development of such technology
compared to the total investment in the company, net of financial assets that the company has at the time of the transaction, but in no event less than the amount of the grant.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the event that the committee believes that the consideration to be paid in a transaction requiring payment to the OCS pursuant to the
provisions of the law described above does not reflect the true value of the technology or the company being acquired, it may determine an alternate value to be used as the basis for calculating the requisite payments.

In 2001 and 2002, we received approvals for grants from the OCS in an aggregate amount of $372,000, which were received by us through
December 31, 2003. During 2007, 2008, and 2009 we made royalty payments of $6,000, $5,000, and $700, respectively, to the OCS related to these grants. As of December 31, 2009, we have an outstanding contingent liability to pay royalties in
the amount of approximately $393,000, including interest, to the OCS.

Trend Information

Our results of operations related to revenues may be subject to significant fluctuations due to several factors,
primarily the timing of large orders, which represent a significant percentage of our revenues, customer budget cycles, which impact our customers timing for buying decisions, competitive pressures, the ability of our partners to become
effective in selling and marketing our products, and other factors.

During 2008, our total revenues increased by 1.9%
compared to 2007. This increase was attributable to a growth of 6.4% in our maintenance and services revenues, from $9.4 million in 2007 to $10.0 million in 2008, offset, in part, by a decline of 21.9% in our software license revenues, from $1.8
million in 2007 to $1.4 million in 2008 (from 15.9% of our total revenue in 2007 to 12.1% of our total revenue in 2008). The growth of our maintenance and services revenues, which is a good indicator of existing and new customers continuous
interest in additional services projects, added favorably to our gross margins, although its impact on our gross margins was partially offset by the decline in software revenues, which was due to a decrease in the number of our software license
sales.

Contrary to 2008, during 2009, our total revenues declined by 8.3% compared to 2008, while our software license
revenues grew 9.3% from $1.4 million in 2008 to $1.5 million in 2009 and increased from 12.1% of our total revenues in 2008 to 14.5% of our total revenues in 2009. While growth of our software license revenues in 2009 was a good indicator of
buying interest in our products and added favorably to our gross margins and profitability, a portion of the increase of such revenues as a percentage of our total revenues was also due to a 10.7% reduction in our revenues from services, which
declined from $10.0 million in 2008 to $8.9 million in 2009. The decline in our services revenues in 2009 was not directly related to any changes in the amount of our software license sales but was instead related to the completion of some
large professional services engagements that began in 2008 and did not contribute as much revenue in 2009.

As a result of the
continuation of the global slowdown or, in some instances, the very slow recovery of the global economy, we began to experience in the last two quarters of 2008, and we have continued to experience during 2009, its adverse impact on customers
demand for our products and services We anticipate that this trend may continue for so long as global macroeconomic uncertainties are prevalent.

Another significant trend that we have noted that has impacted our financial results recently commencing in 2008 and continuing
into 2009 is an increase in the volatility of currency exchange rates, particularly the U.S. dollar- New Israeli Shekel and the U.S. dollar  Australian dollar exchange rates. As described elsewhere in this annual report, our revenues and
financial results generally are reported in U.S. dollars, yet in 2009 approximately 29%  a significant portion of our expenses were incurred in New Israeli Shekels and approximately 9% of our expenses were incurred in Australian dollars.
Therefore, to the extent that the NIS appreciates relative to the U.S. dollar, or, even if the NIS devaluates in relation to the U.S. dollar, if the rate of inflation in Israel exceeds such rate of devaluation or the timing of such devaluation lags
behind inflation in Israel, we are subject to increased dollar costs for our operations. We are subject, to a lesser extent, to a similar trend with the Australian dollar. The recent significant fluctuations in exchange rates make it difficult for
us to decipher a unidirectional trend, but the mere existence of such fluctuations increases the likelihood that our operating results may also fluctuate in an erratic fashion as a result thereof. We have noted some stabilization of late in the
NIS-U.S. dollar exchange rate, which has essentially settled in the range of 3.7 to 3.9 NIS per U.S. dollar from July 2009 to the current time.

For more information about our expectations regarding our future revenues, cost of revenues, future operating expenses and liquidity and
capital resources, please see the discussion under the Risk Factors section of Item 3 and the Liquidity and Capital Resources section of this Item 5 above.

Off-balance Sheet Arrangements

Other than potential royalty payments to the OCS (which are discussed above in this Item 5 under the heading Research and
Development Grants from the OCS), we are not party to any material off-balance sheet arrangements.



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Tabular Disclosure of Contractual Obligations

Contractual Obligations as of December 31, 2009 (1)



|                                  |  |                                          |       |                |   |            |  |            |       |                 |   |   |  |   |  
|--------------------------------- |  | ---------------------------------------- | ----- | -------------- | - | ---------- |  | ---------- | ----- | --------------- | - | - |  | - | -
|                                  |  | Payments due by Period(US$ in
thousands)
|                                  |  | Total                                    |       | LessThan 1Year |   | 1  3Years |  | 3  5Years |       | MoreThan 5Years
|Short-term bank debt              |  | $                                        | 380   |                | $ | 380        |  | $          |      |                 | $ |  |  | $ | 
|Long-term bank debt (1)           |  | $                                        | 1,289 |                | $ | 400        |  | $          | 889   |                 | $ |  |  | $ | 
|Long-term convertible debt (1)    |  | $                                        | 480   |                | $ |           |  | $          | 480   |                 | $ |  |  | $ | 
|Operating leases (2)              |  | $                                        | 694   |                | $ | 469        |  | $          | 225   |                 | $ |  |  | $ | 
|Accrued severance pay, net (3)    |  | $                                        | 464   |                | $ |           |  | $          |      |                 | $ |  |  | $ | 
|Uncertain income tax position (4) |  | $                                        | 59    |                | $ |           |  | $          |      |                 | $ |  |  | $ | 
|Total Contractual Obligations:    |  | $                                        | 3,366 |                | $ | 1,249      |  | $          | 1,594 |                 | $ |  |  | $ | 



|(1) | See Liquidity and Capital Resources-Bank Financing.
|--- | -----------------------------------------------------

|(2) | Includes leases for facilities and automobiles. Payments under non-cancelable operating lease agreements for facilities expire on various dates through 2011. As of the
date hereof, our annual aggregate lease obligations for facilities for the years 2010 and 2011 are $316,000, $96,000, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor law. These obligations are payable only upon
termination, retirement or death of the relevant employee and there is no obligation if the employee voluntarily resigns. See also Note 2 to our financial statements for further information regarding accrued severance pay.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Our uncertain income tax position under ASC 740-10. ASC 740-10 reflects when income taxes are due upon settlement and we are unable to reasonably estimate the ultimate
amount or timing of settlement. See Note 12 of the Notes to Consolidated Financial Statements for further information regarding our liability under ASC 740-10.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 6. | Directors, Senior Management and Employees
|------- | ------------------------------------------

Directors and Senior Management



|                     |  |     |  |                                             
|-------------------- |  | --- |  | --------------------------------------------
|Name                 |  | Age |  | Position                                    
|Samuel I. HaCohen    |  | 52  |  | Executive Chairman of the Board of Directors
|Memy Ish-Shalom      |  | 50  |  | Chief Executive Officer                     
|Jeffrey J. Oskin     |  | 40  |  | President                                   
|Nir Diskin           |  | 44  |  | Vice President, Engineering                 
|Mark Hosking         |  | 47  |  | Manager, ViryaNet Australia                 
|Vladimir Morgenstern |  | 52  |  | Director                                    
|Arie Ovadia          |  | 61  |  | Director                                    
|Herman Amelink       |  | 69  |  | Director                                    
|Nati Perry           |  | 56  |  | Director                                    
|Austin W. Lewis IV   |  | 34  |  | Director                                    
|Andy Ben-Artzy       |  | 64  |  | Director                                    

Samuel I. HaCohen
co-founded ViryaNet in March 1988. Since March 1988, Mr. HaCohen has served as our chairman of the board of directors. From March 1988 until February 2001, Mr. HaCohen served as our chief executive officer and as the chairman of the board
of directors. Before co-founding ViryaNet, Mr. HaCohen held senior systems management positions in John Bryce Systems Ltd., a software company, and the Hadassah Hospital, Jerusalem. Mr. HaCohen holds a Bachelor of Science degree in
computer science and statistics from the Hebrew University of Jerusalem and has completed all course work for a Master of Science degree in statistics from the Hebrew University of Jerusalem.

Memy Ish-Shalom has served as our president and chief executive officer since January 2006 and had served as our chief operating
officer from February 2001 until November 2002. Prior to rejoining ViryaNet, Mr. Ish-Shalom served as the chief executive officer of Wadago, Ltd., an Israeli based privately held company that has developed a product set for enabling visibility
and control for file-based application integration. Prior to Wadago, Ltd., Mr. Ish-Shalom served as the chief operating officer of Guardium Inc., a privately held company that develops and delivers innovative database security solutions for
IBM, Oracle, Microsoft, and Sybase environments based in Waltham, Massachusetts. Mr. Ish-Shalom served as vice president of customer care and billing at Amdocs from April 2000 until November 2000. During the period from May 1989 until April
2000, Mr. Ish-Shalom was employed at ViryaNet and served in a number of senior management positions, including research and development manager, general manager of Israeli operations, and executive vice president of engineering.
Mr. Ish-Shalom holds a Bachelor of Science degree in computer science from the Hebrew University of Jerusalem.

Jeffrey J. Oskin rejoined ViryaNet in January 2005 as the vice president of international, responsible for our international
subsidiaries, and was promoted to chief operating officer in January 2006. Mr. Oskin has more than 15 years of business experience with high technology and service-oriented organizations. Prior to rejoining ViryaNet, Mr. Oskin was vice
president of sales at Commerce Technologies, a provider of e-commerce solutions to the retail and manufacturing industries. During his previous tenure with ViryaNet from October 1998 to January 2004, Mr. Oskin held a number of executive
positions, including as vice president of sales for North America. Prior to ViryaNet, Mr. Oskin held a number of positions at high tech companies, including Teradyne, a leading supplier of automated test equipment to semiconductor manufacturing
companies, where he managed a global service operation. Mr. Oskin holds a Bachelor of Science in mechanical engineering from Rensselaer Polytechnic Institute and an MBA from Boston University.

Nir Diskin has served as our vice president of engineering since September 2005 and is responsible for leading ViryaNets
diverse worldwide development team. Previously, Mr. Diskin held a number of management positions within our research and development organization and was promoted to vice president of product management in 2000. Prior to joining ViryaNet in
1996, Mr. Diskin served as a major in the Israeli Air Force where he held positions of leadership and participated in avionics software development. Mr. Diskin holds a Bachelor of Science degree in computer science from the Hebrew
University in Jerusalem.



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Mark Hosking joined the Company in June 2005 from e-Wise Solutions and currently
serves us in our ViryaNet Australia subsidiary. Mr. Hosking founded e-Wise Solutions in June 1998 and served as the chief executive officer and chief technical officer. Prior to the founding of e-Wise Solutions, Mr. Hosking was a senior
manager at Ipex Computers Australia, a systems integrator that grew from 40 to 450 employees during his tenure. Mr. Hosking holds a Bachelor of Science degree in Electrical Engineering from Melbourne University of Victoria, Australia.

Vladimir Morgenstern co-founded the Company with Mr. HaCohen. He has served as one of the Companys
directors since July 1999. Mr. Morgenstern currently serves as a business and technology advisor to several start-up companies and is a senior architect at EMC Software. From November 1999 until October 2001, Mr. Morgenstern served as the
Companys executive vice president, corporate programs. Mr. Morgenstern served as the Companys technical manager and chief technology officer from March 1988 until November 1999. Before co-founding ViryaNet, Mr. Morgenstern held
senior systems management positions at John Bryce Systems Ltd. and the Hadassah Hospital, Jerusalem. Currently, Mr. Morgenstern is a senior architect at EMC Software. Mr. Morgenstern holds a Bachelor of Science degree in physics from
Vilnius University in Lithuania and has completed all course work for a Master of Science degree in applied mathematics.

Arie Ovadia advises major Israeli companies on finance, accounting and valuations and is a member of the board of directors of
several corporations, including Israel Discount Bank, Phoenix Insurance Company, Elite Industries, Israel Petrochemical Industries and Tadiran Communications. He has taught at New York University (New York, NY), Temple University (Philadelphia, PA)
and, in Israel, at Tel Aviv and Bradford Universities. Dr. Ovadia serves as a member of the Israeli Accounting Board and is a 15-year member of the Israeli Security Authority. He holds an undergraduate degree and an MBA from Tel Aviv University
and earned his PhD in economics from the Wharton School at the University of Pennsylvania.

Herman Amelink has
functioned, since 2004, as Strategic Advisor for acquisitions in the Energy Division of Telvent and is a board member of Telvent North America. In 1978 Mr. Amelink co-founded a consultancy company, ECC Inc, specializing in real-time control
systems to electric, gas, and water utilities. In 1993 that company was sold to KEMA, a Dutch engineering and materials testing company. Mr. Amelink remained CEO until 2003 when he retired from KEMA. In those 10 years, KEMA Consulting grew at a
compounded rate of 25% ending at $65M annual revenue. KEMA Consulting expanded geographically when KEMA established offices in many parts of the world and the company expanded its areas of expertise to serve clients not only for their real-time
automation projects, but also for demand side management, energy efficiency, energy trading, and transmission and distribution grid management. Mr. Amelink was born in the Netherlands, received an MSEE of the Technical University of Delft, then
moved to the USA where he worked as programmer, supervisor, manager of SCADA /EMS Systems, first at Westinghouse, and later at Boeing.

Nati Perry has served as a director of ViryaNet since December 2007. Mr. Perry is the former founder and chief executive
officer of Barak I.T.C., a leading ISP and telephony company based in Israel. Prior to becoming chief executive officer, Mr. Perry also served as the chief operating officer, and vice president of engineering since founding Barak I.T.C in 1997.
Prior to Barak I.T.C., Mr. Perry was with the Israeli Air Force since 1984 and served as the head of several departments of the Air Force including communications, planning and logistics. Mr. Perry received his Bachelor of Science degree
in electrical engineering from Ben-Gurion University of Negev, Israel in 1981, and his Master of Science degree in Teleprocessing from USM University in the United States in 1984.

Austin W. Lewis IVcurrently serves as the Chief Executive Officer of Lewis Asset Management Corp., an investment management
company headquartered in New York City which he founded in 2004. From 2003 to 2004, Mr. Lewis was employed at Puglisi & Company, a New York based broker-dealer registered with FINRA, where he served as a registered representative and
managed individual client accounts, conducted due diligence for investment banking activities and managed his own personal account. In 2002, Mr. Lewis co-founded Thompson Davis, & Company, Inc., a registered broker-dealer headquartered
in Richmond, Virginia. From 1998 to 2002, Mr. Lewis was employed by Branch Cabell and Company, Inc. in Richmond, Virginia (Branch Cabell) where he was a registered representative. Following the November 2000 acquisition of Branch
Cabell by Tucker Anthony Incorporated (Tucker Anthony), Mr. Lewis served as a Vice-President for Tucker Anthony and subsequently RBC Dain Rauscher, Inc. which acquired Tucker Anthony in August of 2001. Mr. Lewis received his
Bachelor of Science degree in Finance and Financial Economics from James Madison University in 1998.

Andy Ben-Artzy was a
member of the senior management of Swiss Re, the leading reinsurance company in the world, from 1996 to 2006. As a member of the Executive Team of the Global IT function, Andy had responsibility over Business Architecture and Strategy and Planning.
Dr. Ben-Artzy had held management positions for the World Bank (1989 to 1993), Bank Leumi in Israel (1979 to 1989), Citibank in New York (1970 to 1979) and the Government of Israel (Mamram, 1964 to 1969). During his tenure at Swiss Re,
Dr. Ben-Artzy was part of the team responsible for designing the IT architecture to support the new business model for the globalization of Swiss Re, i.e. its transformation from a multinational to a global company. Born in 1945, Dr. Ben
Artzy studied economics and statistics at Tel Aviv University (1969) followed by an MBA and a Ph. D. in investment finance and management information systems from New York University (1978).

Arrangements or understandings concerning appointments of directors

Mr. Amelink, a member of our Board of Directors, is a Strategic Advisor for acquisitions in the Energy Division of Telvent and is a
board member of Telvent North America, an affiliate of Telvent Investments, S.L. (Telvent), the holder of 292,081 of our ordinary shares, which possesses the right to designate a member of our Board of Directors.

Other than to the extent (if any) described immediately above, there are no arrangements or understandings pursuant to which any of our
directors or members of senior management were elected as such. There are furthermore no family relationships among any such directors or members of our senior management.

Compensation

The aggregate remuneration we paid to our directors and executive officers as a group in salaries, fees, commissions and bonuses for the
year ended December 31, 2009 was approximately $1.1 million. The aggregate amount set aside or accrued during 2009 to provide pension, retirement or similar benefits for directors and officers of our company, pursuant to any existing plan
provided or contributed to by us, was approximately $27,000.

On November 29, 2005, our shareholders approved a revised
compensation plan for our directors who are not executive officers which became effective on January 1, 2006. The revised compensation plan includes (i) an annual fixed retainer of $3,000 for each member of the Board of Directors,
(ii) an annual fixed retainer of an additional $3,000 for each director who also serves as a member of the Audit Committee of the Board of Directors, and (iii) a fee of $1,000 per meeting for each of the four (4) scheduled meetings of
each of the Board of Directors and Audit Committee during each calendar year, whether participation for such meeting is attended in person or via telephone. Participation in any additional meetings of the Board of Directors or the Audit Committee
does not entitle any director to additional compensation. All directors are reimbursed for their reasonable expenses incurred for each Board of Directors or committee meeting attended in person. With respect to our external directors, such
compensation and reimbursement of expenses are made in accordance with the applicable provisions of the Companies Law. For additional information, please see the discussion below under the heading External Directors.

On January 31, 2008 our shareholders approved a grant of 90,000 restricted shares, in the aggregate, to our directors.

During 2008, 75,000 restricted shares were granted to one of our executive officers.

During 2009, 33,000 restricted shares were granted to one of our executive officers.

In February 2010, our shareholders approved the authorization of the Audit Committee and the Board of Directors to grant, on an annual
basis (starting from 2009), up to 20,000 restricted shares to each director of the Company, subject to the available pool under the Companys stock option plans. The actual terms of the grants, including the vesting schedule and related terms,
shall be as determined by the Board of Directors as long as the annual grant per director does not exceed such 20,000 restricted shares.



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In February 2010, 50,000 restricted shares were granted, in the aggregate, to our directors
and 130,659 restricted shares were granted, in the aggregate, to two of our executive officers.

All restricted shares that we
granted in 2008 and 2009 did not require payment of consideration by the grantees thereof. In general, restrictions on some restricted shares lapse at a rate of 50% per year over two years from the date of grant and some shares are released
from restriction upon grant, All restricted shares granted to executive officers and directors would be released from restriction upon our consummation of a merger, acquisition or similar transaction in which there is a change of control of the
Company.

