##### 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, 2011

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 Ha Marpe 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, 2011, the Registrant had 3,778,745 shares outstanding, comprised of 3,451,948 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).  x  Yes   ̈  No [(The registrant intends to submit and post the Interactive Data File for
the financial statements included in this annual report within the 30 day grace period accorded to registrants complying with XBRL for the first time under the Commissions rules and regulations)]

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









---

##### Table of Contents

TABLE OF CONTENTS



|         |  |                                                       |  |          |    | 
|-------- |  | ----------------------------------------------------- |  | -------- | -- | 
|ITEM     |  |                                                       |  | Page No. |   
|         |  | PART I                                                |  |          | 5  | 
|         |  |                                                      
|Item 1.  |  | Identity of Directors, Senior Management and Advisers |  |          | 5  | 
|         |  |                                                      
|Item 2.  |  | Offer Statistics and Expected Timetable               |  |          | 5  | 
|         |  |                                                      
|Item 3.  |  | Key Information                                       |  |          | 5  | 
|         |  |                                                      
|         |  | Selected Financial Data                               |  |          | 5  | 
|         |  | Capitalization and Indebtedness                       |  |          | 6  | 
|         |  | Reasons for the Offer and Use of Proceeds             |  |          | 6  | 
|         |  | Risk Factors                                          |  |          | 7  | 
|         |  |                                                      
|Item 4.  |  | Information on the Company                            |  |          | 17 | 
|         |  |                                                      
|         |  | History and Development of the Company                |  |          | 17 | 
|         |  | Business Overview                                     |  |          | 18 | 
|         |  | Organizational Structure                              |  |          | 22 | 
|         |  | Property, Plants and Equipment                        |  |          | 23 | 
|         |  |                                                      
|Item 4A. |  | Unresolved Staff Comments                             |  |          | 23 | 
|         |  |                                                      
|Item 5.  |  | Operating and Financial Review and Prospects          |  |          | 23 | 
|         |  |                                                      
|         |  | Overview                                              |  |          | 23 | 
|         |  | Operating Results                                     |  |          | 29 | 
|         |  | Liquidity and Capital Resources                       |  |          | 33 | 
|         |  | Research and Development, Patents and Licenses, etc.  |  |          | 36 | 
|         |  | Trend Information                                     |  |          | 37 | 
|         |  | Off-balance Sheet Arrangements                        |  |          | 38 | 
|         |  | Tabular Disclosure of Contractual Obligations         |  |          | 38 | 
|         |  |                                                      
|Item 6.  |  | Directors, Senior Management and Employees            |  |          | 38 | 
|         |  |                                                      
|         |  | Directors and Senior Management                       |  |          | 38 | 
|         |  | Compensation                                          |  |          | 40 | 
|         |  | Board Practices                                       |  |          | 40 | 
|         |  | Employees                                             |  |          | 44 | 
|         |  | Share Ownership                                       |  |          | 44 | 
|         |  |                                                      
|Item 7.  |  | Major Shareholders and Related Party Transactions     |  |          | 45 | 
|         |  |                                                      
|         |  | Major Shareholders                                    |  |          | 45 | 
|         |  | Related Party Transactions                            |  |          | 47 | 



---

##### Table of Contents

|         |  |                                                            |  |  |    | 
|-------- |  | ---------------------------------------------------------- |  |  | -- | 
|         |  |                                                           
|         |  | Interests of Experts and Counsel                           |  |  | 48 | 
|         |  |                                                           
|Item 8.  |  | Financial Information                                      |  |  | 48 | 
|         |  |                                                           
|         |  | Consolidated Statements and Other Financial Information    |  |  | 48 | 
|         |  | Significant Changes                                        |  |  | 48 | 
|         |  |                                                           
|Item 9.  |  | The Offer and Listing                                      |  |  | 48 | 
|         |  |                                                           
|         |  | Market Price Information                                   |  |  | 48 | 
|         |  | Markets on Which our Ordinary Shares Trade                 |  |  | 49 | 
|         |  |                                                           
|Item 10. |  | Additional Information                                     |  |  | 49 | 
|         |  |                                                           
|         |  | Share Capital                                              |  |  | 49 | 
|         |  | Memorandum and Articles of Association                     |  |  | 49 | 
|         |  | Material Contracts                                         |  |  | 53 | 
|         |  | Exchange Controls                                          |  |  | 53 | 
|         |  | Taxation                                                   |  |  | 53 | 
|         |  | Documents on Display                                       |  |  | 62 | 
|         |  |                                                           
|Item 11. |  | Quantitative and Qualitative Disclosures About Market Risk |  |  | 62 | 
|         |  |                                                           
|Item 12. |  | Description of Securities Other than Equity Securities     |  |  | 63 | 