Board Practices

The following table sets forth certain information concerning our current directors and executive officers:



|                       |  |                                              |  |                       |  |                                             
|---------------------- |  | -------------------------------------------- |  | --------------------- |  | --------------------------------------------
|Name                   |  | Current Office(s) Held                       |  | Commencementof Office |  | Expiration/RenewalOf Current Term 
of Office
|Samuel I. HaCohen      |  | Executive Chairman of the Board of Directors |  | March 1998            |  | 2011 Annual Meeting                         
|Memy Ish-Shalom        |  | Chief Executive Officer                      |  | January 2006          |  | Not applicable                              
|Jeffrey J. Oskin       |  | President                                    |  | January 2006          |  | Not applicable                              
|Nir Diskin             |  | Vice President, Engineering                  |  | January 2006          |  | Not Applicable                              
|Mark Hosking           |  | Manager, ViryaNet Australia                  |  | June 2005             |  | Not applicable                              
|Vladimir Morgenstern   |  | Director                                     |  | July 1999             |  | 2011 Annual Meeting                         
|Arie Ovadia (1),(2)    |  | Director                                     |  | December 2006         |  | 2011 Annual Meeting                         
|Herman Amelink         |  | Director                                     |  | January 2009          |  | 2011 Annual Meeting                         
|Nati Perry (2)         |  | Director                                     |  | December 2007         |  | 2011 Annual Meeting                         
|Austin W. Lewis IV     |  | Director                                     |  | February 2010         |  | 2011 Annual Meeting                         
|Andy Ben-Artzy (1) (2) |  | Director                                     |  | February 2010         |  | 2014 Annual Meeting                         



|(1) | External Director under the Companies Law
|--- | -----------------------------------------

|(2) | Member of Audit Committee
|--- | -------------------------

Other than our employment agreement with Mr. HaCohen, we do not have any employment or service contracts with our directors that
provide for benefits upon termination of employment. Mr. HaCohens employment agreement contains various provisions, including provisions relating to acceleration of vesting of his options and/or restricted shares upon a change in the
control of our company. In addition, he is entitled to 6 months of severance benefits in the event that we terminate his employment without cause, under the circumstances provided in his employment agreement or in the event that he resigns due to a
demotion.

Our Articles of Association provide that directors are elected at our annual general meeting of the shareholders by
a vote of the holders of a majority of the voting power represented at that meeting. Each director, except for the external directors under the Companies Law as described below, holds office until the next annual general meeting of the shareholders.

External Directors;

Companies Law

We are subject to the provisions of the Companies Law. Under the Companies Law, companies incorporated under the laws of Israel whose
shares have been offered to the public in or outside of Israel, are required to appoint at least two external directors. Mr. Ovadia and Mr. Ben-Artzy serve as our external directors.

Who May Be Appointed

A person may not be appointed as an external director if the person or the persons relative, partner, employer or any entity under
the persons control, has, as of the date of the persons appointment to serve as external director, or had, during the two years preceding that date, any affiliation with the company, any entity or person controlling the company or any
entity controlled by the company or by a controlling shareholder of the company. The term affiliation includes:



| |  |  | an employment relationship;
| | - |  | ---------------------------



| |  |  | a business or professional relationship maintained on a regular basis;
| | - |  | ----------------------------------------------------------------------



| |  |  | control; and
| | - |  | ------------



| |  |  | service as an office holder.
| | - |  | ----------------------------

Under the Companies Law, at least one of the external directors serving on a companys board of directors is required to have
financial expertise and the other external director or directors are required to have professional expertise. A director is deemed to have professional expertise if he or she either (i) has an academic degree
in economics, business management, accounting, law or public service, (ii) has an academic or other degree or completed another form of higher education, all in the field of business of the Company or relevant for his/her position, or
(iii) has at least 5 years experience as either a senior managing officer in the Companys line of business with a significant volume of business, a public office, or a senior position in the Companys main line of business. A
director with financial expertise is a director who, due to his or her education, experience and skills, has a high expertise and understanding in financial and accounting matters and financial statements, in such a manner which allows
him or her to deeply understand the financial statements of the Company and initiate a discussion about the presentation of financial data. We believe that both of our external director[s] possess both professional expertise and financial expertise.

Conflicts of Interest

No person can serve as an external director if the persons position or other business creates, or may create, conflicts of interests
with the persons responsibilities as an external director or may impair his or her ability to serve as an external director. Until the lapse of two years from termination of office of an external director, for any reason, a company may not
engage such former external director to serve as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.



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How External Directors Are Elected

External directors are generally elected by a majority vote at a shareholders meeting, provided that either:



| | (a) | the majority of the shares voted at the meeting, including at least one third of the shares of non-controlling shareholders or their representatives that are voted at
the meeting, vote in favor of the election; or
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | the total number of shares of non-controlling shareholders voted against the election of an external director does not exceed one percent of the aggregate voting rights
in the company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Term of Service

The initial term of an external director is three years and may be extended by the shareholders for an additional three years. If, when we
elect an external director, all of our directors are of the same gender, then the next external director must be of the other gender. Each committee exercising powers of the Board of Directors is required to include at least one external director,
and the audit committee of the Company is required to include all external directors.

Audit Committee:

Companies Law

Our Board of Directors has formed an audit committee. The audit committee exercises the powers of the Board of Directors for our
accounting, reporting and financial control practices. Under the Companies Law, both external directors of a public company must be members of the audit committee. Messrs. Ovadia, Ben-Artzy and Perry, of whom Mr. Ovadia and Mr. Ben-Artzy
are external directors, are members of our audit committee.

Under the Companies Law, the board of directors of any public
company must also appoint an audit committee. The Companies Law requires that the audit committee be comprised of at least three directors, including all of the external directors, but excluding:



| |  |  | the chairman of the board of directors;
| | - |  | ---------------------------------------



| |  |  | a controlling shareholder or the relative of a controlling shareholder; or
| | - |  | --------------------------------------------------------------------------



| |  |  | any director employed by the company, or who provides services to the company on a regular basis.
| | - |  | -------------------------------------------------------------------------------------------------

Role of Audit Committee

Under the Sarbanes-Oxley Act, the audit committee (i) has the sole authority and responsibility to select, evaluate, and, where
appropriate, replace the companys independent auditors, (ii) is directly responsible for the appointment, compensation and oversight of the work of the independent auditors for the purpose of preparing its audit report or related work,
and (iii) is responsible for establishing procedures for (A) the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (B) the confidential,
anonymous submission by employees of the company of concerns regarding questionable accounting or auditing matters. The audit committee is required to consult with management but may not delegate these responsibilities.

The roles of our audit committee under the Companies Law include identifying irregularities in the management of the companys
business and approving related party transactions as required by law.

In addition to such functions as the audit committee
may have under the Companies Law,, the primary purpose of our audit committee, including pursuant to other responsibilities with which it is charged under the Sarbanes-Oxley Act, is to assist the board of directors in fulfilling its responsibility
to oversee managements conduct of the financial reporting process, the systems of internal accounting and financial controls and the annual independent audit of the Companys financial statements. The audit committee reviews with
management and our outside auditors the audited financial statements included in our Annual Report on Form 20-F.

In
discharging its oversight role, our audit committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of our company and the power to retain outside counsel, auditors or
other experts for this purpose.

Conflicts of Interest

An audit committee of a public Israeli company may not approve an action or a transaction between the company and an interested party such
as an office holder, a controlling shareholder, or an entity in which any such party or person has a personal interest unless, at the time of approval, the companys two external directors are serving as members of the audit committee and at
least one of the external directors was present at the meeting in which an approval was granted.

Employees

As of December 31, 2009, we had 21 employees in Israel, 36 in the United States and 7 in Australia. Of our 64 employees, 15 were
engaged in research and development, 14 in sales, marketing and business development, 26 in professional services and technical support and 9 in finance, administration and operations. None of our employees is represented by a labor union.

We are not a party to any collective bargaining agreement with our employees. However, some provisions of the collective
bargaining agreement between the Histadrut, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists Association of Israel, are applicable to our Israeli employees under
expansion orders of the Israeli Ministry of Labor and Welfare. These provisions principally concern the length of the work day and the work week, minimum wages for workers, contributions to pension funds, insurance for work-related accidents,
procedures for dismissing employees and determination of severance pay. Under these provisions, the wages of most of our employees are automatically adjusted based on changes in the Israeli consumer price index. The amount and frequency of these
adjustments are modified occasionally. We consider our relationship with our employees to be good and have never experienced a strike or work stoppage.

We have to comply with various labor and immigration laws throughout the world, including laws and regulations in Israel, the United
States and Australia. Compliance with these laws has not been a material burden for us. If the number of our employees increases over time, our compliance with these regulations could become more burdensome.

Share Ownership

As of June 1, 2010, the aggregate number of our Ordinary Shares (including Ordinary Shares which may be issued upon conversion of
Preferred A Shares and including 1,001,136 Ordinary Shares that may be issued upon exercise of options, warrants and convertible note that are exercisable or will become exercisable within 60 days of June 1, 2010) that are beneficially owned by
our directors and executive officers as a group was 52.3% (The above number does not take into effect restricted Ordinary Shares that have been granted to executive officers and directors but which will not be released from restriction within 60
days of June 1, 2010).

The aggregate number of our Ordinary Shares beneficially owned by our directors and executive
officers as a group also includes (i) Ordinary Shares as well as Ordinary Shares underlying Preferred A Shares that are held by Jerusalem High-tech Founders, Ltd. since two of its affiliates serve on our Board of Directors and,



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accordingly, such affiliates may be deemed to be the beneficial owners of the Ordinary Shares held thereby (although these affiliates disclaim such beneficial ownership, except to the extent of
their respective pecuniary interests therein), (ii) Ordinary Shares, Ordinary Shares underlying warrants, and Ordinary Shares issuable upon conversion of convertible notes, in each case that are held by Lewis Opportunity Fund Group and its
affiliates, since an affiliate thereof serves on our Board of Directors and may be deemed to be the beneficial owner thereof, (iii) Ordinary Shares held by e-Wise Holdings Pty Ltd, since an affiliate thereof (Mark Hosking, the Manager
of ViryaNet Australia), is our executive officer and may be deemed to be the beneficial owner thereof. See Item 7- Major Shareholders and Related Party Transactions below for more details concerning the beneficial
ownership of our Ordinary Shares by our directors and executive officers.

As of June 1, 2010, under our equity
compensation plans, 135,159 restricted Ordinary Shares, granted to our directors and executive officers, had not yet been released from restrictions (37,500 of such shares will be released from restrictions within 60 days of June 1, 2010). The
restricted Ordinary Shares had been granted for no consideration.

Shares held by our directors and executive officers do not
possess different voting rights than any shares held by any of our other shareholders.

Option Plans

We currently maintain two option plans, the 2005 Share Option Plans (as defined below). The purposes of the option plans are to provide an
incentive to the officers, directors, employees and consultants of our company, or of any of our subsidiaries, to acquire a proprietary interest in us, to continue as officers, directors, employees and consultants, to increase their efforts on
behalf of ViryaNet and to promote the success of our business.

In the past, we maintained a 1996 Stock Option and Incentive
Plan, 1997 Stock Option and Incentive Plan, 1998 Stock Option and Incentive Plan and 1999 Stock Option and Incentive Plan, each of which has expired. The 266,541 Ordinary Shares that were still available for grant of additional options under these
plans prior to the expiration thereof were transferred to the 2005 Share Option Plans. Despite the expiration of our old Stock Option and Incentive Plans, options to purchase 24,925 Ordinary Shares that were outstanding under such plans currently
remain outstanding.

The 2005 Share Option Plans

In 2005, our Board of Directors believed that it was appropriate for us to adopt and approve, subject to shareholders approval, a
new form of Israeli share option and restricted share plan and a new form of international share option and restricted share plan (collectively, the 2005 Share Option Plans), which were to supersede and replace all existing options
plans, including our then-current 1999 Stock Option and Incentive Plan. The 2005 Share Option Plans were approved by our shareholders at our annual general meeting held on November 29, 2005.

The 2005 Share Option Plans provide for the grants of options, restricted shares and other share based awards
to employees, directors, office holders, service providers, consultants and any other person or entity that provides services that our Board of Directors decides are valuable to us or our affiliates. The 2005 Share
Option Plans provide for the grant of incentive stock options (options that qualify for special tax treatment under Section 422 of the U.S. Internal Revenue Code), nonqualified stock options, 102 Share Options (options
that qualify for special tax treatment under Section 102 of the Israeli Tax Ordinance (New Version) 1961 (the Ordinance)), 102 Shares (shares that qualify for special tax treatment under Section 102 of
the Ordinance) 3(I) Stock Options (options subject to tax treatment under Section 3(I) of the Ordinance), restricted shares and other share based awards.

As of the effectiveness of the 2005 Share Option Plans, any options that had remained available for grants under any of our prior stock
option plans became available for subsequent grants of awards under the 2005 Share Option Plans. In addition, if any outstanding award under our then-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 June 1, 2010, grants of restricted shares relating to a total of 189,080 Ordinary Shares, in the aggregate, were outstanding
under the 2005 Share Option Plans, and 177,107 Ordinary Shares were available for additional grants under the 2005 Share Option Plans.

Administration of Our Option Plans

Our share option plans are administered by our Board of Directors. Under our share option plans, the exercise price of options is
determined by our Board of Directors. The Board of Directors also determines the vesting schedule of option and restricted share grants, but generally option and restricted share grants vest over a two to four year period. Each option granted under
the share option plans is exercisable, unless extended, until seven years from the date of the grant of the option. The 2005 Share Option Plans will expire on December 31, 2015.



|Item 7. | Major Shareholders and Related Party Transactions
|------- | -------------------------------------------------

Major Shareholders

The following table summarizes information about the beneficial ownership of our outstanding Ordinary Shares as of June 1, 2010 for
each person or group that we know owns 5% or more of our outstanding Ordinary Shares, and for our directors and executive officers as a group.

We determine beneficial ownership of shares under the rules of the Securities and Exchange Commission and include any Ordinary Shares
over which a person possesses sole or shared voting or investment power, or the right to receive the economic benefit of ownership, or for which a person has the right to acquire any such beneficial ownership at any time within 60 days of
June 1, 2010. Because the holders of our Preferred A Shares are entitled to identical rights as holders of our Ordinary Shares (except that Preferred A Shares have superior liquidation preferences) and because the Preferred A Shares are
convertible into Ordinary Shares on a one for one basis at any time at the election of the holders thereof, we have included such shares together with our Ordinary Shares in calculating the number of shares held, and beneficial ownership
percentages, provided below, indicating, however, where applicable, as to the number of Preferred A Shares included in the ownership of any shareholder listed below. Except as otherwise indicated, and subject to applicable community property laws,
the persons named in the table possess sole voting and investment power for all Ordinary Shares held by them. Applicable percentage ownership in the following table is based on 3,466,814 shares outstanding as of June 1, 2010, which include
326,798 Preferred A Shares.



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Ordinary Shares Beneficially Owned



|                                                                                                                                                     |  |           |     |  |                 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | --- |  | --------------- | -
|Name and Address                                                                                                                                     |  | Number    |     |  | Percent ofClass |  
|Lewis Opportunity Fund Group
45 Rockefeller Center
Suite 2570
New York, NY 10111                                                                     |  | 1,390,272 | (1) |  | 31.4            | %
|Jerusalem High-tech Founders, Ltd.
c/o Hamotal Insurance Agency
9 HaRatom Street
Har Hotzvim
Jerusalem 41450
Israel                                  |  | 380,323   | (2) |  | 11.0            | %
|LibertyView Special Opportunities Fund, LP
LibertyView Capital Management
Neuberger Berman, LLC
111 River Street  Suite 1000
Hoboken, NJ 07030-5776 |  | 373,585   | (3) |  | 10.6            | %
|Telvent Investments, S.L.
Valgrande 6
28108 Alcobendas
Madrid, Spain                                                                                 |  | 292,081   |     |  | 8.4             | %
|All directors and executive officers as a group (11 persons)                                                                                         |  | 2,147,151 | (4) |  | 52.3            | %



|(1) | Includes
|--- | --------



| |  |  | (i) 325,605 Ordinary Shares, (ii) warrants to purchase 234,000 Ordinary Shares exercisable within 60 days of June 1, 2010 and
(iii) 60,606 Ordinary Shares that may be issued upon a conversion of convertible note at a fixed conversion price of $1.65 per Ordinary Share, held by Lewis Opportunity Fund LP;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (ii) 91,031 Ordinary Shares and (ii) warrants to purchase 66,000 Ordinary Shares exercisable within 60 days of June 1, 2010, held by LAM
Opportunity Fund LP;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (iii) warrants to purchase 300,000 Ordinary Shares at an exercise price of $ 2.00 per Ordinary share, exercisable within 60 days of
June 1,2010 and (ii) 303,030 Ordinary Shares that may be issued upon a conversion of convertible note at a fixed conversion price of $1.65 per Ordinary Share, held by W.A. Lewis IV; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (iv) 10,000 Ordinary Shares held by Mr. Lewis who serves on our Board of Directors and has a financial interest in The Lewis Opportunities Fund
Group.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes (i) 1,315 Ordinary Shares held by Jerusalem High-tech Founders Ltd., (ii) 56,194 Ordinary Shares, in the aggregate, held by Mr. HaCohen and
Mr. Morgenstern, who serve on our Board of Directors and have a financial interest in Jerusalem High-tech Founders, Ltd. and (iii) 322,814 Preferred A Shares, which can be converted to Ordinary Shares on a one-to-one basis at any time,
held by Jerusalem High-tech Founders Ltd.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes (i) 306,714 Ordinary Shares, (ii) 43,537 Ordinary Shares issuable upon conversion of the $480,000 balance of the convertible debt owed to
LibertyView, which may be converted at any time at a fixed conversion price of $11.025 per Ordinary Share, and (iii) warrants to purchase 23,334 Ordinary Shares that are exercisable within 60 days of June 1, 2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes options and restricted shares granted to our directors and executive officers that are exercisable or for which the restrictions thereon lapse within 60 days
of June 1, 2010. This number includes the following shares beneficially owned by those directors and executive officers who beneficially own more than 1% of our outstanding shares: (i) 357,964 shares or 10.3% of our outstanding shares
beneficially owned by Samuel HaCohen, the Executive Chairman of our Board of Directors, out of which 33,835 Ordinary Shares are held directly by Mr. HaCohen, and 322,814 Preferred A Shares and 1,315 Ordinary Shares are held by Jerusalem
High-tech Founders Ltd (Jerusalem High-tech), which Mr. HaCohen may be deemed to beneficially own due to his status as an affiliate of Jerusalem High-tech; (ii) 346,488 shares or 10.0% of our outstanding shares beneficially
owned by Vladimir Morgenstern, a director of ours, out of which 22,359 ordinary shares are held directly by Mr. Morgenstern, and 322,814 Preferred A Shares and 1,315 Ordinary Shares are held by Jerusalem High-tech, which Mr. Morgenstern
may be deemed to beneficially own due to his status as an affiliate of Jerusalem High-tech (322,814 Preferred A Shares and 1,315 Ordinary Shares held by Jerusalem High-tech are included only once under the aggregate directors and executive
officers beneficial ownership); (iii) 111,156 Ordinary Shares or 3.2% of our outstanding shares beneficially owned by Mark Hosking, the Manager of ViryaNet Australia, all of which are held by e-Wise Holdings Pty Ltd and which
Mr. Hosking may be deemed to beneficially own due to his status as an affiliate of e-Wise Holdings Pty Ltd,; (iv) 122,000 Ordinary Shares or 3.5% of our Ordinary Shares, held by Memy Ish-Shalom, our chief executive officer, which include
84,500 Ordinary Shares held directly by him and 37,500 restricted shares for which the restrictions thereon lapse within 60 days of June 1, 2010; (v) 1,390,272 shares or 31.4% of our outstanding shares, beneficially owned by Austin W.
Lewis IV, a director of ours, out of which 10,000 Ordinary Shares are held by Mr. Lewis and 1,380,272 Ordinary Shares are beneficially owned by Lewis Opportunity Fund Group and its affiliates (as described in 1(i), 1(ii) and 1(iii) above),
which Mr. Lewis may be deemed to beneficially own due to his financial interest in the Lewis Opportunity Fund Group; (vi) 50,000 Ordinary Shares or 1.4% of our Ordinary Shares, held directly by Herman Amelik, a director of ours and
(vii) 45,000 Ordinary Shares or 1.3% of our Ordinary Shares, held directly by Jeff Oskin, our president.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other than as detailed immediately above, none of our directors and executive officers beneficially owns more than 1% of our outstanding
shares.

Record Holders

Based upon a review of the information provided to us by our transfer agent, as of June 1, 2010, there were 164 holders of record of
our Ordinary Shares (including Ordinary Shares issuable upon conversion of our outstanding Preferred A Shares), of which 86 record holders holding 2,231,189, or approximately 64%, of our outstanding Ordinary Shares (including Ordinary Shares
issuable upon conversion of our Preferred A Shares) reside in the United States. These numbers are not representative of the number of beneficial holders of our shares, nor are they representative of where such beneficial holders reside, since many
of these shares were held of record by various nominees (including CEDE & Co, the U.S. nominee company of the Depository Trust Company, which holds of record approximately 33% of our outstanding shares).

Our major shareholders do not have different voting rights than any other holders of our shares.



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##### Table of Contents

Recent Significant Changes in the Percentage Ownership of Major Shareholders during the
past three years:

During 2007 and 2008, we raised approximately $1.2 million of cash, excluding transaction related
expenses, in a financing transaction involving our sale of Ordinary Shares, a convertible note and warrants. The transaction consisted of a private placement, on December 19, 2007, to a group of new financial investors (the Lewis
Opportunity Fund Group) that involved our issuance of (i) 363,636 Ordinary Shares at a price of $1.65 per Ordinary Share, for aggregate consideration of $600,000, (ii) a non-interest bearing convertible note in the amount of $600,000
with a conversion price of $1.65 per Ordinary Share, and (iii) warrants to purchase an aggregate of 600,000 Ordinary Shares at an exercise price of $2.00 per Ordinary Share. The convertible notes have no maturity date and can only be converted
into Ordinary Shares. The warrants have a callable feature whereby we can force the exercise of up to 50% of the warrants when all Ordinary Shares issued in connection with this investment transaction are registered for resale with the SEC.

In January 2008, LibertyView sold 261,238 of our Preferred A Shares that it then held to Jerusalem High-tech.

Related Party Transactions

Unsecured Debt Agreement with an Officer

As part of our acquisition of e-Wise in June 2005, we assumed an amount of approximately $285,000 of unsecured debt payable to
e-Wises major shareholder, Mark Hosking. As a result of our acquisition of e-Wise, Mr. Hosking became a shareholder, officer and employee of our Company. As of December 31, 2009, the balance of the outstanding debt to
Mr. Hosking was $79,000.

Loans

In June 1999, our Board of Directors approved our issuance to Mr. HaCohen of 3,478 Series C-2 Preferred Shares (which were converted
into 3,478 Ordinary Shares upon the closing of our IPO), in consideration of his payment of $100,000, the funds for which Mr. HaCohen borrowed from us. The loan was approved by our shareholders in June 2000 and bears annual interest at the rate
of 6.5%. Repayment of the loan is due when Mr. HaCohen sells or otherwise disposes of the shares subject to the loan. In addition, we, in our sole discretion, may call for immediate payment of the loan and the interest thereon in the event that
(i) Mr. HaCohen becomes bankrupt or files a motion for bankruptcy, or (ii) Mr. HaCohen ceases to remain in the employment of the Company for any reason.

Directors and Officers Insurance

We have obtained directors and officers liability insurance for the benefit of our directors and office holders and intend to
continue to obtain such insurance and pay all premiums thereunder to the fullest extent permitted by the Companies Law.

Indemnification of Office Holders

Our Articles of Association provide that we may indemnify an office holder (i.e., an executive officer or director) against:



| |  |  | a financial liability imposed on him/her in favor of another person by any judgment, including a settlement or an arbitrators award approved by a
court concerning an act performed in his/her capacity as an office holder;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reasonable litigation expenses, including attorneys fees, expended by the office holder or charged to him/her by a court in proceedings we
institute against him/her, instituted on our behalf, or instituted by another person, in each case relating to an act performed in his/her capacity as an office holder; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reasonable litigation expenses relating to an act performed in his/her capacity as an office holder, including attorneys fees, expended by the
office holder or charged to him/her by a court in a criminal proceeding from which he/she was acquitted, or a criminal proceeding in which he/she was convicted for a criminal offense that does not require proof of intent.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Articles of Association also include:



| |  |  | authorization to undertake, in advance, to indemnify an office holder, provided that the undertaking is limited to specified events which the board of
directors believes are anticipated and limited in amount determined by the board of directors to be reasonable under the circumstances; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | authorization to indemnify an office holder retroactively.
| | - |  | ----------------------------------------------------------

We have agreed to indemnify our office holders under indemnification agreements with each office holder. We have also exempted, and
agreed to indemnify, our office holders from liabilities resulting from acts performed by them in their capacity as officer holders to the maximum extent permitted under the Companies Law.

Interests of Experts and Counsel

Not applicable.



|Item 8. | Financial Information
|------- | ---------------------

Consolidated Statements and Other Financial Information

Our consolidated financial statements and other financial information are included in this annual report in Item 18 - Financial
Statements.

Legal Proceedings

We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a significant effect on our
financial position or profitability.

Dividend Distribution Policy

We have never declared or paid dividends to our shareholders and we do not intend to pay dividends in the future. We anticipate that we
will retain all of our future earnings, if any, for use in the expansion and operation of our business rather than for the payment of dividends.



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##### Table of Contents

Significant Changes

Since the date of our consolidated financial statements included in this annual report, there has not been a significant change in our
Company other than as described (if at all) in the notes to such financial statements.



|Item 9. | The Offer and Listing
|------- | ---------------------

Market Price Information

Through June 30, 2010, the high and low reported sales prices for our Ordinary Shares were as follows for the periods indicated
below:



|                                        |  |      |       |     |   |     
|--------------------------------------- |  | ---- | ----- | --- | - | ----
|Period                                  |  | High |       | Low
|Years ended:                            |  |      |       |     |   |     
|December 31, 2009                       |  | $    | 1.50  |     | $ | 0.10
|December 31, 2008                       |  |      | 1.90  |     |   | 0.15
|December 31, 2007                       |  |      | 4.40  |     |   | 1.01
|December 31, 2006                       |  |      | 9.60  |     |   | 3.60
|December 31, 2005                       |  |      | 15.40 |     |   | 8.05
|Quarters:                               |  |      |       |     |   |     
|2010                                    |  |      |       |     |   |     
|Second Quarter, ended June 30, 2010     |  |      | 1.11  |     |   | 0.80
|First Quarter, ended March 31, 2010     |  |      | 1.50  |     |   | 0.62
|2009                                    |  |      |       |     |   |     
|Fourth Quarter, ended December 31, 2009 |  |      | 1.50  |     |   | 0.10
|Third Quarter, ended September 30, 2009 |  |      | 0.25  |     |   | 0.10
|Second Quarter, ended June 30, 2009     |  |      | 0.25  |     |   | 0.18
|First Quarter, ended March 31, 2009     |  |      | 0.25  |     |   | 0.20
|2008                                    |  |      |       |     |   |     
|Fourth Quarter, ended December 31, 2008 |  |      | 1.50  |     |   | 0.15
|Third Quarter, ended September 30, 2008 |  |      | 1.60  |     |   | 1.50
|Second Quarter, ended June 30, 2008     |  |      | 1.55  |     |   | 0.95
|First Quarter, ended March 31, 2008     |  |      | 1.90  |     |   | 1.10
|                                        |  |     
|Most Recent Six Months                  |  | High |       | Low
|June 2010                               |  |      | 0.95  |     |   | 0.80
|May 2010                                |  |      | 1.06  |     |   | 0.95
|April 2010                              |  |      | 1.11  |     |   | 1.01
|March 2010                              |  |      | 1.27  |     |   | 0.91
|February 2010                           |  |      | 0.92  |     |   | 0.72
|January 2010                            |  |      | 1.50  |     |   | 0.62

Markets on Which Our Ordinary Shares Trade

Prior to June 12, 2007 our Ordinary Shares were listed on the
NASDAQ SmallCap Market (now known as the NASDAQ Capital Market). On June 12, 2007 our Ordinary Shares were delisted from NASDAQ SmallCap Market and became eligible for quotation and trading on the Pink Sheets. On December 14, 2007, our
Ordinary Shares became eligible for quotation and trading on the OTCBB under the ticker symbol VRYA.OB.

On September 11,
2008, due to our delinquency with respect to the filing of our annual report on Form 20-F for the period ended December 31, 2007, our Ordinary Shares ceased to be eligible for quotation on the OTCBB and were removed from the OTCBB.
Following the removal from OTCBB, our Ordinary Shares became immediately eligible for quotation and trading on the Pink Sheets.

On March 4, 2010, our Ordinary Shares became eligible once again for quotation and trading on the OTCBB under the ticker symbol
VRYAF.OB.

For further information, see Risk FactorsOur Ordinary Shares are quoted on the Over
the Counter Bulletin Board and previously were quoted on the Pink Sheets, which has adversely affected, and may continue to adversely affect, the market price of, and trading market for, our Ordinary Shares in Item 3 above.



|Item 10. | Additional Information
|-------- | ----------------------

Share Capital

Not applicable.

Memorandum and Articles of Association

Register

Our registration number at the Israeli registrar of companies is 511281354.

Companys Objectives

The Companys objectives, as set forth in Section 3 of our Articles of Association, are to carry on any business and do any act,
which is not prohibited by law. We may also make contributions of reasonable sums to worthy purposes even if such contributions are not made on the basis of business considerations.



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Directors

Any director is entitled to vote in a meeting of our Board of Directors, except that a director who has a personal interest in an
extraordinary transaction (as defined below) which is considered at a meeting of our Board of Directors, may not be present at this meeting or vote on this matter. An extraordinary transaction is defined in the Companies Law
as a transaction that is either (i) not in the ordinary course of business; (ii) not on market terms; or (iii) that is likely to have a material impact on the Companys profitability, assets or liabilities.

Until otherwise decided by our Board of Directors, a quorum at a meeting of our Board of Directors shall be constituted by the presence
in person, by alternate or by telephone or similar communication equipment, of a majority of the directors then in office who are lawfully entitled to participate and vote at the meeting. If within one-half hour (or within such longer time not to
exceed one (1) hour, as the Chairman of the meeting, at his discretion, may decide) from the time appointed for the convening of the board meeting, a quorum is not present, the board meeting shall stand adjourned to the same day in the next
week at the same time and place (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public
holiday). If, at such adjourned board meeting, a quorum is not present within half an hour from the time appointed for holding the meeting, the directors present, in person, by alternate or by telephone or similar communication equipment who are
lawfully entitled to participate and vote at such meeting, shall be a quorum.

Our business is managed by the Board of
Directors, which may exercise all such company powers and perform on our behalf all such acts as may be exercised and performed by us as are not by the Companies Law or by our Articles of Association required to be exercised or done by us through a
general meeting of our shareholders. Our Articles of Association provide that the board of directors may from time to time, at its discretion, cause us to borrow or secure the payment of any sum or sums of money for the Companys purposes, and
may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any
mortgages, charges, or other securities on the undertaking of the whole or any part of our property, both present and future, including its uncalled or called but unpaid capital for the time being.

There is no age limit as to the ability of individuals to serve as members of our Board of Directors.

A director is not required to hold our shares as a condition to his or her nomination or election as a director.

Rights attached to our shares

We have two classes of shares authorized and outstanding: Ordinary Shares and Preferred A Shares. The rights attached to the Preferred A
Shares are the same rights attached to our Ordinary Shares, except that the Preferred A Shares have superior liquidation preference (as set forth below), and, for purposes of the disclosure in this annual report, we have generally treated the
Preferred A Shares as Ordinary Shares, except where explicitly described to the contrary.

All dividends (if any) that may be
declared by our Board of Directors shall be declared and paid in proportion to the amount paid up on account of the nominal value of the Ordinary Shares in respect of which the dividend is being paid. As regards to Ordinary Shares not fully paid
throughout the period in respect of which the dividend is paid, dividends in respect thereto shall be apportioned and paid pro rata according to amounts deemed under our Articles of Association to be paid up on account of the nominal value of such
shares during any portion or portions of the period in respect of which the dividend is paid.

Under our Articles of
Association, every shareholder who is present, in person, by proxy, or by written ballot or is deemed under the Companies Law to be present at a general meeting of the shareholders, shall be entitled to one vote for each Ordinary Share of which he
or she is the holder.

The distribution of dividends is under the discretion of our Board of Directors, which is under no
obligation to distribute dividends to our shareholders out of the Companys profits.

In the event of any liquidation,
dissolution or winding up of the Company, the Preferred A Shares will entitle their holders to receive (from assets and funds legally available for distribution to the shareholders), and prior to the pro-rata distribution to all of the Ordinary
Shares of the Company, per each such Preferred A Share, an amount equal to the Preferred A Shares original issue price (adjusted for share combinations or subdivisions or other recapitalizations of the Companys shares) (the
Preferred A Share Liquidation Preference). Following such distribution of the Preferred A Share Liquidation Preference to the holders of Preferred A Shares, the Preferred A Shares shall not participate in the distribution of the
remaining assets to the shareholders of the Company and their holders shall not be entitled to any additional distributions.

Changes of rights attached to our shares

Changes to the rights attached to our Ordinary Shares require the approval of shareholders present, in person, by proxy, or by written
ballot, or deemed under the Companies Law to be present, holding greater than fifty percent (50%) of the total voting power attached to the Ordinary Shares whose holders were present, in person, by proxy, or by written ballot, or deemed under
the Companies Law to be present, at such general meeting, and voted thereon. If, at any time, the share capital of the Company is divided into different classes of shares, the right attached to any class (unless otherwise provided by the terms of
issue of the shares of that class) may be varied only upon consent of a separate general meeting of the holders of the shares of that class, and the provisions of our Articles of Association relating to general meetings shall apply to every such
separate general meeting. The enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed to vary, modify or abrogate the rights attached to
previously issued shares of such class or of any other class of shares.

General Meetings

We are required to hold an annual general shareholders meeting once in every calendar year within a period of not more
than fifteen (15) months after the last preceding annual general shareholders meeting. All general shareholders meetings other than annual general shareholders meeting are deemed to be special shareholders meetings. Our Board of Directors may
call for a general shareholders meeting whenever it sees fit, and, under the Companies Law, is required to call a general shareholders meeting upon a demand in writing by (i) a shareholder or shareholders holding at least 5% of the outstanding
shares and 1% of the voting rights in the company, or (ii) a shareholder or shareholders holding at least 5% of the voting rights in the company. Subject to applicable law and regulations, prior notice of at least 21 days of any general
shareholders meeting, specifying the place, date and hour of the meeting, shall be given to the shareholders of the Company. No business shall be transacted at any general shareholders meeting unless a quorum is present when the meeting proceeds to
business. For all purposes, the quorum shall not be less than two (2) shareholders present in person, or by proxy, or deemed by the Companies Law to be present at such meeting, holding, in the aggregate, at least thirty-three and one-third
percent (33 and1/ 3 %) of the voting rights in our
issued share capital. If, within half an hour from the time appointed for the meeting, a quorum is not present (or within such longer time not exceeding one (1) hour as the Chairman of the meeting may decide), the meeting, if convened upon the
requisition of the shareholders, shall be dissolved; in any other case, it shall stand adjourned to the same day in the next week at the same place and time (unless such day shall fall on a public holiday either in Israel or the United States, in
which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday), or any other day, hour and/or place as the directors shall notify the shareholders. If a quorum is not present at
the second meeting within half an hour from the time appointed for the meeting, any two shareholders present personally or by proxy or by any other valid instrument, shall constitute a quorum, and shall be entitled to deliberate and to resolve in
respect of the matters for which the meeting was convened.

Ownership of our shares

Our Articles of Association and the laws of the State of Israel do not restrict in anyway the ownership or voting of our shares by
non-residents of Israel, except for shareholders who are subjects of countries which are in a state of war with Israel.



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Change of Control

Our Articles of Association do not contain specific provisions intended to delay, defer or prevent a change of control.

The Companies Law includes provisions with respect to the approval of corporate mergers that are applicable to us. These provisions
require that the board of directors of each company that is party to the merger approve the transaction. In addition, the shareholders of each company must approve the merger by a vote of the majority of the companys shares, present and voting
on the proposed merger at a shareholders meeting. In determining whether the requisite majority has approved the merger, shares held by the other party to the merger or any person holding at least 25% of such other party or otherwise
affiliated with such other party are excluded from the vote.

The Companies Law does not require court approval of a merger
other than in specified situations. However, upon the request of a creditor of either party to the proposed merger, a court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the
surviving company will be unable to satisfy the obligations of any of the parties of the merger to their creditors.

A merger
may not be completed unless at least 50 days have passed from the date that a proposal of the merger was filed with the Israeli Registrar of Companies by each merging company and 30 days from the date that shareholder approval of both merging
companies was obtained. The merger proposal may be filed once a shareholder meeting has been called to approve the merger.

The Companies Law also provides that the acquisition of shares in a public company on the open market must be made by means of a tender
offer if, as a result of the acquisition, the purchaser would become a 25% shareholder of the company. The rule does not apply if there already is another 25% shareholder of the company. Similarly, the law provides that an acquisition of shares in a
public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 45% shareholder of the company, unless there already is a 45% shareholder of the company.

If, following any acquisition of shares, the purchaser would hold 90% or more of the shares of the company, that acquisition must be made
by means of a tender offer for all of the target companys shares. An acquirer who wishes to eliminate all minority shareholders must do so by means of a tender offer and acquire 95% of all shares not held by or for the benefit of the acquirer
prior to the acquisition. However, in the event that the tender offer to acquire that 95% is not successful, the acquirer may not acquire tendered shares if by doing so the acquirer would own more than 90% of the shares of the target company.

Material Contracts

During the past two years, we have not been party to any contracts that have been material to our business and that were or had been
entered into outside of the ordinary course of business, other than those discussed in the Property, Plant and Equipment section of Item 4 above, the Liquidity and Capital Resources section of Item 5 above, and the
Related Party Transactions section of Item 7 above.

Exchange Controls

There are currently no Israeli currency control restrictions on remittances of dividends on the Ordinary Shares or the
proceeds from the sale of shares except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions.; however, legislation remains in effect pursuant to which currency controls can be imposed by
administrative action at any time. Non-residents of Israel who purchase our securities with non-Israeli currency will be able to repatriate dividends (if any), liquidation distributions and the proceeds of any sale of such securities, into
non-Israeli currencies at the rate of exchange prevailing at the time of repatriation, provided that any applicable Israeli taxes have been paid (or withheld) on such amounts.

Neither our Memorandum of Association nor our Articles of Association nor the laws of the State of Israel restrict in any way the
ownership or voting of Ordinary Shares by non-residents of Israel, except for shareholders who are subjects of countries which are in a state of war with Israel.