---

##### Table of Contents

|          |  |                                                                              |  |  |    | 
|--------- |  | ---------------------------------------------------------------------------- |  |  | -- | 
|          |  | PART II                                                                      |  |  | 63 | 
|          |  |                                                                             
|Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                              |  |  | 63 | 
|          |  |                                                                             
|Item 14.  |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  |  | 63 | 
|          |  |                                                                             
|Item 15.  |  | Controls and Procedures                                                      |  |  | 63 | 
|          |  |                                                                             
|Item 16.  |  | Reserved                                                                     |  |  | 64 | 
|          |  |                                                                             
|Item 16A. |  | Audit Committee Financial Expert                                             |  |  | 64 | 
|          |  |                                                                             
|Item 16B. |  | Code of Ethics                                                               |  |  | 64 | 
|          |  |                                                                             
|Item 16C. |  | Principal Accountant Fees and Services                                       |  |  | 64 | 
|          |  |                                                                             
|Item 16D. |  | Exemptions from the Listing Standards for Audit Committees                   |  |  | 65 | 
|          |  |                                                                             
|Item 16E. |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       |  |  | 65 | 
|          |  |                                                                             
|Item 16F. |  | Change in Registrants Certifying Accountant                                 |  |  | 65 | 
|          |  |                                                                             
|Item 16G. |  | Corporate Governance                                                         |  |  | 65 | 
|          |  |                                                                             
|          |  | PART III                                                                     |  |  | 65 | 
|          |  |                                                                             
|Item 17.  |  | Financial Statements                                                         |  |  | 65 | 
|          |  |                                                                             
|Item 18.  |  | Financial Statements                                                         |  |  | 65 | 
|          |  |                                                                             
|Item 19.  |  | Exhibits                                                                     |  |  | 65 | 



---

##### 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 annual report 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 annual report 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
annual report 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
annual report.

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, 2009, 2010 and 2011, and the selected consolidated balance sheet data as of December 31, 2010 and 2011, 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, or GAAP. We derived the consolidated statements of operations data for the years
ended December 31, 2007 and 2008 and the selected consolidated balance sheet data as of December 31, 2007, 2008 and 2009 from audited consolidated financial statements that are not included in this annual report.



5



---

##### Table of Contents

Summary Consolidated Financial Information

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



|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                                                  |  | 2007 |           |   | 2008 |   |           | 2009 |  |   | 2010      |   |  | 2011 |          
|Statement of Operations Data(1):                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Revenues:                                                                                         |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Software licenses                                                                                 |  | $    | 1,677     |   |      | $ | 1,310     |      |  | $ | 1,453     |   |  | $    | 1,574     |   |  | $ | 1,549     |  
|Maintenance and services                                                                          |  |      | 8,430     |   |      |   | 9,252     |      |  |   | 8,298     |   |  |      | 8,735     |   |  |   | 8,122     |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total revenues                                                                                    |  |      | 10,107    |   |      |   | 10,562    |      |  |   | 9,751     |   |  |      | 10,309    |   |  |   | 9,671     |  
|Cost of revenues:                                                                                 |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Software licenses                                                                                 |  |      | 207       |   |      |   | 120       |      |  |   | 62        |   |  |      | 68        |   |  |   | 56        |  
|Maintenance and services                                                                          |  |      | 5,064     |   |      |   | 5,091     |      |  |   | 3,591     |   |  |      | 3,873     |   |  |   | 3,513     |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total cost of revenues                                                                            |  |      | 5,271     |   |      |   | 5,211     |      |  |   | 3,653     |   |  |      | 3,941     |   |  |   | 3,569     |  
|Gross profit                                                                                      |  |      | 4,836     |   |      |   | 5,351     |      |  |   | 6,098     |   |  |      | 6,368     |   |  |   | 6,102     |  
|Operating expenses:                                                                               |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Research and development, net                                                                     |  |      | 2,111     |   |      |   | 1,725     |      |  |   | 1,029     |   |  |      | 1,010     |   |  |   | 1,614     |  
|Sales and marketing                                                                               |  |      | 3,083     |   |      |   | 2,995     |      |  |   | 2,546     |   |  |      | 2,782     |   |  |   | 2,847     |  
|General and administrative                                                                        |  |      | 2,253     |   |      |   | 2,085     |      |  |   | 1,648     |   |  |      | 1,551     |   |  |   | 1,708     |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total operating expenses                                                                          |  |      | 7,447     |   |      |   | 6,805     |      |  |   | 5,223     |   |  |      | 5,343     |   |  |   | 6,169     |  
|Income (loss) from continuing operations                                                          |  |      | (2,611    | ) |      |   | (1,454    | )    |  |   | 875       |   |  |      | 1,025     |   |  |   | (67       | )
|Financial expenses, net                                                                           |  |      | 515       |   |      |   | 402       |      |  |   | 155       |   |  |      | 237       |   |  |   | 129       |  
|Other income (loss)                                                                               |  |      | (239      | ) |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income (loss) from continuing operations before taxes on income                                   |  |      | (3,365    | ) |      |   | (1,856    | )    |  |   | 720       |   |  |      | 788       |   |  |   | (196      | )
|Taxes on income                                                                                   |  |      |          |   |      |   | 14        |      |  |   | 47        |   |  |      | 69        |   |  |   | 9         |  
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss) from continuing operations                                                      |  | $    | (3,365    | ) |      |   | (1,870    | )    |  |   | 673       |   |  |      | 719       |   |  |   | (205      | )
|Income (loss) from discontinued operations                                                        |  |      | (445      | ) |      |   | (210      | )    |  |   | (177      | ) |  |      | (50       | ) |  |   | (14       | )
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss)                                                                                 |  | $    | (3,810    | ) |      | $ | (2,080    | )    |  | $ | 496       |   |  | $    | 669       |   |  | $ | (219      | )
|                                                                                                  |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic net income (loss) per share                                                                 |  | $    | (1.66     | ) |      | $ | (0.70     | )    |  | $ | 0.16      |   |  | $    | 0.19      |   |  | $ | (0.06     | )
|Weighted average number of shares used in computing basic net income (loss) per Ordinary Share    |  |      | 2,292,190 |   |      |   | 2,992,752 |      |  |   | 3,176,831 |   |  |      | 3,467,302 |   |  |   | 3,671,547 |  
|Diluted net income (loss) per share                                                               |  | $    | (1.66     | ) |      | $ | (0.70     | )    |  | $ | 0.14      |   |  | $    | 0.17      |   |  | $ | (0.06     | )
|Weighted average number of shares used in computing basic and diluted net loss per Ordinary Share |  |      | 2,292,190 |   |      |   | 2,992,752 |      |  |   | 3,540,467 |   |  |      | 3,884,201 |   |  |   | 3,671,547 |  
|Balance Sheet Data:                                                                               |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Cash and cash equivalents                                                                         |  | $    | 413       |   |      | $ | 143       |      |  | $ | 156       |   |  | $    | 97        |   |  | $ | 104       |  
|Working capital (deficit)                                                                         |  |      | (6,098    | ) |      |   | (5,830    | )    |  |   | (5,611    | ) |  |      | (5,635    | ) |  |   | (4,528    | )
|Total assets                                                                                      |  |      | 11,190    |   |      |   | 9,802     |      |  |   | 9,241     |   |  |      | 9,760     |   |  |   | 9,211     |  
|Long-term bank loans, including current maturities                                                |  |      | 738       |   |      |   | 1,739     |      |  |   | 1,289     |   |  |      | 1,089     |   |  |   | 1,499     |  
|Long-term convertible debt                                                                        |  |      | 556       |   |      |   | 543       |      |  |   | 530       |   |  |      |          |   |  |   | 502       |  
|Shareholders equity (deficit)                                                                    |  |      | 50        |   |      |   | (1,375    | )    |  |   | (606      | ) |  |      | 357       |   |  |   | 270       |  



|(1) | We have reclassified our historical results of operations to remove the operations of two entities of which we disposed during 2011, ViryaNet Pty in Australia and
ViryaNet Europe in the U.K., from our revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations. All of the operations data in this document, including data that appears in the
Risk Factors and in the Operating and Financial Review and Prospects sections, reflects this reclassification.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.