Taxation

United States Federal Income Tax Consideration

The following discussion describes the material United States federal income tax consequences to a person from the purchase, ownership,
and disposition of our Ordinary Shares. The following discussion is based on the United States Internal Revenue Code, current and proposed treasury regulations, judicial decisions and published positions of the Internal Revenue Service, all as in
effect on the date of this annual report, and all of which are subject to change, possibly with retroactive effect. This discussion does not address all aspects of United States federal income taxation that may be relevant to a person based on
particular circumstances. For example, the following discussion does not address the United States federal income tax consequences of the purchase, ownership and disposition of the Ordinary Shares if the person:



| |  |  | controls or owns, directly, indirectly or through attribution, 10% or more of our shares by vote or value;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | is a broker-dealer, insurance company, tax-exempt organization, or financial institution;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | holds Ordinary Shares as part of an integrated investment comprised of Ordinary Shares and one or more other positions; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | has a functional currency that is not the United States dollar.
| | - |  | ---------------------------------------------------------------

The following discussion also does not address any aspect of state, local or non-United States tax laws or any aspect of United States
estate or gift taxation and does not address aspects of United States federal income taxation applicable to United States holders holding options, warrants or other rights to acquire our Ordinary Shares, or who otherwise receive our Ordinary Shares
as compensation. Further, this summary generally considers only United States holders that hold their Ordinary Shares as capital assets and does not consider the tax treatment of holders who are partnerships or who hold Ordinary Shares through a
partnership or other pass-through entity. This discussion also assumes that we will not be treated as a controlled foreign corporation. Under the Internal Revenue Code, a controlled foreign corporation generally means any foreign corporation if, on
any day during its taxable year, more than fifty percent of either the total combined voting power of all classes of stock of the corporation entitled to vote, or the total value of the stock of the corporation is owned, directly, indirectly or by
attribution, by United States persons who, in turn, own directly, indirectly or by attribution, ten percent or more of the total combined voting power of all classes of stock of the corporation entitled to vote. This discussion does not apply to any
person who is not a United States holder or to any person, which holds shares other than Ordinary Shares.

For purposes of
this discussion, a person is a United States holder (or U.S. holder) if such person holds Ordinary Shares and if such person is:



| |  |  | a citizen or resident of the United States;
| | - |  | -------------------------------------------



| |  |  | a partnership or a corporation or other entity taxable as a corporation organized under the laws of the United States or of any state of the United
States or the District of Columbia;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an estate the income of which is includible in gross income for United States federal income tax purposes regardless of source; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | a trust, if a United States court is able to exercise primary supervision over its administration and one or more United States persons have the
authority to control all of its substantial decisions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

You should be aware that this summary is not a
comprehensive description of all the tax considerations that may be relevant to your purchase, ownership or disposition of our Ordinary Shares. United States holders of our Ordinary Shares are advised to consult their own tax advisors concerning the
United States federal, state and local tax consequences, as well as the tax consequences in Israel and other jurisdictions, of the purchase, ownership and disposition of our Ordinary Shares in their particular situations.

Distributions

We have never paid dividends, and do not intend to pay dividends in the future. In general, and subject to the discussion below, if we do
make a distribution on the Ordinary Shares, the distribution will be treated as a dividend for United States federal income tax purposes to the extent of our current and accumulated earnings and profits, as calculated under United States federal
income tax principles. If the amount of the distribution exceeds our earnings and profits, the excess will first be treated as a non-taxable return of a United States holders tax basis in the Ordinary Shares that reduces that United States
holders tax basis dollar-for-dollar, and then as gain from the constructive disposition of the Ordinary Shares. In general, preferential tax rates not exceeding 15% for qualified dividend income and long-term capital gains are
applicable for U.S. holders that are individuals, estates or trusts (these preferential rates are scheduled to expire for taxable years beginning after December 31, 2010, after which time dividends are scheduled to be taxed at ordinary income
rates and long-term capital gains are scheduled to be taxed at rates not exceeding 20%). For this purpose, qualified dividend income means, inter alia, dividends received from a qualified foreign corporation. A
qualified foreign corporation is a corporation that is entitled to the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax Treaty
satisfies this requirement, and we believe we are eligible for the benefits of that treaty.

The amount received by a United
States holder that is treated as a dividend for United States federal income tax purposes:



| |  |  | will be includible in the United States holders gross income;
| | - |  | --------------------------------------------------------------



| |  |  | will be subject to tax at the rates applicable to ordinary income; and
| | - |  | ----------------------------------------------------------------------



| |  |  | will not qualify for the dividends received deduction applicable in some cases to United States corporations.
| | - |  | -------------------------------------------------------------------------------------------------------------

The amount of dividend income will include the amount of Israeli taxes, if any, withheld by us on the dividends we paid, as described
below under Israeli Taxation and Investment Programs. Thus, if withholding taxes are imposed, a United States holder will be required to report income in an amount greater than the cash or the value of other property it receives on the
Ordinary Shares. However, a United States holder may be eligible to claim as a credit against its United States federal income tax liability the amount of tax withheld by us on the dividends we paid.

The amount of foreign income taxes, which may be claimed as a credit in any year, is subject to complex limitations and restrictions,
which must be determined on an individual basis by each United States holder. In general, the total amount of allowable foreign tax credits in any year cannot exceed the pre- credit United States tax liability for the year attributable to each of
nine categories of foreign source taxable income. Dividends received by a United States holder on stock of a foreign corporation, such as our Ordinary Shares, are generally treated as foreign source income within the category of passive income for
this purpose, but are subject to being reclassified as United States source income in specific circumstances. Because distributions in excess of our current and accumulated earnings and profits generally will not give rise to foreign source income,
a person may be unable to claim a foreign tax credit for Israeli withholding tax imposed on the excess amount unless, subject to applicable limitations, such person has other foreign source income. A United States holders foreign tax credit
may be further limited or restricted based on that United States holders particular circumstances, including the length of time the United States holder owned our Ordinary Shares and whether the alternative minimum tax provisions of the
internal revenue code apply. If a United States holders foreign tax credit is restricted in one taxable year, the excess foreign tax credit generally can be carried back for two taxable years and forward for five taxable years, subject to the
limitations described above.

If a United States holder receives a dividend in NIS or other non-United States currency, the
amount of the distribution for United States federal income tax purposes will be the United States dollar value of the distribution determined by the spot rate of exchange on the date the distribution is received, or is treated as received. A United
States holder will have a tax basis in the foreign currency for United States federal income tax purposes equal to the United States dollar value of the foreign currency as determined under the preceding sentence. A United States holder generally
will recognize exchange gain or loss upon the subsequent disposition of the foreign currency equal to the difference between the amount realized on the disposition and the United States holders tax basis in the foreign currency. The gain or
loss generally will be ordinary gain or loss and will generally be treated as United States source gain or loss for United States federal income tax purposes.

Alternatively, a United States holder may elect to claim a United States federal income tax deduction for the Israeli tax paid or
withheld, but only for a taxable year in which the United States holder elects to deduct all foreign income taxes. A non-corporate United States holder, however, may not elect to deduct Israeli taxes if that United States holder does not itemize
deductions.

Because the tax rules that limit the availability or use of foreign tax credits are complex, we are unable to
provide United States holders with any assurance as to the effect of limitations on United States foreign tax credits and deductions for foreign taxes, and United States holders should consult with, and rely solely upon, their personal tax advisors
with respect to such matters.

Sale, Exchange or Other Disposition

Subject to the discussion below, a United States holder generally will recognize capital gain or loss for United States federal income tax
purposes upon the sale or other disposition of the United States holders Ordinary Shares equal to the difference between the amount realized on the sale or other disposition and the United States holders tax basis in its Ordinary Shares.
The capital gain or loss will be long-term capital gain or loss if the Ordinary Shares have been held for more than one year at the time of sale or other disposition. In general, any gain or loss recognized by a United States holder on the sale or
other disposition of Ordinary Shares will be United States source income or loss for foreign tax credit purposes. In some cases, however, losses upon the sale or other disposition of Ordinary Shares may be required to be allocated to foreign source
income.

Foreign Personal Holding Companies

A foreign corporation will be classified as a foreign personal holding company for United States federal income tax purposes if both of
the following two tests are satisfied:



| |  |  | five or fewer individuals who are United States citizens or residents actually or constructively own, under attribution rules, more than 50% of all
classes of the corporations stock measured by voting power or value at any time during the corporations taxable year; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the corporation receives at least 60%, 50% if previously a foreign personal holding company, of its gross income regardless of source, as specifically
adjusted, from passive sources.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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If a corporation is classified as a foreign personal holding company, a portion of its
undistributed foreign personal holding company income, as defined for United States federal income tax purposes, would be imputed to all of its shareholders who are United States holders on the last day of the corporations taxable year, or, if
earlier, the last day on which the United States ownership test set forth above is met. The imputed income would be taxable as a dividend, even if no cash dividend is actually paid. United States holders who dispose of their shares before that date
would not be subject to United States federal income tax under these rules. We cannot provide any assurance that we will not qualify as a foreign personal holding company because it is difficult to make accurate predictions of future income and the
amount of stock a United States citizen or resident will actually or constructively own in us.

Foreign Investment
Companies

A foreign corporation may be classified as a foreign investment company if, at any time during a taxable year
when 50% or more by vote or value of the corporations outstanding stock is owned, directly or indirectly, by United States holders, it is:



| |  |  | registered under the Investment Company Act of 1940 as a management company or unit investment trust; or
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | engaged, or holding itself out as being engaged, primarily in the business of investing, reinvesting, or trading in securities, commodities, or any
interest, including a futures or forward contract or option, in securities or commodities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In general, if a
corporation is classified as a foreign investment company at any time during the period a United States holder holds the corporations stock, any gain from the sale or exchange, or distribution treated as an exchange, of stock in that
corporation by the United States holder will be taxable as ordinary income to the extent of the United States holders ratable share of the corporations accumulated earnings and profits. We cannot provide any assurance that we will not
qualify as a foreign investment company because it is difficult to make accurate predictions of the amount of stock United States holders will directly or indirectly own in us.

Passive Foreign Investment Company Rules

We would be a passive foreign investment company, or PFIC, if either:



| |  |  | 75% or more of our gross income (including our pro rata share of gross income for any company, U.S. or foreign, in which we are considered to own 25%
or more of the shares by value), in a taxable year is passive (the Income Test); or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At least 50% of our assets, averaged over the year and generally determined based upon value (including our pro rata share of the assets of any company
in which we are considered to own 25% or more of the shares by value), in a taxable year are held for the product of, or produce, passive income (the Asset Test).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions
and from notional principal contracts. Cash is treated as generating passive income.

If we are or become a PFIC, each U.S.
holder who has not elected to treat us as a qualified electing fund by making a QEF election, or who has not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions by us and upon
disposition of our Ordinary Shares at a gain, be liable to pay U.S. federal income tax at the then prevailing highest tax rates on ordinary income plus interest on such tax, as if the distribution or gain had been recognized ratably over the
taxpayers holding period for the Ordinary Shares. In addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. holder, the tax basis of such shares would not receive a step-up to fair market value as of
the date of the decedents death, but instead would be equal to the decedents basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also be subject to special U.S. federal income tax rules.

The PFIC rules would not apply to a U.S. holder who makes a QEF election for all taxable years that such U.S. holder has held
the Ordinary Shares while we were are a PFIC, provided that we comply with certain reporting requirements. Instead, each U.S. holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income such U.S.
holders pro rata share of our ordinary earnings as ordinary income and such U.S. holders pro rata share of our net capital gains as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In
general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the IRS. Although we have no obligation
to do so, we intend to comply with the applicable information reporting requirements for U.S. holders to make a QEF election.

A U.S. holder of PFIC shares which are traded on certain public markets, including the NASDAQ, can elect to mark the shares to market
annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and the U.S. holders adjusted basis in the PFIC shares. Loses are
allowed only to the extent of net mark-to-market gain previously included income by the U.S. holder under the election for prior taxable years.

In light of the complexity of PFIC rules, we cannot assure you that we have not been or are not a PFIC or will avoid becoming a PFIC in
the future. U.S. holders who hold Ordinary Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC. U.S. holders are urged to consult their tax advisors about the PFIC rules, including QEF and
mark-to-market elections. For those U.S. Shareholders who determine that we were a PFIC in any our taxable years and notify us in writing of their request for the information required in order to effectuate the QEF Election described above, we will
promptly make such information available to them.

Backup Withholding and Information Reporting

Dividends on our Ordinary Shares, and payments of the proceeds of a sale of our Ordinary Shares, paid within the United States or through
certain United States-related financial intermediaries are subject to information reporting and may be subject to backup withholding (currently at a rate of 28%, but scheduled to increase to 31% for taxable years beginning after December 31,
2010) unless (i) the payer is entitled to, and does in fact, presume the United States holder of our Ordinary Shares is a corporation or other exempt recipient or (ii) the United States holder provides a taxpayer identification number on a
properly completed Form W-9 and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding will be allowed as a credit against a United States holders United States federal income tax
liability and may entitle that United States holder to a refund, provided that required information is furnished to the Internal Revenue Service.

Israeli Taxation and Investment Programs

The following is a summary of the principal tax laws applicable to companies in Israel, including special reference to their effect on us,
and Israeli government programs benefiting us. This section also contains a discussion of the material Israeli tax consequences to you if you acquire Ordinary Shares of our Company. This summary does not discuss all the acts of Israeli tax law that
may be relevant to you in light of your personal investment circumstances or if you are subject to special treatment under Israeli law. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or
administrative interpretation, we cannot assure you that the views expressed in this discussion will be accepted by the tax authorities. The discussion should not be understood as legal or professional tax advice and is not exhaustive of all
possible tax considerations.

General Corporate Tax Structure

Israeli companies were subject to corporate tax at the rate of 26% for the year 2009 and are subject to corporate tax at the rate of 25%
for the year 2010. Corporate tax rates, which were reduced from a rate of 31% for the 2006 tax year, to a rate of 29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year, will further decrease to
24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter.



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Notwithstanding these rates, we may be subject to a lower rate with respect to portions of our income, as described below, due to our participation in certain government incentive programs;
however, no assurances can be provided to such effect, as we do not receive prior approval as to our qualification for tax benefits under certain such programs.

Law for the Encouragement of Industry, Taxes, 1969

We qualify as an industrial company under the Law for the Encouragement of Industry (Taxes), 1969, otherwise known as the industry
encouragement law. A company qualifies as an industrial company under the industry encouragement law if it resides in Israel and at least 90% of its income in a given tax year, exclusive of income from specified loans, capital gains, interest and
dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial manufacturing.

Under the industry encouragement law, an industrial company is entitled to deduct the purchase price of know how, patents or rights over
a period of eight years beginning with the year in which the rights were first used.

The tax laws and regulations dealing
with the adjustment of taxable income for inflation in Israel also provide that industrial enterprises, like ours, are eligible for special rates of depreciation deductions. These rates vary in the case of plant and machinery according to the number
of shifts in which the equipment is operated and range from 20% to 40% on a straight-line basis, or from 30% to 50% on a declining balance basis for equipment first put into operation on or after June 1, 1989, instead of the regular rates,
which are applied on a straight-line basis.

Industrial enterprises which are approved enterprises can also choose between:



| |  |  | the special rates referred to above; and
| | - |  | ----------------------------------------



| |  |  | accelerated rates of depreciation applied on a straight-line basis on property and equipment, generally ranging from 200% on equipment to 400% of the
ordinary depreciation rates on buildings during the first five years of service of the assets subject to a ceiling of 20% per year on depreciation of buildings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Qualification as an industrial company under the industrial encouragement law is not conditioned upon the receipt of prior approval from
any Israeli government authority. No assurance can be given that we will continue to qualify as an industrial company or will in the future be able to avail ourselves of any benefits available to companies so qualifying.

Law for the Encouragement of Capital Investments, 1959

The Law for Encouragement of Capital Investments, 1959, which is referred to below as the Investment Law, provides that capital
investments in a production facility or other eligible assets may, upon application to the Israeli Investment Center of the Ministry of Industry and Commerce (the Investment Center), be designated as an approved enterprise. Each
certificate of approval for an approved enterprise relates to a specific investment program in the approved enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. An
approved enterprise is entitled to benefits, including Israeli government cash grants and tax benefits.

As described below in
further detail, a year 2005 amendment to the Investment Law significantly changed the provisions of the Investment Law. The amendment limits the scope of enterprises, which may be approved by the Investment Center by setting criteria for the
approval of a facility as an approved enterprise. Additionally, the amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to
qualify for tax benefits. However, the amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.

Tax Benefits

Taxable income derived from an approved enterprise is subject to a reduced corporate tax rate of 25%. That income is eligible for further
reductions in tax rates depending on the percentage of the foreign investment in our share capital and the percentage of our combined share and loan capital owned by non-Israeli residents. The tax rate is 20% if the foreign investment is 49% or more
but less than 74%, 15% if the foreign investment is 74% or more but less than 90% and 10% if the foreign investment is 90% or more. The lowest level of foreign investment during the year will be used to determine the relevant tax rate for that year.
These tax benefits described above are granted for a limited period of time and begin when a company is operational and profitable. The benefits are granted for up to 7 years, or 10 years for a company that has 25% or more of its shares owned by
non-Israeli shareholders, from the first year in which the approved enterprise has taxable income, other than income subject to capital gains tax. The period of benefits may not, however, exceed the lesser of 12 years from the year in which the
production began or 14 years from the year of receipt of approved enterprise status.

An approved enterprise approved after
April 1, 1986, may elect to forego any entitlement to the grants otherwise available under the capital investments law or may participate in an alternative benefits program, under which the undistributed income from the approved enterprise is
fully exempt from corporate tax for a defined period of time. The period of tax exemption ranges between two and ten years, depending upon the location within Israel of the approved enterprise and the type of the approved enterprise. Alternatively,
approved enterprises approved after January 1, 1997 in national priority region A, may elect to receive grants and a two-year tax exemption for undistributed profits derived from the approved enterprise program. We cannot assure you that the
current benefit programs will continue to be available or that we will continue to qualify for benefits under the current programs.

On March 29, 2005, the Israeli Parliament passed an amendment to the Investment Law, which revamps the Israeli tax incentives for
future industrial and hotel investments (the 2005 Amendment). A tax holiday package can now be elected for up to 15 years for a Privileged Enterprise as defined in the 2005 Amendment, if certain conditions are
met, without needing to obtain approval. The extent of the tax benefits available depends upon the level of foreign investment.

The 2005 Amendment became effective on April 1, 2005. Taxpayers may, under certain conditions, claim Privileged Enterprise status
for new and expanded enterprises with respect to 2004 or subsequent years, unless the Investment Center granted such taxpayer Approved Enterprise status prior to December 31, 2004.

Subject to certain conditions, various alternative tax-only benefit packages can now be elected with respect to investments in a
Privileged Enterprise, without prior approval. Companies in industry or tourism in Israel may elect between:

(i)
Tax holiday package  for a Privileged Enterprise: a tax exemption applies to undistributed profits for 2 to 15 years depending on geographical location of the Privileged Enterprise and the level of foreign
ownership. Company tax rates of between 10% and 25% apply to distributed exempt profits or profits derived subsequent to the exempt period. The total period of tax benefits is 7 to 15 years, or

(ii) Grant / Reduced tax package  for an approved enterprise: Fixed asset grants of between 20% and 32% for enterprises
in a development area and reduced company tax rates between 0% and 25% for a period of 7 to 15 years.



40



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We currently have one approved enterprise program under the Investments Law, before the 2005
Amendment, which entitles us to some tax benefits, subject to certain conditions. The Companys production facilities had, in the past, been granted an approved enterprise status under the law, for three separate investment
programs, which were approved in February 1989, March 1995 and April 1998. The status of approved enterprise granted for each of our February 1989 and March 1995 investment programs has expired.

The tax benefits period for our April 1998 program has not yet begun. Income derived from this alternative benefit programs 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 we will have a certain minimum number of professional employees. We have not yet
met this condition; however we have applied for relief, and adjustment of this requirement. There can be no assurance that the relief will be granted to us, and if the relief is not granted we will lose our entitlement to future benefits under the
Investment Law.

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, we have elected for our investment program the alternative benefits track and waived government grants in return for a tax exemption.
Our offices and research and development center are located in Jerusalem, in a region defined as a Priority A Development Region. Therefore, income derived from these programs will be tax-exempt for a period of ten years commencing with
the year in which it first earns taxable income, subject to certain conditions.