6



---

##### Table of Contents

RISK FACTORS

You should carefully consider the risks described below and in the documents we have incorporated by reference in this annual report before making an investment decision. The risks described below and
in the documents we have incorporated by reference in 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 incurred a net loss in 2011, have incurred losses in the past and may incur losses in the future.

Although we had net income of $0.5 million in 2009 and $0.7 million in 2010, we had incurred substantial net losses during each of the
three fiscal years prior to 2009 and again incurred a net loss in 2011, and may not achieve profitability in 2012 or in future years. As of December 31, 2011, we had an accumulated deficit of approximately $120.7 million. In order to achieve
and 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 and 2007 were $11.4 million and $11.2 million, respectively, we incurred net losses of $2.1 million and $3.8 million, respectively, during those years. While we achieved profitability in 2009 and 2010, our revenues in those years decreased
relative to in 2008 and 2007, to $9.7 million and $10.3 million, respectively. Furthermore, our revenues in 2011 further decreased compared to in 2010, to $9.7 million, and we incurred a loss of $0.2 million, after two consecutive profitable years.
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 restore or 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.

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 and the Israeli prime interest rate (which are the benchmark rates used to determine the interest
expenses incurred by us on our bank borrowings under our bank arrangements);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 is likely to decrease.



7



---

##### 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., or LibertyView, which is due in
full in August 2013. 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.

During the each of the four years in the period ended December 31, 2011, 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. Over the past five years, we have raised approximately $1.2 million in a combination of equity and convertible debt financings (mostly 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 in the OTCQB marketplace of OTC Markets Group. 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 and Bank Otsar Ha-Hayal, which may be subject to immediate repayment if we do not meet our repayment schedule or meet specified
conditions.

Our overall bank financing arrangement with Bank Hapoalim is subject to financial covenants, that require that on a
quarterly basis (i) our shareholders equity must be at least the higher of (a) 13% of our total assets, or (b) $1.5 million, and (ii) our cash balance must be not less than $0.5 million. Because we have often not been in
compliance with these covenants, we have required waivers from Bank Hapoalim on multiple occasions, for several quarters at a time, during each of the years from 2007 through 2012. In connection with these waivers, the past modification of these
covenants and the conversion of short-term loans and credits to long-term loans, we have paid an aggregate of $62,500 in fees and have issued an aggregate of 10,000 Ordinary Shares to the bank.

As of March 31, 2012, our outstanding debt to Bank Hapoalim consists of: (i) the remaining $0.38 million of a $1.6 million long-term loan that is
payable in monthly installments of $0.04 million each, which bears interest quarterly at a rate of a three months LIBOR plus 3.25%; (ii) a $460,000 long-term loan that is payable in 11 monthly payments starting February 6, 2013, bearing
interest that is due on a monthly basis starting January 6, 2012 at a rate of a one month LIBOR plus 5.7%.

We have also received an
aggregate of NIS 2.1 million of bank financing that is guaranteed by the Israeli government based on an approval from Israels State Guaranteed Medium Business Assistance Fund, or the Fund, and with respect to which Samuel HaCohen, the
Companys Chairman of the Board of Directors, has provided a personal guarantee. The loan was disbursed to us in two stages (NIS 750,000 and NIS 1,350,000 in July 2011 and September 2011, respectively) by the Funds participating bank,
Bank Otsar Ha-Hayal. The two portions of the loan bear interest annually at the Israeli prime rate, plus 3.5%, which is payable on a monthly basis, beginning on August 6, 2011 and October 7, 2011, respectively, and the principal portions
of the loan are payable in 49 equal monthly payments of NIS 18,080 and NIS 32,545, respectively (each of which includes interest as well), beginning on August 6, 2012 and September 8, 2012, respectively. For more information, please see
Item5. Operating and Financial Review and Prospects Liquidity and Capital ResourcesSources of CashBank Financing

We may need to obtain funding from third parties to meet the payment obligations under the above-described loan arrangements in a timely manner, and
there is no assurance that either Bank Hapoalim or Bank Otsar Ha-Hayal 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 bank loans may be impacted by the limited liquidity of our Ordinary Shares on the OTCQB. There can be no assurance that we will meet our covenants to Bank Hapoalim or that Bank Hapoalim will continue to waive
non-compliance with any such covenants in the event that we once again do not meet them. If we fail to timely effect any repayment of these loans or to meet our covenants to Bank Hapoalim, the relevant bank may demand immediate repayment of the
outstanding debts and all interest thereon and would be entitled to exercise any remedies available to it. That would have a material adverse effect on our business. For more information, please see Item5. Operating and Financial Review and
Prospects Liquidity and Capital ResourcesSources of CashBank Financing and Item5. Operating and Financial Review and Prospects Liquidity and Capital ResourcesSources of Cash Government Guaranteed Bank
Financing.



8



---

##### Table of Contents

We substantially reduced the number of our employees several years ago, and, as a result, may be
unable to meet certain revenue objectives and sustain profitability.

Following our acquisition of e-Wise Solutions in 2005, we
determined that we had an excess of resources resulting from that and other past acquisitions and took action to reduce our headcount. These actions resulted in a reduction of our headcount from 148 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, and it has remained at that approximate level since that time. In December 2011, we further reduced our headcount to 60 employees as
a result of the sale of our Australian subsidiary. 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 to sustain and enhance our business and operations, may be adversely 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 conducted reductions in the number of our employees as described above,
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 and customer
support staff to support new customers and the expanding needs of existing customers. Generally, the training period for these new positions can take a significant amount of time before these personnel can provide support to 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.

We
may not be able to compete effectively for the personnel that we need. In a number of our key markets and locations, particularly Israel and the US, the competition for senior employees is very intense, and the process of locating, training and
successfully integrating qualified personnel into our operations can be lengthy and expensive. Even in times of economic downturn, competition for these employees is high, because of the limited number of people available with the necessary
technical and sales skills and understanding of our products and technology. 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 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. In 2010, 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 2011, two customers each accounted for approximately 6% or more of our revenues, and such revenues represented, in the aggregate, 13% of our total
revenues. We do not expect that the two customers accounting for 13% of our revenues during 2011 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 revenues and operating results.



9



---

##### Table of Contents

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 significantly increase 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 been slightly variable over the past three years, ranging from approximately $1.45 million in 2009 to approximately $1.57 million in 2010 and
approximately $1.55 million in 2011. Our revenues from services have also fluctuated during this same three year period, rising to approximately $8.7 million in 2010 from approximately $8.3 million in 2009, and then declining to approximately $8.1
million in 2011. 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 once again decline, or if services revenues 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 improve our margins on services revenues in the future, our results of operations could suffer.

Our margins on services revenues have been fairly consistent in the last three years. In 2011, our margins on services revenues were 57% compared to 56%
in 2010 and 57% in 2009. 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 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 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.

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s 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.



10



---

##### Table of Contents

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 against companies such as, but not limited to, Service Power Technologies, Oracle, Ventyx (acquired in 2010 by ABB Ltd.), ClickSoftware Ltd and TOA Technologies. 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 may also be exposed to claims by the parties that license that
software to us due to overdeployment of the software by our customers.

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. Our reliance upon third-party software may also expose us to claims by the providers of the software that the software is being overdeployed by our customers.

Marketing and distributing our products outside of the United States and other international operations may require us to incur increased expenses
and may increase our exposure to risks with respect to which we may not be able to obtain adequate protection.

We market and sell our
products and services in the United States, Europe, the Middle East, Asia and Australia. We received 7% of our total revenue in 2009, 15% of our total revenue in 2010 and 10% of our total revenue in 2011 from sales to customers located outside of
the United States. In addition to our operations in the United States, we have marketing and support facilities and offices in Israel. 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 operations. 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, Ourbusiness may become increasingly susceptible to numerous risks associated with international operations.



11



---

##### Table of Contents

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,
which generally require notification prior to departure, although 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.

In the past, we have acquired (as described below in Item 4Information on the Company), and in the future,
we may further 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 and Israel,. 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, particularly in southeast Asia;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------



| |  |  | 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 revenues to increase as a percentage of total revenues, 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 our Intellectual Property

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



12



---

##### Table of Contents

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.