As the Company currently has no taxable
income, the benefits from the April 1998 program have not been yet utilized.

If dividends are paid out of tax-exempt profit
derived from our approved enterprise, we will be liable for corporate tax on the gross amount of distributed profits before company tax at the rate that would have been applied if we had not elected the alternative tax benefit. This rate is
generally 10% to 25%, depending on the percentage of a companys shares held by foreign shareholders. We will also be required to withhold on behalf of the dividend recipients 15% of the amount distributed as dividends. Cash dividends paid by
an Israeli company are normally subject to a withholding tax, except for dividends that are paid to an Israeli company, in which case no tax is withheld unless the dividend is paid from earnings from an approved enterprise. Since we have received
some benefits under Israeli laws relating to approved enterprises, payment of dividends may subject us to some Israeli taxes to which we would not otherwise be subject.

The benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the capital investments
law and its regulations and the criteria in the specific certificate of approval, as described above. If these conditions are violated, in whole or in part, we would be required to refund the amount of tax benefits and linkage differences to the
Israeli consumer price index and interest.

Our approved enterprise program and the tax benefits thereunder may not continue
in the future at their current levels or at any level. The termination or reduction of these tax benefits would likely increase our taxes. The amount, if any, by which our taxes would increase will depend upon the rate of the tax increase, the
amount of any tax benefit reduction, and the amount of any taxable income that we may earn in the future.

Taxation Under
Inflationary Conditions

The Income Tax, Inflationary Adjustment, Law, 1985, which is referred to below as the inflationary
adjustments law, attempts to overcome some of the problems presented to a traditional tax system by an economy experiencing rapid inflation, which was the case in Israel at the time the law was enacted. Generally, the inflationary adjustments law
provides significant tax adjustments, based on net equity less fixed assets, to depreciation methods and tax loss carry forwards to compensate for loss of value resulting from an inflationary economy. Our taxable income was subject to the provisions
of this law.

The Israeli Parliament approved the cancellation (subject to transitional provisions) of the Income Tax,
Inflationary Adjustment, Law, 1985, commencing from tax year 2008.

Tax Benefits of Research and Development

Israeli tax law permits, under some conditions, a tax deduction in the year incurred for expenditures, including capital
expenditures, in scientific research and development projects, if the expenditures are approved by the relevant government ministry and if the research and development is for the promotion of the enterprise and is carried out by, or on behalf of, a
company seeking the deduction.

The OCS has approved some of our research and development programs and we have been able to
deduct, for tax purposes, a portion of our research and development expenses net of the grants received. Other research and development expenses that are not approved may be deducted for tax purposes in 3 equal installments during a 3-year period.

Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders

Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel or received in Israel. These sources
of income include passive income like dividends, royalties and interest, as well as non-passive income from business conducted or services rendered in Israel. On distribution of dividends other than bonus shares or stock dividends, income tax is
withheld at the source at the following rates: (i) 20% for dividends paid to an individual or foreign corporation who is not a substantial shareholder; (ii) 25% for dividends paid to a substantial shareholder at any time during the
12-month period preceding such distribution, unless a different rate is provided in a treaty between Israel and the shareholders country of residence; and (iii) 12.5% for dividends paid to U.S. taxpayers, if the dividend recipient is a
corporation that holds 10% or more of our voting stock during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year. Notwithstanding the foregoing, with regard to dividends generated
by an approved enterprise or Privileged Enterprise, we are required to withhold income tax at the rate of 15%, unless in each case a different rate is provided in a treaty between Israel and a shareholders country of residence. If the dividend
is attributable partly to income derived from an approved enterprise and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. The withheld tax is the final tax in
Israel on dividends paid to non-residents who do not conduct business in Israel.

Israeli law generally imposes a capital
gains tax on the sale of publicly traded securities. Pursuant to changes made to the Israeli Income Tax Ordinance in January 2003 and August 2005, capital gains on the sale of our Ordinary Shares will be subject to Israeli capital gains tax,
generally at a rate of 20% unless the holder holds 10% or more of our voting power during the 12 months preceding the sale, in which case it will be subject to a 25% capital gains tax. As of January 1, 2003 nonresidents of Israel are exempt
from capital gains tax in relation to the sale of our Ordinary Shares for so long as (a) our Ordinary Shares are listed for trading on a stock exchange outside of Israel, (b) the capital gains are not accrued or derived by the nonresident
shareholders permanent enterprise in Israel, (c) the Ordinary Shares in relation to which the capital gains are accrued or derived were acquired by the nonresident shareholder after the initial listing of the Ordinary Shares on a stock
exchange outside of Israel, and (d) neither the shareholder nor the particular capital gain is otherwise subject to certain sections of the Israeli Income Tax Ordinance. However, non-Israeli corporations will not be entitled to the foregoing
exemptions if an Israeli resident (a) has a controlling interest of 25% of more in such non-Israeli corporation or (b) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.

The convention between the United States and the government of the State of Israel on taxes on
income, which shall be referred to as the treaty, is generally effective as of January 1, 1995.

Under the treaty, the
following entities or individuals generally are exempt from Israeli capital gains tax on income derived from the sale, exchange or disposition of Ordinary Shares if these entities or individuals own, directly or indirectly, less than 10% of the
voting power in our Company during the twelve month period preceding the sale, exchange or disposition of their Ordinary Shares:



| |  |  | individuals that are residents of the United States;
| | - |  | ----------------------------------------------------



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| |  |  | corporations, or entities taxable as corporations, that are not residents of Israel and that are organized under the laws of the United States or of
any state of the United States or the District of Columbia; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other entities, to the extent that the other entities income is taxable in the United States as the income of residents of the United States.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

The application of the treaty provisions applying to dividends and capital gains described above and below
is conditioned upon the fact that this income is not effectively connected with a permanent establishment maintained by the non-Israeli residents in Israel. Under the treaty, a permanent establishment generally means a fixed place of business
through which industrial or commercial activity is conducted, directly or indirectly through agents.

Unless an exemption
applies under domestic Israeli law, residents of the United States who own the requisite 10% or more of our outstanding voting shares are subject to Israeli tax on any gain realized on the sale, exchange or disposition of those shares but would
generally be permitted under the treaty to claim a credit for those taxes against the United States income tax imposed on any gain from the sale, exchange or disposition, subject to the limitations applicable to foreign tax credits.

Under the treaty, the maximum tax on dividends paid to a holder of Ordinary Shares who is a resident of the United States under the
treaty generally is 25%. However, dividends generally paid to a United States corporation by an Israeli company that does not enjoy the benefits of an approved enterprise will generally be subject to a 12.5% dividend withholding tax if:



| |  |  | the recipient corporation owns at least 10% of the outstanding voting shares of the Israeli company during the portion of the current taxable year and
during the whole of the prior taxable year of the Israeli company preceding the date of the dividend; and not more than 25% of the gross income of the Israeli company during the prior taxable year of the Israeli company preceding the date of the
dividend consists of interest or dividends.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If the Israeli company is entitled to the Israeli tax benefits
applicable to an approved enterprise and the requirements listed above are met, the withholding tax rate on dividends paid to a United States corporation is 15%.

Documents on Display

We are subject to the informational requirements of the Securities and Exchange Act of 1934, as amended, applicable to foreign private
issuers, and fulfill the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission, or SEC. You may read and copy any document we file with the Securities and Exchange Commission without charge at
the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Certain of our SEC filings are also available to the public at the SECs website at http://www.sec.gov. Copies of such material may be obtained by mail from the
Public References Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. In addition, all documents concerning ViryaNet referred to in this document and
required to be made available to the public are available at our offices located at 8 HaMarpe Street, Science Based Industries Campus, Har Hotzvim, Jerusalem, Israel 91450.



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

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.



|Item 12. | Description Of Securities Other Than Equity Securities
|-------- | ------------------------------------------------------

Not applicable.

PART II



|Item 13. | Defaults, Dividend Arrearages And Delinquencies
|-------- | -----------------------------------------------

None.



|Item 14. | Material Modifications To The Rights Of Security Holders And Use Of Proceeds
|-------- | ----------------------------------------------------------------------------

Not applicable.



|Item 15T. | Controls and Procedures
|--------- | -----------------------

(a)Disclosure Controls and Procedures. Our management, with the participation of the Executive Chairman of our Board of Directors
(who serves as our co-principal executive officer and our acting principal financial officer), and our Chief Executive Officer (who serves as our co-principal executive officer) has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 2009. Based on this evaluation, such principal executive officers (and acting
principal financial officer) have concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the
Exchange Act (i) is recorded, processed, summarized, and reported, within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including such principal executive officers (and
acting principal financial officer), as appropriate to allow timely decisions regarding required disclosures.



42



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##### Table of Contents

(b)Managements Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management assessed the effectiveness of internal control over financial reporting as of December 31, 2009 based on the criteria set forth in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on that
assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2009, based on those criteria, at providing reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Due to
its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements, and can only provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control
over financial reporting. Managements report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only managements report in this annual report.

(c) Changes in Internal Control Over Financial Reporting.

There has been no change in our internal control over financial reporting that occurred during 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.



|Item 16. | 
|-------- | 



|Item 16A. | Audit Committee Financial Expert
|--------- | --------------------------------

Our Board of Directors has determined that we have at least one audit committee financial expert, Mr. Arie Ovadia, who serves on the
Audit Committee of our Board of Directors. Mr. Ovadia also qualifies as an independent director, as defined under the Listing Rules of the NASDAQ Stock Market.



|Item 16B. | Code of Ethics
|--------- | --------------

We have
in place a Code of Ethics that applies to all of our (and our subsidiaries) directors, executive officers and employees, including our principal executive officers, principal financial officer and principal accounting officer or controller (or
persons performing similar functions). Our Code of Ethics constitutes a code of ethics within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, and Item 16B of SEC Form 20-F. The
full text of the Code of Ethics is available on our website, www.viryanet.com/company/investors or you may request a copy of our Code of Ethics, at no cost, by writing to or telephoning us as follows:

ViryaNet, Inc.

2 Willow Street

Southborough, MA 01745-1027

Telephone:
508-490-8600



|Item 16C. | Principal Accountant Fees and Services
|--------- | --------------------------------------

Arik Eshel, CPA & Assoc., PC. served as our independent public accountants for the years ended December 31, 2008 and 2009
and billed us aggregate fee amounts for professional services as described below.

Audit Fees

Audit fees in 2009 and 2008 amounted to $55,000 and $40,000, respectively, which primarily related to professional services rendered by
Arik Eshel, CPA & Assoc., PC in connection with the audits of our financial statements and review of our interim financial statements for such fiscal years.

Audit-Related Fees

We incurred no fees for assurance and related services rendered to us by our independent public accountants that were reasonably related
to the audit of our financial statements in 2008 or 2009 (aside from the fees included under Audit Fees above).

Tax Fees

Tax fees amounted to $10,000 and $10,000 in 2009 and 2008, respectively, and primarily related to tax compliance services provided to us
by Arik Eshel, CPA & Assoc., PC.

All Other Fees

We incurred no fees for products or services rendered to us by our independent public accountants in 2009 or 2008 other than the Audit
Fees and Tax Fees described above.

Pre-Approval Policies for Non-Audit Services

Each year, the engagement of our independent auditors is approved by the Audit Committee of our Board of Directors and by the vote of our
shareholders at our Annual General Meeting of Shareholders. Our Audit Committee has also adopted its own rules of procedure. The Audit Committees rules of procedure provide for a process with respect to the prior approval of all services,
including non-audit services, to be performed by our independent auditors for us over the course of the year, specifying the particular services that may be performed. Such fees for 2008 and 2009 were pre-approved by the Audit Committee in
accordance with these procedures.



|Item 16D. | Exemption From The Listing Standards For Audit Committees
|--------- | ---------------------------------------------------------

Not applicable.



43



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##### Table of Contents

|Item 16E. | Purchases of Equity Securities By The Issuer And Affiliated Purchasers
|--------- | ----------------------------------------------------------------------

Not applicable.



|Item 16F. | Change in Registrants Certifying Accountant
|--------- | --------------------------------------------

(a)(2) Based on the approval by the Audit Committee of our Board of Directors, obtained on May 24, 2009, Arik Eshel, CPA &
Assoc., PC, (Arik Eshel) was engaged as our new independent auditor for the fiscal year ending December 31, 2008. Prior to its engagement, we did not consult with Arik Eshel regarding matters or events set forth in paragraphs
(a)(2)(i) or (a)(2)(ii) of Item 16F of Form 20-F.

We had previously notified our prior independent auditor,
Gabbay & Kasierer, a member of Ernst and Young Global, that we would not be renewing its service as our independent auditor effective following the conclusion of its audit of our consolidated financial statements for the 2007
fiscal year (i.e., which preceded our two most recent fiscal years).



|Item 16G. | Corporate Governance
|--------- | --------------------

Not
applicable.

PART III



|Item 17. | Financial Statements
|-------- | --------------------

We
have elected to provide financial statements and related information pursuant to Item 18.



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

See
the Index to Consolidated Financial Statements and related Financial Statements accompanying this annual report, beginning on page F-1.



44



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|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.                                     
|               |  |                                                                                                                                                                                                                             
|4.5.2          |  | 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.
|               |  |                                                                                                                                                                                                                             
|4.5.3          |  | 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.
|               |  |                                                                                                                                                                                                                             
|4.8            |  | 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.                                     
|               |  |                                                                                                                                                                                                                             
|4.11           |  | 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.                                     
|               |  |                                                                                                                                                                                                                             
|4.12.2         |  | 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 20-F for the year ending December 31, 2001 and incorporated herein by reference.                                                              
|               |  |                                                                                                                                                                                                                             
|4.12.3         |  | 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.                                       
|               |  |                                                                                                                                                                                                                             
|4.14.1         |  | 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, No. 333-42158 and incorporated herein by reference.                                                      
|               |  |                                                                                                                                                                                                                             
|4.14.2         |  | 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.                                     
|               |  |                                                                                                                                                                                                                             
|4.15           |  | 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, No. 333-42158 and incorporated herein by reference.                                                      
|               |  |                                                                                                                                                                                                                             
|4.16           |  | The Companys 2005 Israeli Share Option and Restricted Share Plan.                                                                                                                                                           |  | Filed as Exhibit 4(c)(7) to the Companys 20-F for the year ending December 31, 2005.                                                                                                
|               |  |                                                                                                                                                                                                                             
|4.17           |  | The Companys 2005 International Share Option and Restricted Share Plan.                                                                                                                                                     |  | Filed as Exhibit 4(c)(8) to the Companys 20-F for the year ending December 31, 2005.                                                                                                
|               |  |                                                                                                                                                                                                                             
|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 Kost, Forer, Gabbay & Kasierer, a member of Ernst and Young Global                                                                                                                                                |  | Filed herewith                                                                                                                                                                       
|               |  |                                                                                                                                                                                                                             
|15.2           |  | Consent of Arik Eshel, CPA & Assoc., PC                                                                                                                                                                                      |  | Filed herewith                                                                                                                                                                       
|               |  |                                                                                                                                                                                                                             
|15.3           |  | Consent of Nexia ASR, for the audit of ViryaNet Pty Ltd.                                                                                                                                                                     |  | Filed herewith                                                                                                                                                                       



45



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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 annual report on its behalf.



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

Date: July 15, 2010



46



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2009

IN U.S. DOLLARS

INDEX



|                                                        |  |            
|------------------------------------------------------- |  | -----------
|                                                        |  | Page       
|Report of Independent Registered Public Accounting Firm |  | F-2 - F-4  
|                                                        | 
|Consolidated Balance Sheets                             |  | F-5 - F-6  
|                                                        | 
|Consolidated Statements of Operations                   |  | F-7        
|                                                        | 
|Statements of Changes in Shareholders Equity           |  | F-8 - F-10 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | F-11 - F-12
|                                                        | 
|Notes to Consolidated Financial Statements              |  | F-13 - F-40







F-1



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##### Table of Contents

LOGO



| |  |  |  |  |  |                                                                                               
| |  |  |  |  |  | ----------------------------------------------------------------------------------------------
| |  |  |  |  |  | 462 7th Avenue 14th
Floor New York, NY 10018 P: (212)
302-7900 F: (212) 244-2932
www.aecpa.com

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, 2009 and 2008,
and the related consolidated statements of operations, comprehensive income (loss), shareholders deficit, and cash flows for each of the two years in the period ended December 31, 2009. 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, which statements
reflect total assets of 9.2 percent and 9.0 percent of the related consolidated totals as of December 31, 2009 and 2008, respectively, and total revenue of 6.5 percent and 7.0 percent of the related consolidated totals for each of the two years
in the period ended December 31, 2009. 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. The financial statements of the Company for the year ended December 31, 2007 were audited by other auditors whose report, dated September 23, 2008, expressed an unqualified opinion on those statements.

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 at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ ARIK ESHEL, CPA & ASSOCIATES., PC

New York, New York

July 15, 2010



F-2



---

##### Table of Contents

| |  |                                                              
| |  | -------------------------------------------------------------
| |  | LOGO                                                         
| |  | Incorporating the firms of
Alexander & Spencer
and Rosenbergs

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, 2009 and 2008, and the related statements of operations for each of the three years in the period ended December 31, 2009. 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, 2009 and 2008, and the results of its operations for each of the three years in the period ended December 31, 2009, in conformity with United States generally accepted accounting principles.

NEXIA ASR

ABN 16 847 721 257

/s/ GEORGE S. DAKIS

Partner

Audit & Assurance Services

Melbourne, Vic.

15 July 2010



|                                                                                                                                                                                                                        |  |     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|value beyond numbers
nexia asrabn 16 847 721 257
level 14 / 440 Collins Street Melbourne Australia 3000
telephone +61 3 9608 0100 facsimile +61 3 9670 8325
email theteam@nexiaasr.com.au website www.nexiaasr.com.au |  | LOGO

Liability limited by a scheme approved under Professional Standards Legislation other than
for the acts or omissions of financial services licensees



F-3



---

##### Table of Contents

|     |  |  |  |                                                                                                                      
|---- |  |  |  | ---------------------------------------------------------------------------------------------------------------------
|LOGO |  |  |  | Kost Forer Gabbay & Kasierer
2 Pal-Yam Ave. Haifa 33095, Israel
 Tel: 972 (4)8654000
Fax: 972(3)5633443
www.ey.com.il

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

VIRYANET LTD.