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, such as in certain countries in southeast Asia.

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.

Security breaches could compromise sensitive information
belonging to us or our customers and could harm our business (including our intellectual property) and reputation.

The safeguarding of
our information technology infrastructure is important to our business. A cyber-attack that bypasses our information technology (IT) security systems causing an IT security breach may lead to a material disruption of our IT business systems and/or
the loss of business information, resulting in adverse business impact. Adverse effects could include:



| |  |  | adversely affected future results of operations due to the theft, destruction, loss, misappropriation or release of our confidential data or our
intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | operational or business delays resulting from the disruption of IT systems and subsequent clean-up and mitigation activities; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | negative publicity resulting in reputation or brand damage with our customers, partners or industry peers.
| | - |  | ----------------------------------------------------------------------------------------------------------

Risks Related to the Ownership of our Ordinary Shares

Our Ordinary Shares are quoted on the OTCQB, 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 the 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. 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, and, beginning in
April 2010, with the launch by OTC Markets Group of its new OTCQB marketplace for reporting issuers who are current in their reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our Ordinary Shares began to be quoted
in that marketplace as well. In October 2010, our Ordinary Shares ceased to be quoted on the OTCBB and are currently quoted only on the OTCQB.



13



---

##### Table of Contents

The limited volume of trading in our Ordinary Shares on the OTCQB 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 be removed from the OTCQB and once again 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 fluctuated substantially between $0.42 and $1.15 during 2011, and decreased overall from $0.95 on December 31, 2010 to $0.54 on December 30, 2011. The market
price of our Ordinary Shares increased during the first three months of 2012, to $1.00 on March 31, 2012, and may continue to fluctuate substantially due to a variety of factors, including:



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



| |  |  | 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 Ordinary 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 initial public offering, 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 the Liquidity and
Capital Resources sub-section of Item 5, under the headings How We Have Financed Our Business and Sources 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 2005, which resulted in the issuance of an aggregate of 111,156 Ordinary Shares.

As of March 31, 2012, we have reserved up to 828,000 Ordinary Shares for issuance under our share option plans, under which 36,534 options have been exercised, the restrictions on 594,696 restricted
shares have lapsed and the restrictions on 26,319 restricted shares have not lapsed yet as of March 31, 2012. 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



14



---

##### Table of Contents

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 have an exercise price set at fair value, and we may therefore be required to
reflect appropriate charges to our income in our financial statements. 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 April 5, 2012, our executive officers and directors serving as of such date, and entities affiliated with them,
beneficially owned, in the aggregate, approximately 44.2% of our outstanding Ordinary Shares, which includes Ordinary Shares that may be issued upon exercise of options and warrants, conversion of convertible notes and vesting of restricted shares
that are exercisable, convertible or that have vested, or that will become exercisable, convertible or will vest, within 60 days of April 5, 2012. 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 April 5, 2012. 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 2011. There have been periods of violence and extensive hostilities among Israel, Hamas, the Palestinian Authority and other groups, which have typically 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 and there has been extensive internal instability and violence inside Syria during the last 12
months. 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



15



---

##### Table of Contents

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 2010, the NIS appreciated relative to the dollar by approximately 6%, whereas
in 2011 the NIS depreciated relative to the dollar by approximately 7.7% (in each case, measured based on the change in the exchange rate from the start to the end of the year). The Israeli consumer price index, which serves as a barometer of
Israeli inflation, furthermore increased during 2010 and 2011 at the rate of 2.7% and 2.2% respectively, thereby escalating the increase in the dollar cost of our Israeli operations in 2010, and reducing the impact of the depreciation of the NIS in
2011. 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 were available to us from the Investment Center of the Israeli Ministry of Industry, Trade and
Labor have expired, which could increase our future tax expenses.

Our production facilities were granted Approved
Enterprise status by the Israeli Investment Center of the Ministry of Industry, Trade and Labor under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, under three separate investment programs. Generally,
Approved Enterprise tax benefits are limited to 12 years from commencement of production or 14 years from the date of approval, whichever expires earlier. The Approved Enterprise status that had been granted to us for two of
our investment programs expired in previous years, while it expired with respect to a third investment program in April 2012. Because we have not had taxable income, the benefits from these programs were never utilized. We had elected the
alternative benefits track with respect to our third Approved Enterprise program, under which income derived from the related production facility was to be exempted from tax for a period of ten years, starting in the first year in which
we were to generate taxable income from the Approved Enterprise, subject to certain conditions, including that we would have a certain minimum number of skilled employees. We did not meet this condition, and because the Approved Enterprise status of
this investment program has expired, we will not be entitled to future benefits under this program. Our inability to utilize the tax benefits under our three past Approved Enterprise programs may increase our tax liability at a later date, if and
when we derive taxable income from these programs.

We may submit requests for new programs to be designated as Approved Enterprises. These
requests might not be approved. In addition, in 2005 and again in 2011, the Investment Law was amended to revise the criteria for an investment that qualifies for tax benefits. We cannot assure you that we will, in the future, be eligible to receive
tax benefits under this law.

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 that 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.

We have received in the past
royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel, or the OCS, under the Law for 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. An 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. The increased royalty rate and repayment amount will be required in such cases, however. 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



16



---

##### Table of Contents

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 were not a passive foreign investment company in 2011, we cannot assure our shareholders that we will not be treated as a passive foreign investment company in 2012 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
on the 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

Our legal name, which also serves as our 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 112 Turnpike Road, Westborough, Massachusetts 01581, as our agent for service of process.

Over the past 24 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.

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.



17



---

##### Table of Contents

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 was 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 year 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. In April 2010, upon the launch by OTC Markets
Group of its new OTCQB marketplace for reporting issuers who are current in their Exchange Act reports, our Ordinary Shares began to be quoted in that marketplace as well. In October 2010, our Ordinary Shares ceased to be quoted on the OTCBB and are
currently quoted only on the OTCQB.

During fiscal 2011, we decided to explore strategic alternatives to our direct sales activities in
Australia in order to focus on indirect sales channels in the Asia-Pacific region, which decision culminated in the sale of our wholly owned subsidiary in Australia, ViryaNet PTY Ltd., on December 31, 2011, for a purchase price of $340,000,
payable in interest-bearing installments. ViryaNet PTY revenues and assets constituted less the 10% of our revenues and assets during the last three fiscal years.

During fiscal 2011, we also decided to strike off our wholly inactive subsidiary in the U.K., ViryaNet Europe Ltd, by filing an application with the U.K. Companies House in December 2011, which became
effective in April 2012.

Our cash used towards capital expenditures (i.e., for the purchase of property and equipment) has been $83,000,
$100,000 and $7,000 for the years ended December 31, 2011, December 31, 2010, and December 31, 2009, 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 2012, we anticipate spending approximately $100,000 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 50 customers worldwide, whom we service from our support offices in the United States and Israel.

We target companies in
the utility, telecommunications, retail, healthcare, 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, which we later sold as part of our sale of ViryaNet PTY Ltd. in December 2011. 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.



18



---

##### Table of Contents

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, healthcare, 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, Schneider/Telvent, Amdocs and Vodafone.

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.

Healthcare. Within the healthcare sector, we target healthcare service providers that manage a mobile workforce of medical staff.

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 these categories of revenues in our consolidated statements of operations:



|                         |  |                         |       |   |      |  |       |      |  |  |       |  
|------------------------ |  | ----------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                         |  | Year Ended December 31, |      
|                         |  | 2009                    |       |   | 2010 |  |       | 2011 | 
|Category of Revenues:    |  |                         |       |   |      |  |       |      |  |  |       |  
|Software licenses        |  |                         | 14.9  | % |      |  | 15.3  | %    |  |  | 16.0  | %
|Maintenance and services |  |                         | 85.1  | % |      |  | 84.7  | %    |  |  | 84.0  | %
|                         |  |                         |       |   |      |  |       |      |  |  |       |  
|Total                    |  |                         | 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, |      
|Region                 |  | 2009                    |       |   | 2010 |  |       | 2011 | 
|North America          |  |                         | 92.9  | % |      |  | 84.8  | %    |  |  | 90.0  | %
|Europe and Middle East |  |                         | 4.4   |   |      |  | 7.8   |      |  |  | 7.3   |  
|Asia Pacific           |  |                         | 2.7   |   |      |  | 7.4   |      |  |  | 2.7   |  
|                       |  |                         |       |   |      |  |       |      |  |  |       |  
|Total                  |  |                         | 100.0 | % |      |  | 100.0 | %    |  |  | 100.0 | %

Our sales personnel operate through our United States subsidiary and cover North America, Europe and the Asia Pacific
regions. 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, 2011,
we employed 14 sales, marketing, product management and business development personnel.