We have audited the accompanying consolidated balance sheets of ViryaNet Ltd. (the Company) and its subsidiaries as of
December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a wholly-owned subsidiary, whose statements reflect total
assets constituting 12% and 16% as of December 31, 2007 and 2006, respectively and whose total revenues constituting 9%, 14% and 7% of the related consolidated totals for each of the three years in the period ended December 31, 2007. Those
statements were audited by other auditors whose report has been furnished to us, and our opinion, 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. 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 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 the other auditors, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting



|                   |  |                                 
|------------------ |  | --------------------------------
|Haifa, Israel      |  | /s/ KOST FORER GABBAY & KASIERER
|                   | 
|September 23, 2008 |  | A Member of Ernst & Young Global



F-4



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



U.S. dollars in thousands



|                                               |  |              |       |      |   |      
|---------------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                               |  | December 31,
|                                               |  | 2008         |       | 2009
|Assets                                         |  |              |       |      |   |      
|CURRENT ASSETS:                                |  |              |       |      |   |      
|Cash and cash equivalents                      |  | $            | 143   |      | $ | 156  
|Trade receivables                              |  |              | 562   |      |   | 289  
|Unbilled receivables                           |  |              | 219   |      |   | 258  
|Other accounts receivable and prepaid expenses |  |              | 113   |      |   | 97   
|                                               |  |              |       |      |   |      
|Total current assets                           |  |              | 1,037 |      |   | 800  
|                                               |  |              |       |      |   |      
|NON - CURRENT ASSETS:                          |  |              |       |      |   |      
|Severance pay fund                             |  |              | 961   |      |   | 912  
|Other                                          |  |              | 64    |      |   | 60   
|                                               |  |              |       |      |   |      
|Total non - current assets                     |  |              | 1,025 |      |   | 972  
|                                               |  |              |       |      |   |      
|PROPERTY AND EQUIPMENT,net                     |  |              | 167   |      |   | 89   
|                                               |  |              |       |      |   |      
|GOODWILL                                       |  |              | 7,022 |      |   | 7,169
|OTHER INTANGIBLE ASSETS,net                    |  |              |       |      |   |      
|Customer relationship                          |  |              | 367   |      |   | 138  
|Other                                          |  |              | 184   |      |   | 73   
|                                               |  |              |       |      |   |      
|Total intangible assets:                       |  |              | 7,573 |      |   | 7,380
|                                               |  |              |       |      |   |      
|Total assets                                   |  | $            | 9,802 |      | $ | 9,241
|                                               |  |              |       |      |   |      

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



F-5



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



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



|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                                                                    |  | December 31, |         
|                                                                                                                                                                                                                                                    |  | 2008         |          |   | 2009 |  
|Liabilities and shareholders equity                                                                                                                                                                                                                |  |              |          |   |      |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                                                                                                |  |              |          |   |      |   |          |  
|Short-term bank credit                                                                                                                                                                                                                              |  | $            | 280      |   |      | $ | 380      |  
|Current maturities of long-term bank loans                                                                                                                                                                                                          |  |              | 450      |   |      |   | 400      |  
|Trade payables                                                                                                                                                                                                                                      |  |              | 729      |   |      |   | 530      |  
|Deferred revenues                                                                                                                                                                                                                                   |  |              | 3,367    |   |      |   | 2,961    |  
|Other accounts payable and accrued expenses                                                                                                                                                                                                         |  |              | 1,963    |   |      |   | 2,061    |  
|Loan from related party                                                                                                                                                                                                                             |  |              | 78       |   |      |   | 79       |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                                                                           |  |              | 6,867    |   |      |   | 6,411    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                                                              |  |              |          |   |      |   |          |  
|Long-term bank loan, net of current maturities                                                                                                                                                                                                      |  |              | 1,289    |   |      |   | 889      |  
|Long-term convertible debt                                                                                                                                                                                                                          |  |              | 543      |   |      |   | 530      |  
|Long-term deferred revenues                                                                                                                                                                                                                         |  |              | 932      |   |      |   | 641      |  
|Accrued severance pay                                                                                                                                                                                                                               |  |              | 1,546    |   |      |   | 1,376    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total long-term liabilities                                                                                                                                                                                                                         |  |              | 4,310    |   |      |   | 3,436    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|COMMITMENTS AND CONTINGENT LIABILITIES(Note 11)                                                                                                                                                                                                     |  |              |          |   |      |   |          |  
|SHAREHOLDERS DEFICIT:                                                                                                                                                                                                                              |  |              |          |   |      |   |          |  
|Share capital -                                                                                                                                                                                                                                     |  |              |          |   |      |   |          |  
|Ordinary shares of NIS 5.0 par value - Authorized: 6,600,000 shares at December 31, 2008 and 2009; Issued and outstanding:
2,780,453 and 2,944,048 shares at December 31, 2008 and 2009, respectively                                               |  |              | 3,379    |   |      |   | 3,592    |  
|Preferred A shares of NIS 5.0 par value - Authorized: 400,000 shares at December 31, 2008 and 2009; Issued and outstanding:
326,797 shares at December 31, 2008 and 2009. Aggregate liquidation preference of $ 2,500 at December 31, 2008 and 2009 |  |              | 369      |   |      |   | 369      |  
|Additional paid-in capital                                                                                                                                                                                                                          |  |              | 116,660  |   |      |   | 116,603  |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                       |  |              | (114     | ) |      |   | 3        |  
|Accumulated deficit                                                                                                                                                                                                                                 |  |              | (121,669 | ) |      |   | (121,173 | )
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total shareholders deficit                                                                                                                                                                                                                         |  |              | (1,375   | ) |      |   | (606     | )
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total liabilities and shareholders deficit                                                                                                                                                                                                         |  | $            | 9,802    |   |      | $ | 9,241    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  

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



F-6



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



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



|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                             |  | Year ended December 31, |          
|                                                                                             |  | 2007                    |           |   | 2008 |   |           | 2009 | 
|REVENUES:                                                                                    |  |                         |           |   |      |   |           |      |  |   |           |  
|Software licenses                                                                            |  | $                       | 1,769     |   |      | $ | 1,380     |      |  | $ | 1,508     |  
|Maintenance and services                                                                     |  |                         | 9,390     |   |      |   | 9,990     |      |  |   | 8,919     |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|Total revenues                                                                               |  |                         | 11,159    |   |      |   | 11,370    |      |  |   | 10,427    |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|COST OF REVENUES:                                                                            |  |                         |           |   |      |   |           |      |  |   |           |  
|Software licenses                                                                            |  |                         | 358       |   |      |   | 275       |      |  |   | 206       |  
|Maintenance and services                                                                     |  |                         | 5,633     |   |      |   | 5,586     |      |  |   | 3,967     |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|Total cost of revenues                                                                       |  |                         | 5,991     |   |      |   | 5,861     |      |  |   | 4,173     |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|GROSS PROFIT                                                                                 |  |                         | 5,168     |   |      |   | 5,509     |      |  |   | 6,254     |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|OPERATING EXPENSES:                                                                          |  |                         |           |   |      |   |           |      |  |   |           |  
|Research and development                                                                     |  |                         | 2,290     |   |      |   | 1,753     |      |  |   | 1,076     |  
|Selling and marketing                                                                        |  |                         | 3,429     |   |      |   | 3,119     |      |  |   | 2,700     |  
|General and administrative                                                                   |  |                         | 2,485     |   |      |   | 2,303     |      |  |   | 1,822     |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|Total operating expenses                                                                     |  |                         | 8,204     |   |      |   | 7,175     |      |  |   | 5,598     |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|INCOME (LOSS) FROM OPERATIONS                                                                |  |                         | (3,036    | ) |      |   | (1,666    | )    |  |   | 656       |  
|FINANCIAL EXPENSES, net                                                                      |  |                         | (535      | ) |      |   | (414      | )    |  |   | (160      | )
|LOSS FROM LIQUIDATION OF A SUBSIDIARY (Note 1a)                                              |  |                         | (239      | ) |      |   |          |      |  |   |          |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|NET INCOME (LOSS)                                                                            |  | $                       | (3,810    | ) |      | $ | (2,080    | )    |  | $ | 496       |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|BASIS NET EARNINGS (LOSS) PER SHARE                                                          |  | $                       | (1.66     | ) |      | $ | (0.70     | )    |  | $ | 0.16      |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTION OF BASIC NET EARNINGS (LOSS) PER SHARE   |  |                         | 2,292,190 |   |      |   | 2,992,752 |      |  |   | 3,176,831 |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|DILUTED NET EARNINGS (LOSS) PER SHARE                                                        |  | $                       | (1.66     | ) |      | $ | (0.70     | )    |  | $ | 0.14      |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTION OF DILUTED NET EARNINGS (LOSS) PER SHARE |  |                         | 2,292,190 |   |      |   | 2,992,752 |      |  |   | 3,540,467 |  
|                                                                                             |  |                         |           |   |      |   |           |      |  |   |           |  

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



F-7



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



U.S. dollars in thousands, except
share data



|                                                                                                                        |  |                 |  |  |                  |       |  |                    |         |  |                                 |   |     |             |  |   |                     |   |  |                     |      |   |               |   |          |        |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | --------------- |  |  | ---------------- | ----- |  | ------------------ | ------- |  | ------------------------------- | - | --- | ----------- |  | - | ------------------- | - |  | ------------------- | ---- | - | ------------- | - | -------- | ------ |  | - | ------ | - |  | - | ------ | -
|                                                                                                                        |  | Ordinary Shares |  |  | Preferred shares |       |  | Additional
paid-in |         |  | Accumulated
other
comprehensive |   |     | Accumulated |  |   | Total
comprehensive |   |  | Total
shareholders |     
|                                                                                                                        |  | Number *)       |  |  | Amount           |       |  | Number *)          |         |  | Amount                          |   |     | capital     |  |   | income (loss)       |   |  | deficit             |      |   | income (loss) |   |          | equity | 
|Balance as of January 1, 2007                                                                                           |  | 1,922,711       |  |  |                  | 2,266 |  |                    | 326,797 |  |                                 |   | 369 |             |  |   | 115,937             |   |  |                     | (314 | ) |               |   | (115,724 | )      |  |   |        |   |  |   | 2,534  |  
|Issuance of shares and convertible note to an investor, net of issuance cost (see also note 12j)                        |  | 363,636         |  |  |                  | 461   |  |                    |        |  |                                 |   |    |             |  |   | 239                 |   |  |                     |     |   |               |   |         |        |  |   |        |   |  |   | 700    |  
|Issuance of shares in connection with a conversion of short-term convertible note                                       |  | 211,457         |  |  |                  | 268   |  |                    |         |  |                                 |   |     |             |  |   | (268                | ) |  |                     |      |   |               |   |          |        |  |   |        |   |  |   |       |  
|Issuance of shares, in connection with interest expenses, related to the convertible debts                              |  | 14,546          |  |  |                  | 17    |  |                    |        |  |                                 |   |    |             |  |   | 23                  |   |  |                     |     |   |               |   |         |        |  |   |        |   |  |   | 40     |  
|Issuance of shares and release of restricted shares in connection with compensation to consultants                      |  | 38,500          |  |  |                  | 50    |  |                    |        |  |                                 |   |    |             |  |   | (19                 | ) |  |                     |      |   |               |   |          |        |  |   |        |   |  |   | 31     |  
|Stock based compensation                                                                                                |  |                |  |  |                  |      |  |                    |        |  |                                 |   |    |             |  |   | 208                 |   |  |                     |     |   |               |   |         |        |  |   |        |   |  |   | 208    |  
|Release of restricted shares to employees and directors, net                                                            |  | 9,390           |  |  |                  | 13    |  |                    |        |  |                                 |   |    |             |  |   | (13                 | ) |  |                     |     |   |               |   |         |        |  |   |        |   |  |   |       |  
|Issuance of shares in connection with restructuring bank covenants and credit line                                      |  | 10,000          |  |  |                  | 12    |  |                    |        |  |                                 |   |    |             |  |   | 14                  |   |  |                     |     |   |               |   |         |        |  |   |        |   |  |   | 26     |  
|Comprehensive loss:                                                                                                     |  |                 |  |  |                  |       |  |                    |         |  |                                 |   |     |             |  |   |                     |   |  |                     |      |   |               |   |          |        |  |   |        |   |  |   |        |  
|Cumulative effect of adjustment upon adoption of FIN 48                                                                 |  |                |  |  |                  |      |  |                    |        |  |                                 |   |    |             |  |   |                    |   |  |                     |     |   |               |   | (55      | )      |  |   |        |   |  |   | (55    | )
|Foreign currency translation adjustments recognized as loss resulting from dissolution of Companys subsidiary in
Japan |  |                |  |  |                  |      |  |                    |        |  |                                 |   |    |             |  |   |                    |   |  |                     | 239  |   |               |   |         |        |  |   |        |   |  |   | 239    |  
|Foreign currency translation adjustments                                                                                |  |                |  |  |                  |      |  |                    |        |  |                                 |   |    |             |  |   |                    |   |  |                     | 137  |   |               |   |         |        |  | $ | 137    |   |  |   | 137    |  
|Net loss                                                                                                                |  |                |  |  |                  |      |  |                    |        |  |                                 |   |    |             |  |   |                    |   |  |                     |     |   |               |   | (3,810   | )      |  |   | (3,810 | ) |  |   | (3,810 | )
|                                                                                                                        |  |                 |  |  |                  |       |  |                    |         |  |                                 |   |     |             |  |   |                     |   |  |                     |      |   |               |   |          |        |  |   |        |   |  |   |        |  
|Total comprehensive loss                                                                                                |  |                 |  |  |                  |       |  |                    |         |  |                                 |   |     |             |  |   |                     |   |  |                     |      |   |               |   |          |        |  | $ | (3,673 | ) |  |   |        |  
|                                                                                                                        |  |                 |  |  |                  |       |  |                    |         |  |                                 |   |     |             |  |   |                     |   |  |                     |      |   |               |   |          |        |  |   |        |   |  |   |        |  
|Balance as of December 31, 2007                                                                                         |  | 2,570,240       |  |  | $                | 3,087 |  |                    | 326,797 |  |                                 | $ | 369 |             |  | $ | 116,121             |   |  | $ **)               | 62   |   |               | $ | (119,589 | )      |  |   |        |   |  | $ | 50     |  
|                                                                                                                        |  |                 |  |  |                  |       |  |                    |         |  |                                 |   |     |             |  |   |                     |   |  |                     |      |   |               |   |          |        |  |   |        |   |  |   |        |  



|*) | All share data are reported after the effect of the 1 for 5 reverse split that occurred on January 17, 2007.
|-- | ------------------------------------------------------------------------------------------------------------

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

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



F-8



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



U.S. dollars in thousands, except
share data



|                                                                                                   |  |                 |  |                  |       |                   |         |        |                               |         |  |             |               |   |                    |         |       |                    |               |   |          |        |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | --------------- |  | ---------------- | ----- | ----------------- | ------- | ------ | ----------------------------- | ------- |  | ----------- | ------------- | - | ------------------ | ------- | ----- | ------------------ | ------------- | - | -------- | ------ |  | - | ------ | - |  | - | ------ | -
|                                                                                                   |  | Ordinary Shares |  | Preferred shares |       | Additionalpaid-in |         |        | Accumulatedothercomprehensive |         |  | Accumulated |               |   | Totalcomprehensive |         |       | Totalshareholders |              
|                                                                                                   |  | Number          |  | Amount           |       | Number            |         | Amount |                               | capital |  |             | income (loss) |   |                    | deficit |       |                    | income (loss) |   |          | equity | 
|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 12j)     |  |                 |  |                  |       |                   |        |        |                               |        |  |             | 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.



F-9



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



U.S. dollars in thousands, except
share data



|                                                             |  |                 |  |                  |       |                   |         |        |                                |         |  |             |               |   |                    |         |                     |   |               |   |          |   |  |   |     |  |   |        |  
|------------------------------------------------------------ |  | --------------- |  | ---------------- | ----- | ----------------- | ------- | ------ | ------------------------------ | ------- |  | ----------- | ------------- | - | ------------------ | ------- | ------------------- | - | ------------- | - | -------- | - |  | - | --- |  | - | ------ | -
|                                                             |  | Ordinary Shares |  | Preferred shares |       | Additionalpaid-in |         |        | Accumulated
othercomprehensive |         |  | Accumulated |               |   | Totalcomprehensive |         | Total
shareholders |  
|                                                             |  | Number          |  | Amount           |       | Number            |         | Amount |                                | capital |  |             | income (loss) |   |                    | deficit |                     |   | income (loss) |   | equity   |  
|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.



F-10



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



U.S. dollars in thousands



|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|--------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ---- | -
|                                                                                        |  | Year ended December 31, |       
|                                                                                        |  | 2007                    |        |   | 2008 |   |        | 2009 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                         |        |   |      |   |        |      |  |   |      |  
|Net income (loss)                                                                       |  | $                       | (3,810 | ) |      | $ | (2,080 | )    |  | $ | 496  |  
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |                         |        |   |      |   |        |      |  |   |      |  
|Depreciation and amortization                                                           |  |                         | 680    |   |      |   | 482    |      |  |   | 512  |  
|Amortization of deferred debt issuance cost related to convertible notes                |  |                         | 1      |   |      |   | 7      |      |  |   |     |  
|Amortization of convertible notes premium, discounts and beneficial conversion feature  |  |                         | (12    | ) |      |   | (13    | )    |  |   | (13  | )
|Accrued severance pay, net                                                              |  |                         | 127    |   |      |   | 12     |      |  |   | (121 | )
|Stock based compensation related to directors and employees                             |  |                         | 208    |   |      |   | 199    |      |  |   | 156  |  
|Stock based compensation related to restricted shares and shares to a bank and investor |  |                         | 46     |   |      |   | 95     |      |  |   |     |  
|Stock based compensation related to restricted shares and shares to consultants         |  |                         | 31     |   |      |   | 143    |      |  |   |     |  
|Interest expenses paid in shares                                                        |  |                         | 48     |   |      |   | 27     |      |  |   |     |  
|Loss from liquidation of a subsidiary                                                   |  |                         | 239    |   |      |   |       |      |  |   |     |  
|Decrease (increase) in trade receivables, net and unbilled receivables                  |  |                         | (26    | ) |      |   | 308    |      |  |   | 248  |  
|Decrease in other accounts receivable and prepaid expenses                              |  |                         | 303    |   |      |   | 46     |      |  |   | 20   |  
|Increase (decrease) in trade payables                                                   |  |                         | 110    |   |      |   | (88    | )    |  |   | (200 | )
|Increase (decrease) in long-term and short-term deferred revenues, net                  |  |                         | 863    |   |      |   | 1,087  |      |  |   | (714 | )
|Increase (decrease) in other accounts payable and accrued expenses                      |  |                         | 61     |   |      |   | (73    | )    |  |   | 48   |  
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|Net cash provided by (used in) operating activities                                     |  |                         | (1,131 | ) |      |   | 152    |      |  |   | 432  |  
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                         |        |   |      |   |        |      |  |   |      |  
|Purchase of property and equipment                                                      |  |                         | (194   | ) |      |   | (32    | )    |  |   | (7   | )
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|Net cash used in investing activities                                                   |  |                         | (194   | ) |      |   | (32    | )    |  |   | (7   | )
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                         |        |   |      |   |        |      |  |   |      |  
|Short-term bank credit                                                                  |  |                         | 628    |   |      |   | 18     |      |  |   | 100  |  
|Repayment of short-term bank credit and long-term loan                                  |  |                         | (600   | ) |      |   | (599   | )    |  |   | (450 | )
|Repayment of loan from related party                                                    |  |                         | (38    | ) |      |   | 7      |      |  |   |     |  
|Proceeds from issuance of share capital and convertible debt                            |  |                         | 761    |   |      |   | 186    |      |  |   |     |  
|Proceeds from payment on account of convertible debt                                    |  |                         | 239    |   |      |   |       |      |  |   |     |  
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|Net cash provided by (used in) financing activities                                     |  |                         | 990    |   |      |   | (388   | )    |  |   | (350 | )
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                 |  |                         | 12     |   |      |   | (2     | )    |  |   | (62  | )
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    |  |                         | (323   | ) |      |   | (270   | )    |  |   | 13   |  
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                                      |  |                         | 736    |   |      |   | 413    |      |  |   | 143  |  
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  
|CASH AND CASH EQUIVALENTS AT THE END OF YEAR                                            |  | $                       | 413    |   |      | $ | 143    |      |  | $ | 156  |  
|                                                                                        |  |                         |        |   |      |   |        |      |  |   |      |  

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



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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,
|                                                                                                                         |  | 2007                    |     | 2008 |   | 2009 
|Supplemental disclosure of cash flow activities:                                                                         |  |                         |     |      |   |       |  |   |    
|Cash paid during the year for:                                                                                           |  |                         |     |      |   |       |  |   |    
|Interest                                                                                                                 |  | $                       | 319 |      | $ | 118   |  | $ | 113
|                                                                                                                         |  |                         |     |      |   |       |  |   |    
|Supplemental disclosure of non-cash investing and financing activities:                                                  |  |                         |     |      |   |       |  |   |    
|Refinancing of short-term bank loan on a long-term basis                                                                 |  | $                       |    |      | $ | 1,589 |  | $ |   
|                                                                                                                         |  |                         |     |      |   |       |  |   |    
|Accrued issuance expenses to be paid                                                                                     |  | $                       | 61  |      | $ |      |  | $ |   
|                                                                                                                         |  |                         |     |      |   |       |  |   |    
|Conversion to shares of accrued interest expenses, waivers and deferred charges related to the convertible debt and
note |  | $                       | 67  |      | $ | 83    |  | $ |   
|                                                                                                                         |  |                         |     |      |   |       |  |   |    
|Classification of payments on account of convertible note to equity                                                      |  | $                       |    |      | $ | 239   |  | $ |   
|                                                                                                                         |  |                         |     |      |   |       |  |   |    

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



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##### Table of Contents

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.
The Companys subsidiary in Japan (ViryaNet Japan) was dissolved in April 2007.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | e) | All share data in this report are reported after the effect of the 1 for 5 reverse split that occurred on January 17, 2007 (see Note 11).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

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 were 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.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 made 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 by 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 lease
or 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.



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.):



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. 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 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 is negative as of the testing date, 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 of whether a potential impairment of goodwill exists and 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 each 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.



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2009 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 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 2007, 2008 and 2009, no impairment losses were
recorded.

Income taxes:

The Company accounts for income taxes using the liability method 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 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.

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.



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.):



Revenues from software license agreements are recognized in accordance with ASC
985-605-15 (originally issued as American Institute of Certified Public Accountants (AICPA) Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-9).

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.

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
(originally issued as SOP 81) Accounting for Performance of Construction-Type and Certain Production-Type Contracts,. Amounts of revenue recognized in advance of contractual billing are recorded as unbilled receivable.

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, 2007, 2008 and 2009, 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 for three months. As of December 31, 2009 and 2008, the provision for warranty cost was immaterial.



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.):



Advertising Costs:

The Company records advertising expenses as incurred and amounted to approximately $ 14, $ 23, and $11 in the years ended
December 31, 2009, 2008, and 2007, respectively, and 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.

The Companys and its subsidiaries trade receivables are derived from sales to customers located primarily in the United
States, 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 its accounts receivable. No allowance for doubtful accounts was required for the year ended December 31,
2009.



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.):



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.

Convertible note:

The Company presents the outstanding principal amount of the convertible note (see Note 11b) as a separate component in the shareholders
equity in accordance with ASC Topic 815, Derivatives and Hedging and ASC 480 Topic, Distinguishing Liabilities from Equity . The convertible note was 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 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.

All 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 the diluted net earnings or loss per Ordinary share because all such securities are anti-dilutive for all periods presented. The total weighted-average number of shares related to the outstanding
options and unvested restricted shares, warrants and shares issuable upon conversion of the long-term convertible debt excluded from the calculations of diluted net earnings or loss per share, was 465,087, 1,235,675 and 828,030 for the years ended
December 31, 2007, 2008 and 2009, respectively.

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



|                                                                                                                      |  |                        |   |  |           |   |  |          
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | --------- | - |  | ---------
|                                                                                                                      |  | Year ended December 31
|                                                                                                                      |  | 2007                   |   |  | 2008      |   |  | 2009     
|Net income (loss) attributable to ordinary shares (US$ thousands)                                                     |  | (3,810                 | ) |  | (2,080    | ) |  | 496      
|                                                                                                                      |  |                        |   |  |           |   |  |          
|Weighted average number of ordinary shares outstanding used in basic earnings (loss) per ordinary share
calculation   |  | 2,292,190              |   |  | 2,992,752 |   |  | 3,176,831
|Add assumed conversion of convertible note dilutive potential ordinary shares                                         |  |                       |   |  |          |   |  | 363,636  
|                                                                                                                      |  |                        |   |  |           |   |  |          
|Weighted average number of ordinary shares outstanding used in diluted earnings (loss) per ordinary share
calculation |  | 2,292,190              |   |  | 2,992,752 |   |  | 3,540,467
|                                                                                                                      |  |                        |   |  |           |   |  |          
|Basic earnings (loss) per ordinary shares (US$)                                                                       |  | (1.66                  | ) |  | (0.70     | ) |  | 0.16     
|                                                                                                                      |  |                        |   |  |           |   |  |          
|Diluted earnings (loss) per ordinary shares (US$)                                                                     |  | (1.66                  | ) |  | (0.70     | ) |  | 0.14     
|                                                                                                                      |  |                        |   |  |           |   |  |          



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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.):



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.

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 the 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:



|                                       |  |      |     |      |   |      |  |   |    
|-------------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | ---
|                                       |  | 2007 |     | 2008 |   | 2009
|Cost of revenues                       |  | $    | 23  |      | $ | 17   |  | $ | 14 
|Research and development cost          |  |      | 9   |      |   | 7    |  |   | 5  
|Selling and marketing expenses         |  |      | 24  |      |   | 18   |  |   | 5  
|General and administrative expenses    |  |      | 152 |      |   | 157  |  |   | 132
|                                       |  |      |     |      |   |      |  |   |    
|Total stock-based compensation expense |  | $    | 208 |      | $ | 199  |  | $ | 156
|                                       |  |      |     |      |   |      |  |   |    

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 2007, 2008 and 2009.

All restricted shares to employees granted in 2009, 2008 and 2007 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 2009, 2008 and 2007 was $ 0.40, $ 1.52 and $ 3.34, respectively.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.):



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 in 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, 2007, 2008 and 2009 amounted to approximately
$ 149, $ 126 and $83 respectively.

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 this term is determined in ASC Topic 860, Transfers and Servicing, the relevant receivable is de-recognized and cash recorded. Where receivables are
sold and the transfers of the rights to future cash receipts are related to underlying sales transactions for which the revenue has not been recognized, the receivable is not de-recognized and a liability reflecting the obligation to the financial
institution is recorded as debt until the liability is discharged through the financial institution receiving payment.

The
balance of sold receivables amounted to approximately $68 and $156 as of December 31, 2008 and 2009, 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.

As of December 31, 2008 and December 31, 2009, no sales of accounts receivable to the financial institution, relating to an
annual renewal of support and maintenance transactions for which the revenue has not been recognized, were outstanding.

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.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.):



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

Impact of recently issued accounting standards:

In May 2009, the FASB issued new accounting guidance, under ASU 2010-09, Subsequent Events (Topic 855), which sets forth
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is effective for interim and annual periods ending after
June 15, 2009. The adoption of this guidance did not have a material impact on the Companys consolidated financial position or results of operations. Refer to Note 16, Subsequent Events for the required disclosures in
accordance with ASC Topic 855.

In June 2009, the FASB issued SFAS No. 166, (ASC Topic 860) Accounting for Transfers
of Financial Assetsan amendment of FASB Statement No. 140 (SFAS 166). The provisions of SFAS 166, in part, amend the derecognition guidance in FASB Statement No. 140, eliminate the exemption from consolidation for
qualifying special-purpose entities and require additional disclosures. The changes are effective for financial asset transfers occurring after the beginning of an entitys first fiscal year that begins after November 15, 2009. The Company
does not expect the standard to have a material effect on the financial position, results of operations or cash flows of the Company.

In July 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162 (SFAS 168) now incorporated in ASC 105 Generally Accepted Accounting Principles. SFAS 168 establishes the FASB Accounting Standards Codification to
become the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. SFAS 168, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The Company has modified all
earlier references to accounting standards to reflect the adoption of SFAS 168.

In October 2009, the FASB issued Accounting
Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Arrangements. ASU 2009-13 amends the guidance that in the absence of vendor-specific objective and third-party evidence for deliverables in
multiple-deliverable arrangements, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangements consideration using the relative selling price method. ASU 2009-13 expands the
disclosure requirements for multiple-deliverable revenue arrangements. The guidance will be effective for financial statements issued for fiscal years beginning after June 15, 2010. Early adoption is permitted. The Company does not expect the
standard to have a material effect on the financial position, results of operations or cash flows of the Company.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

In October 2009, the FASB issued ASU 2009-14, Software (Topic 985), Certain Revenue Arrangements that Include Software Elements. ASU
2009-14 amends the guidance to exclude for the scope of software revenue accounting requirements tangible products if the product contains both software and non-software components that function together to deliver a products essential
functionality and factors to consider in determining whether a product is within the scope of the guidance. The guidance will be effective for financial statements issued for fiscal years beginning after June 15, 2010. Early adoption is
permitted. The Company does not expect the adoption of the update to have a material impact on its consolidated financial statements.

Other account receivable and prepaid expenses consisted of the following:



|                       |  |              |     |      |   |   
|---------------------- |  | ------------ | --- | ---- | - | --
|                       |  | December 31,
|                       |  | 2008         |     | 2009
|Prepaid expenses       |  | $            | 109 |      | $ | 95
|Government authorities |  |              | 4   |      |   | 2 
|                       |  |              |     |      |   |   
|                       |  | $            | 113 |      | $ | 97
|                       |  |              |     |      |   |   

NOTE 4:- PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:



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



|                                             |  |              |       |      |   |      
|-------------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                             |  | December 31,
|                                             |  | 2008         |       | 2009
|Cost:                                        |  |              |       |      |   |      
|Computers, peripheral equipment and software |  | $            | 2,057 |      | $ | 1,657
|Office furniture and equipment               |  |              | 608   |      |   | 336  
|Leasehold improvements                       |  |              | 311   |      |   | 314  
|                                             |  |              |       |      |   |      
|                                             |  |              | 2,976 |      |   | 2,307
|                                             |  |              |       |      |   |      
|Accumulated depreciation                     |  |              | 2,809 |      |   | 2,218
|                                             |  |              |       |      |   |      
|Depreciated cost                             |  | $            | 167   |      | $ | 89   
|                                             |  |              |       |      |   |      

Depreciation expense for the years ended
December 31, 2007, 2008 and 2009 were approximately $ 117, $ 100 and $89, respectively.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 5:- GOODWILL AND INTANGIBLE ASSETS, NET



| | a. | Goodwill
| | -- | --------

The changes in
the carrying amount of goodwill for the years ended December 31, 2008 and 2009 are as follows:



|                                         |  |   |       |  
|---------------------------------------- |  | - | ----- | -
|Balance as of January 1, 2008            |  | $ | 7,152 |  
|Foreign currency translation adjustments |  |   | (130  | )
|                                         |  |   |       |  
|Balance as of December 31, 2008          |  |   | 7,022 |  
|Foreign currency translation adjustments |  |   | 147   |  
|                                         |  |   |       |  
|Balance as of December 31, 2009          |  | $ | 7,169 |  
|                                         |  |   |       |  



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



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



|                               |  |              |       |      |   |      
|------------------------------ |  | ------------ | ----- | ---- | - | -----
|                               |  | December 31,
|                               |  | 2008         |       | 2009
|Costs:                         |  |              |       |      |   |      
|Customer relationship          |  | $            | 1,352 |      | $ | 1,461
|Technology                     |  |              | 1,403 |      |   | 1,585
|Trademark and trade name       |  |              | 110   |      |   | 110  
|                               |  |              |       |      |   |      
|Total cost                     |  |              | 2,865 |      |   | 3,156
|Accumulated amortization:      |  |              |       |      |   |      
|Customer relationship          |  |              | 985   |      |   | 1,323
|Technology                     |  |              | 1,219 |      |   | 1,512
|Trademark and trade name       |  |              | 110   |      |   | 110  
|                               |  |              |       |      |   |      
|Total accumulated amortization |  |              | 2,314 |      |   | 2,945
|                               |  |              |       |      |   |      
|Amortized cost                 |  | $            | 551   |      | $ | 211  
|                               |  |              |       |      |   |      



| | 2) | Customer relationship was acquired as part of the acquisitions of certain subsidiaries. Amortization expenses amounted to $ 256, $ 238 and $ 252 for the years
ended December 31, 2007, 2008 and 2009, respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Amortization expenses of other intangible assets amounted to $299, $144 and $150 for the years ended December 31, 2007, 2008 and 2009, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | The identifiable intangible assets will be fully amortized in 2010 and the estimated amortization expense in 2010 is $211.
| | -- | --------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 6:- SHORT-TERM BANK CREDIT



|         |  |                                              |  |              |     |      |   |    
|-------- |  | -------------------------------------------- |  | ------------ | --- | ---- | - | ---
|         |  | Weighted InterestRate as
ofDecember 31, 2009 |  | December 31,
|Currency |  | %                                            |  | 2008         |     | 2009
|U.S. $   |  | 11.50                                        |  | $            | 149 |      | $ | 249
|NIS      |  | 5.80                                         |  | $            | 131 |      | $ | 131
|         |  |                                              |  |              |     |      |   |    
|         |  |                                              |  | $            | 280 |      | $ | 380
|         |  |                                              |  |              |     |      |   |    

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

In August, 2007, the Bank modified the Companys bank
covenant requirements as part of its overall bank financing arrangement such that on a quarterly basis starting August 1, 2007 (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. In connection with these changes, the Company recorded fees expenses in the amount of $ 10 and issued 10,000 Ordinary shares to the Bank at no
consideration.

The fair value of the Ordinary shares issued to the Bank (Banks Shares) was determined using
the market price of the Companys Ordinary shares at the measurement date. This resulted in an amount of $ 26. The Company recorded the Banks Shares based on their fair value as additional paid-in capital.

On October 28, 2009 the Company received from 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.

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,
|                               |  | 2008         |       | 2009
|Employees and payroll accruals |  | $            | 1,351 |      | $ | 1,256
|Accrued expenses               |  |              | 612   |      |   | 805  
|                               |  |              |       |      |   |      
|                               |  | $            | 1,963 |      | $ | 2,061
|                               |  |              |       |      |   |      



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 8:- LONG-TERM BANK LOAN



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



|                          |  |          |  |               |                       |              |   |       |  |   |      
|------------------------- |  | -------- |  | ------------- | --------------------- | ------------ | - | ----- |  | - | -----
|                          |  | Currency |  | Interest
Rate |                       | December 31,
|                          |  |          |  | 2008          |                       | 2009        
|Loan from a bank          |  | U.S. $   |  |               | 3 MONTH LIBOR* + 2.25 |              | $ | 150   |  | $ |     
|Loan from a bank          |  | U.S. $   |  |               | 3 MONTH LIBOR* + 3.25 |              | $ | 1,589 |  | $ | 1,289
|Less - current maturities |  |          |  |               |                       |              |   | 450   |  |   | 400  
|                          |  |          |  |               |                       |              |   |       |  |   |      
|                          |  |          |  |               |                       |              | $ | 1,289 |  | $ | 889  
|                          |  |          |  |               |                       |              |   |       |  |   |      

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 million is paid over 14 quarterly payments starting October 2, 2009. See Note 6 for information related to bank covenants and security interest.



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



|      |  |             |       |      |   |      
|----- |  | ----------- | ----- | ---- | - | -----
|      |  | December 31
|      |  | 2008        |       | 2009
|2009  |  | $           | 300   |      | $ |     
|2010  |  |             | 400   |      |   | 400  
|2011  |  |             | 400   |      |   | 400  
|2012  |  |             | 400   |      |   | 400  
|2013  |  |             | 89    |      |   | 89   
|      |  |             |       |      |   |      
|Total |  | $           | 1,589 |      | $ | 1,289
|      |  |             |       |      |   |      



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 9:- LONG TERM CONVERTIBLE DEBT



| | c. | For details of charges, see Notes 6 and 10c.
| | -- | --------------------------------------------

Long  term convertible debt is as follows:



|                      |  |              |      |  |              |     |  |   |    
|--------------------- |  | ------------ | ---- |  | ------------ | --- |  | - | ---
|                      |  | Interestrate |      |  | December 31,
|                      |  |              | 2008 |  | 2009        
|Convertible debt:     |  |              |      |  |              |     |  |   |    
|Par                   |  | 7.5          | %    |  | $            | 480 |  | $ | 480
|Deemed premium, net * |  |              |      |  |              | 63  |  |   | 50 
|                      |  |              |      |  |              |     |  |   |    
|                      |  |              |      |  | $            | 543 |  | $ | 530
|                      |  |              |      |  |              |     |  |   |    



| | * | Amortization of the deemed premium added to income were $13 annually for 2008 and 2009.
| | - | ---------------------------------------------------------------------------------------



| | a. | The convertible debt is held by 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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 the Israels Ministry of Industry, Trade and Labor (the OCS).
Through December 31, 2009, the Company had obtained aggregate grants from the OCS of $ 372.

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, 2009, the Company has paid or accrued royalties to the OCS in the amount of $ 30. As of December 31,
2009, the total contingent liability to the OCS amounted to $ 393.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



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



| | 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 2011.

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



|                        |  |            |    
|----------------------- |  | ---------- | ---
|Year ended December 31, |  | Facilities
|2010                    |  |            | 316
|2011                    |  |            | 96 
|                        |  |            |    
|Total                   |  | $          | 412
|                        |  |            |    

Lease expenses in respect of facilities for the years
ended December 31, 2007, 2008 and 2009 were approximately $ 524, $ 442 and $ 349, respectively.

Lease expenses in
respect of motor vehicles for the years ended December 31, 2007, 2008 and 2009 were approximately $ 289, $ 265 and $ 163, respectively. In addition, as of December 31, 2009 future minimum rental payments in connection with motor
vehicles leased for the years 2010, 2011 and 2012 are $ 153, $ 116 and $ 13, 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 the amount of $ 67, in order to secure an office lease agreement.
| | -- | ----------------------------------------------------------------------------------------------------------

NOTE 11:- SHAREHOLDERS EQUITY

The Ordinary shares of the Company were traded until June 11, 2007 on the Nasdaq Capital Market and were delisted from trading on
that date. On June 12, 2007, the Companys Ordinary shares became eligible for quotation and trading on the Pink Sheets. On November 14, 2007, the Companys Ordinary shares became eligible for quotation and trading on the OTC
Bulletin Board (OTCBB). On September 3, 2008 the Companys Ordinary shares ceased to be eligible for quotation and trading on the OTCBB and became eligible for quotation and trading on the Pink Sheets. On March 4, 2010,
the Companys Ordinary shares became eligible again for quotation and trading on the OTC Bulletin Board (OTCBB).

The Preferred A shares are not publicly traded.

On December 29, 2006, the Companys shareholders approved in the annual general shareholders meeting a one (1) for five
(5) reverse split of the Companys Ordinary shares and Preferred A shares, which became effective on of January 17, 2007.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.):



Upon the effectiveness of the reverse share split, five Ordinary shares of NIS 1.0 par
value per Ordinary share were converted and reclassified as one Ordinary share of NIS 5.0 par value per Ordinary share. In addition, five Preferred A shares of NIS 1.0 par value per Preferred A share were converted and reclassified as one
Preferred A share of NIS 5.0 par value per Preferred A share on a post-split basis. All share data in this report are reported after the effect of the 1 for 5 reverse split that occurred on January 17, 2007.

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 as 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 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. The Convertible note does not have any maturity, does not bear any interest, is not subject to a repayment in any event including liquidation, and can only be converted into Ordinary shares
at any time at the holders discretion. 50% of the warrants are callable by the Company when all shares issued in connection with the new investment are registered with the SEC.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All of the warrants and an amount of $ 439 of the Convertible Note were subject to the Companys shareholders approval which was
granted on January 31, 2008.

As of December 31, 2008 and 2009 the total amount of Convertible Note of $ 600 which
was received during 2007 and 2008 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. | Following the December 19, 2007 financing described in b. above, the Company had issued 211,457 Ordinary shares at no consideration to a group of existing
shareholders who exercised its anti-dilution protection right, granted under a September 2006 conversion terms of short-term convertible debt.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | In November 2007 and December 2007, the Company issued 28,500 Ordinary shares under the 2005 Share Options Plans to service providers in consideration of consulting
services.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | On January 31, 2008, the Companys shareholders approved an increase of 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).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-29



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.):



| | f. | 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
2005 Share Options Plans.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | During 2008, the Company issued to consultants 56,757 Ordinary shares in consideration for finders fees related to the December 2007 investment in item b, above.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. | During 2008 the Company issued 76,181 Ordinary shares to investors in connection with interest expenses.
| | -- | --------------------------------------------------------------------------------------------------------

Stock  based compensation:



| | a. | The Companys previous stock options plans, The 1996, 1997, 1998 and 1999 Stock Option Plans (the Plans), have 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 the Companys board of directors shall determine 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.

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, 2009, an aggregate of 101,691 Ordinary shares of the Company were available for future grant.



| | b. | During the year ended December 31, 2007, the Company granted to the Companys employees and consultants 67,160 restricted Ordinary shares, at no consideration
(the Restricted Shares). The Restricted Shares shall be released ratably on an annual basis over a two or three-year period (release period), starting from the date of grant, and some of them are subject to acceleration
provisions upon certain events such as merger or acquisition. The Company has accounted for this award in accordance with ASC 718-10 and for the awards granted to consultants in accordance with ASC 718-10 and ASC 505-50. The total grant date fair
value of $ 224, 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.):



Compensation expenses of approximately $ 110, $ 83 and $ 29 were recognized during the
years ended December 31, 2007, 2008 and 2009, respectively.



| | c. | 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 (the Restricted Shares). 15,200 of the Restricted Shares that were granted to consultants were released in 2008 and 188,000 Restricted Shares shall be 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 provisions upon certain events such as 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 and $ 101 were recognized during the years ended December 31, 2008 and 2009 respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | During the year ended December 31, 2009, the Company granted to the Companys employees 66,000 restricted Ordinary shares for no consideration (the
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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | The following is a summary of the Companys employees and directors stock option activity under the Plans and related information:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------



|                                    |  |                              |   |  |                                                 |  |                         |  |                               |     
|----------------------------------- |  | ---------------------------- | - |  | ----------------------------------------------- |  | ----------------------- |  | ----------------------------- | ----
|                                    |  | Year ended December 31, 2009
|                                    |  | Numberofoptions              |   |  | Weightedaverageremainingcontractualterm (years) |  | Aggregateintrinsicvalue |  | Weightedaverageexercise price
|Outstanding - beginning of the year |  | 61,175                       |   |  |                                                 |  |                         |  | $                             | 9.58
|Forfeited                           |  | (48,650                      | ) |  |                                                 |  |                         |  | $                             | 9.90
|Outstanding - end of the year       |  | 12,525                       |   |  | 0.85                                            |  |                        |  | $                             | 8.38
|                                    |  |                              |   |  |                                                 |  |                         |  |                               |     
|Vested and exercisable              |  | 12,525                       |   |  | 0.85                                            |  |                        |  | $                             | 8.38
|                                    |  |                              |   |  |                                                 |  |                         |  |                               |     

No options were exercised in 2007, 2008 and 2009.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.):



The options outstanding as of December 31, 2009, under the Plans, have been
separated into ranges of exercise price, as follows:



|                       |  |                                                        |  |                                                 |  |                              |      
|---------------------- |  | ------------------------------------------------------ |  | ----------------------------------------------- |  | ---------------------------- | -----
|Range 
ofexerciseprice |  | Optionsoutstandingand exercisableas ofDecember 31,2009 |  | Weightedaverageremainingcontractuallife (years) |  | Weightedaverageexerciseprice
|$7.95-8.20             |  | 9,925                                                  |  | 0.63                                            |  | $                            | 7.95 
|$10.00-11.65           |  | 2,600                                                  |  | 1.70                                            |  | $                            | 10.02
|                       |  |                                                        |  |                                                 |  |                              |      
|                       |  | 12,525                                                 |  |                                                 |  | $                            | 8.38 
|                       |  |                                                        |  |                                                 |  |                              |      

No compensation expenses related to options were
recognized during the years ended December 31, 2007, 2008 and 2009.



| | f. | A summary of the status of the Companys restricted shares as of December 31, 2009, and changes during the year ended December 31, 2009, is presented
below:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                |  |          |   |  |                                       |     
|------------------------------- |  | -------- | - |  | ------------------------------------- | ----
|Restricted shares               |  | Shares   |   |  | Weightedaverage grant-date fair value
|Restricted at January 1, 2009   |  | 206,300  |   |  | $                                     | 1.76
|Granted                         |  | 66,000   |   |  | $                                     | 0.40
|Vested                          |  | (164,856 | ) |  | $                                     | 1.23
|Forfeited                       |  | (17,780  | ) |  | $                                     | 2.37
|                                |  |          |   |  |                                       |     
|Restricted at December 31, 2009 |  | 89,664   |   |  | $                                     | 1.62
|                                |  |          |   |  |                                       |     

As of December 31, 2009, there was $ 33 of total unrecognized compensation cost related to
restricted shares compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted-average period of half year. The total fair value of restricted shares released during the year ended December 31, 2009
was $ 202.

The weighted average grant date fair value of shares granted during 2007, 2008 and 2009 were $3.34, $1.52 and $
0.40, respectively.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.):



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



| | 1. | The Companys outstanding options to consultants as of December 31, 2009, are as follows:
| | -- | -----------------------------------------------------------------------------------------



|              |  |                           |  |                        |       |                    |        |                    |            
|------------- |  | ------------------------- |  | ---------------------- | ----- | ------------------ | ------ | ------------------ | -----------
|Issuance date |  | Options forOrdinaryshares |  | Exerciseprice pershare |       | Optionsexercisable |        | Exercisablethrough
|August 2003   |  | 4,900                     |  | $                      | 7.95  |                    | 4,900  |                    | August 2010
|August 2004   |  | 500                       |  | $                      | 10.00 |                    | 500    |                    | August 2011
|March 2005    |  | 7,000                     |  | $                      | 10.30 |                    | 7,000  |                    | March 2012 
|              |  |                           |  |                        |       |                    |        |                    |            
|Total         |  | 12,400                    |  |                        |       |                    | 12,400 |                    |            
|              |  |                           |  |                        |       |                    |        |                    |            

Compensation expenses of approximately $ 3 were recognized during the year ended
December 31, 2007. No compensation expenses were recognized during the years ended December 31, 2008 and 2009.



| | 2. | In March 2007, the Company granted 6,000 restricted shares under the 2005 Share Options Plans to service providers in consideration of consulting services.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | In November 2007 and December 2007, the Company granted 28,500 Ordinary shares under the 2005 Share Options Plans to service providers in consideration of consulting
services.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | In July 2008, the Company granted 15,200 Ordinary shares under the 2005 Share Options Plans to service providers in consideration of consulting services.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Warrants:

The Companys outstanding warrants to investors and consultants as of December 31, 2009, are as follows:



|                 |  |                            |  |                        |       |                     |         |                    |                   
|---------------- |  | -------------------------- |  | ---------------------- | ----- | ------------------- | ------- | ------------------ | ------------------
|Issuance date    |  | Warrants forOrdinaryshares |  | Exerciseprice pershare |       | Warrantsexercisable |         | Exercisablethrough
|April 1998       |  | 578                        |  | $                      | 1.25  |                     | 578     |                    | No expiration date
|August 2005      |  | 23,334                     |  | $                      | 10.50 |                     | 23,334  |                    | August 2010       
|September 2005   |  | 32,540                     |  | $                      | 10.50 |                     | 32,540  |                    | September 2010    
|January 2008 (*) |  | 600,000                    |  | $                      | 2.00  |                     | 600,000 |                    | December 2010     
|May 2008         |  | 7,152                      |  | $                      | 1.65  |                     | 7,152   |                    | May 2011          
|                 |  |                            |  |                        |       |                     |         |                    |                   
|Total            |  | 663,604                    |  |                        |       |                     | 663,604 |                    |                   
|                 |  |                            |  |                        |       |                     |         |                    |                   



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



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 11:- SHAREHOLDERS EQUITY (CONT.)



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.

NOTE 12:- TAXES ON INCOME

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), an interpretation of ASC 740-10 on January 1, 2007 (see Note 2 Income taxes). As of December 31, 2009, the Company recognized approximately $ 59 of liability for unrecognized tax benefits.

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 2004 through 2009. ViryaNet Inc.s (the U.S. subsidiary) tax returns through 2006 were audited by the U.S. Internal Revenue Service (IRS) which resulted with
no incremental tax liability. ViryaNet Inc. may be subject to examination by the IRS for fiscal years 2007 through 2009. ViryaNet PTY (the Australian subsidiary) may be subject to examination by the Australian tax authorities for fiscal years 2005
through 2009.

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 loss in the period in which such determination is made.

Reduction in Israeli tax rates:

For tax year 2009, Israeli companies are subject to Corporate Tax on their taxable income at the rate of
26%. Following an amendment to the Israeli Income Tax Ordinance, 1961 (the Israeli Tax Ordinance), which came into effect on January 1, 2006, the corporate tax rate is scheduled to decrease to 25% for the 2010 tax year and
thereafter.

Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains
deriving from the sale of listed securities) derived after January 1, 2003.

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

The Companys production facilities have been
granted an approved enterprise status under the law, for three separate investment programs, which were approved in February 1989, March 1995 and April 1998.

The status of approved enterprise granted for the February 1989 and the March 1995 investment programs has expired.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 12:- TAXES ON INCOME (CONT.):



The tax benefits period for the April 1998 program has not yet begun. Income derived
from this alternative benefits track program 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; however it has applied for relief, and adjustment of this requirement. There can be no assurance that the relief will be granted to the Company, and if the
relief is not granted the Company will lose its entitlement to future benefits under Law. 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 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 will be tax-exempt for a period of ten years commencing with the year in which it 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.

The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the 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 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 Law also grants entitlement to accelerated depreciation claim on buildings and equipment used by the approved
enterprise during the first five tax years of using 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 Capital Investments Law came into effect (the Amendment) and has significantly
changed the provisions of the Capital Investments Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions
generally requiring that at least 25% of the Beneficiary Enterprises income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Capital Investments Law so
that companies who choose the alternative benefits track no longer require Investment Center approval in order to qualify for tax benefits.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 12:- TAXES ON INCOME (CONT.):



However, the Capital Investments Law 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 existing approved enterprise will generally not be subject to the provisions of
the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the new 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, 2009, the Company did not generate income under the provision of the new Law.

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.

The Company is an industrial company, as defined by this law and, as such, is entitled to certain tax benefits, mainly
amortization of costs relating to know-how and patents over eight years, the right to claim public issuance expenses and accelerated depreciation.

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 CPI. As explained
in Note 2, the financial statements are presented in U.S. dollars. The difference between the rate of change in Israeli 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, which the Company refers to as 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 at preventing distortions in the tax calculations. In accordance with the Inflationary
Adjustments Amendment, commencing with the 2008 tax year, income for tax purposes will no longer be adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax losses will
no longer be linked to the Israeli Consumer Price Index.

Net operating losses carryforward:

ViryaNet Ltd. has accumulated losses for tax purposes as of December 31, 2009, in the amount of approximately $ 34,319 which may
be carried forward and offset against taxable income and capital gain in the future for an indefinite period.

Through
December 31, 2009, ViryaNet U.K. had accumulated losses for income tax purposes of approximately $ 14,436, which can be carried forward and offset against taxable income in the future for an indefinite period.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 12:- TAXES ON INCOME (CONT.):



As of December 31, 2009, the U.S. subsidiary had U.S. federal net operating loss
carryforward for income tax purposes in the amount of approximately $4,479. 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
expiring between 2010 and 2012. Net operating loss carryforwards 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.

Through December 31, 2009, ViryaNet Australia had accumulated losses for income tax purposes of approximately $ 495, 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, |        
|                                          |  | 2008         |         |   | 2009 |  
|Deferred tax assets:                      |  |              |         |   |      |   |         |  
|U.S. net operating loss carryforward      |  | $            | 2,896   |   |      | $ | 1,804   |  
|Israeli net operating loss carryforward   |  |              | 8,262   |   |      |   | 6,177   |  
|U.K. net operating loss carryforward      |  |              | 3,996   |   |      |   | 4,331   |  
|Australia net operating loss carryforward |  |              | 78      |   |      |   | 148     |  
|Other reserve and allowances              |  |              | 856     |   |      |   | 978     |  
|                                          |  |              |         |   |      |   |         |  
|Total deferred tax assets                 |  |              | 16,088  |   |      |   | 13,438  |  
|Valuation allowance                       |  |              | (16,088 | ) |      |   | (13,438 | )
|                                          |  |              |         |   |      |   |         |  
|Net deferred tax assets                   |  | $            |        |   |      | $ |        |  
|                                          |  |              |         |   |      |   |         |  

As of December 31, 2009, the Company and its subsidiaries have provided valuation allowances in respect
of deferred tax assets resulting from tax loss carryforward and other temporary differences, since they have a history of operating losses and current uncertainty concerning its ability to realize these deferred tax assets in the future. Management
currently believes that it is more likely than not that the deferred tax regarding the loss carryforward and other temporary differences will not be realized in the foreseeable future.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, |       
|         |  | 2007                    |        |   | 2008 |   |        | 2009 | 
|Domestic |  | $                       | (2,660 | ) |      | $ | (2,087 | )    |  | $ | (613  | )
|Foreign  |  |                         | (1,150 | ) |      |   | 7      |      |  |   | 1,109 |  
|         |  |                         |        |   |      |   |        |      |  |   |       |  
|         |  | $                       | (3,810 | ) |      | $ | (2,080 | )    |  | $ | 496   |  
|         |  |                         |        |   |      |   |        |      |  |   |       |  

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

In 2007, 2008 and 2009, the main reconciling item of the statutory tax rate of the Company (29% - in 2007, 27% in 2008 and 26%
in 2009) to the effective tax rate (0%) 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 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, 2007, 2008 and 2009 and long-lived assets as of
December 31, 2007, 2008 and 2009:



|                           |  |               |        |                  |   |               |  |                  |        |               |   |                  |  |   |        |  |   |    
|-------------------------- |  | ------------- | ------ | ---------------- | - | ------------- |  | ---------------- | ------ | ------------- | - | ---------------- |  | - | ------ |  | - | ---
|                           |  | 2007          |        | 2008             |   | 2009         
|                           |  | Totalrevenues |        | Long-livedassets |   | Totalrevenues |  | Long-livedassets |        | Totalrevenues |   | Long-livedassets
|United States              |  | $             | 8,809  |                  | $ | 611           |  | $                | 9,655  |               | $ | 381              |  | $ | 9,062  |  | $ | 156
|Europe and the Middle East |  |               | 1,001  |                  |   | 43            |  |                  | 445    |               |   | 28               |  |   | 424    |  |   | 17 
|Asia Pacific               |  |               | 1,349  |                  |   | 644           |  |                  | 1,270  |               |   | 308              |  |   | 941    |  |   | 127
|                           |  |               |        |                  |   |               |  |                  |        |               |   |                  |  |   |        |  |   |    
|                           |  | $             | 11,159 |                  | $ | 1,298         |  | $                | 11,370 |               | $ | 717              |  | $ | 10,427 |  | $ | 300
|                           |  |               |        |                  |   |               |  |                  |        |               |   |                  |  |   |        |  |   |    



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

One customer represented approximately 11% of our total revenues in 2009. There were no customers representing 10% or more of revenues in
2007 and 2008.



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 14:- FINANCIAL EXPENSES, NET



|                                                                                                            |  |                         |     |      |   |      |  |   |    
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | ---
|                                                                                                            |  | Year ended December 31,
|                                                                                                            |  | 2007                    |     | 2008 |   | 2009
|Income:                                                                                                     |  |                         |     |      |   |      |  |   |    
|Foreign currency translation adjustments                                                                    |  |                         |     |      |   |      |  |   | 5  
|Other income                                                                                                |  |                         |    |      |   | 7    |  |   | 20 
|                                                                                                            |  |                         |     |      |   |      |  |   |    
|Total income                                                                                                |  |                         |    |      |   | 7    |  |   | 25 
|                                                                                                            |  |                         |     |      |   |      |  |   |    
|Expenses:                                                                                                   |  |                         |     |      |   |      |  |   |    
|Interest and bank charges                                                                                   |  |                         | 286 |      |   | 324  |  |   | 185
|Foreign currency translation adjustments                                                                    |  |                         | 113 |      |   |     |  |   |   
|Stock based compensation expenses related to options and shares granted to a Bank and financial consultants |  |                         | 136 |      |   | 97   |  |   |   
|                                                                                                            |  |                         |     |      |   |      |  |   |    
|Total expenses                                                                                              |  |                         | 535 |      |   | 421  |  |   | 185
|                                                                                                            |  |                         |     |      |   |      |  |   |    
|Financial expenses, net                                                                                     |  | $                       | 535 |      | $ | 414  |  | $ | 160
|                                                                                                            |  |                         |     |      |   |      |  |   |    

NOTE 15:- RELATED PARTIES TRANSACTIONS



| | a) | In June 1999, the board of directors approved the issuance of 3,478 Series C-2 Preferred shares to its Chairman in consideration of $ 100, which the Company loaned
to him. The loan was approved by the 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, subject to 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 inunsecured debt. The note bears interest at a rate equal to 5%. The
unsecured debt is payable to sellers major shareholder, Mark Hosking, who became a shareholder and an officer of the Company as a result of the acquisition. As of December 31, 2009, the outstanding amount of the debt is $ 79.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



NOTE 16:- SUBSEQUENT EVENTS

In January 2010, the Company issued 20,000 Ordinary shares to service providers in consideration of consulting services.

In January 2010 the Companys shareholders approved to amend the Companys 2005 Share Option Plans (the Plans) by
increasing the number of shares reserved for grants under the Plans (whether as options and/or as restricted shares) by 300,000.

In February 2010, the Company granted to the Companys employees and directors 224,582 restricted Ordinary shares under the
Companys 2005 Share Option Plans, for no consideration.

On March 4, 2010, the Companys Ordinary shares became
eligible again for quotation and trading on the OTC Bulletin Board (OTCBB).

In April 2010 the Company issued to
the long-term convertible debt holder 50,803 shares for interest expenses.

On July 15, 2010 the Company received from Bank
Hapoalim a waiver of its bank covenants (see Note 6) for the remaining quarters of 2010 and for the first quarter of 2011. In connection with the waiver the Company agreed to pay fees of $15,000 to the bank.

SCHEDULE II

VIRYANET LTD

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)



|                                                     |  |                         |   |      |   |     |      |  |   |   
|---------------------------------------------------- |  | ----------------------- | - | ---- | - | --- | ---- |  | - | --
|                                                     |  | Year ended December 31,
|                                                     |  | 2009                    |   | 2008 |   |     | 2007
|Allowance for doubtful accounts at beginning of year |  | $                       |  |      | $ | 52  |      |  | $ | 52
|Provision                                            |  |                         |  |      |   |    |      |  |   |  
|Accounts receivable written off                      |  |                         |  |      |   | (52 | )    |  |   |  
|                                                     |  |                         |   |      |   |     |      |  |   |   
|Allowance for doubtful accounts at end of year       |  | $                       |  |      | $ |    |      |  | $ | 52
|                                                     |  |                         |   |      |   |     |      |  |   |   







F-40