19



---

##### Table of Contents

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 mostly 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. 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 and Israel.

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 are 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.

What is ViryaNet G4?

A comprehensive
mobile workforce management solution, performing the following business functions:



| |  |  | Manages all work and all resources
| | - |  | ----------------------------------



| |  |  | Creates assignments plans
| | - |  | -------------------------



| |  |  | Provides real-time communication to and from the mobile workforce
| | - |  | -----------------------------------------------------------------



| |  |  | Increases visibility into operational metrics
| | - |  | ---------------------------------------------

What does ViryaNet G4 do?



| |  |  | Provides a complete set of resource planning tools to help manage the entire planning spectrum (workforce buildup, backlog management, daily schedules)
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ensures optimal daily schedules to best reflect service business priorities
| | - |  | ---------------------------------------------------------------------------



| |  |  | Models the entire service business in order to provide transparency, accountability and flexibility throughout the organization
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leverages industry best practices and cost-effectively extends to meet unique business needs
| | - |  | --------------------------------------------------------------------------------------------

What does ViryaNet G4 mean to customers?



| |  |  | Finds the optimal operating point for their service organization, saves dollars by eliminating inefficiencies in their workforce, and provides better
service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Differentiates their service operations and strives for continuous improvement.
| | - |  | -------------------------------------------------------------------------------

ViryaNet G4 Secret Sauce



| |  |  | G4 is the first and only solution to introduce a scheduling engine that optimizes for multiple (likely conflicting) business objectives, guided only by
customer service priorities and not relying upon a subjective, cumbersome tuning exercise.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | G4 is the first and only solution to auto-tune the scheduling algorithm, avoiding the risk of having a far-from-optimal schedule as changes happen in
customers work environment. G4 introduced a unique approach for capturing business processes industry best practices by embedding a standard-based Business Process Engine with its solution. ViryaNet G4 Mobile Workforce Management BPMTMis a set of business processes that capture the essence of
scheduling, dispatch and exception management in field service but at the same time is extensible and continues to improve.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | G4 introduced a unique approach for capturing business processes industry best practices by embedding a standard-based Business Process Engine with its
solution. ViryaNet G4 Mobile Workforce Management BPMTMis
a set of business processes that capture the essence of scheduling, dispatch and exception management in field service but at the same time is extensible and continues to improve.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

ViryaNet G4 Product Suite

The ViryaNet G4 Product Suite helps a customers organization achieve operational excellence through automation, agility, and visibility. ViryaNet G4s integrated process-oriented components
address the full lifecycle of mobile workforce management, providing unmatched flexibility to start with a single component or the entire suite, depending on a customers business objectives. With ViryaNet G4, a customers service
organization has the ability to plan, execute, and monitor long-term trends and short-term, dynamic events to continuously achieve operational goals.

Planning

Planning is a critical link to productivity in a customers business
processes. If it is wrong, a customer loses ground to the competition. If it is right, a customer positions itself to optimize its response and meet budget and customer expectations. ViryaNet G4 enables:



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



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



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

Execution

A customer may have plans that differ from the real world. Each time
a customers mobile workforce rolls out into the real world, the customer needs to be prepared to proactively deal with the exceptions to its plans. With ViryaNet G4, a customer can automate the routine, get real-time information on
what is really happening, and receive alerts about exceptions, so the customer can handle these exceptions proactively. ViryaNet G4 provides [assistance] with the following:



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



| |  |  | Field Application
| | - |  | -----------------



| |  |  | Inventory & Asset Management
| | - |  | ----------------------------

Monitoring

Information is one of the most important assets people have. Normal business
processes produce quantities of information at every step in the process. ViryaNet G4 gives our customers visibility into historical and real-time information and enables our customers reporting tools to share the wealth of information
collected via ViryaNet G4, including by providing:



| |  |  | Reports & Dashboards
| | - |  | --------------------

Infrastructure

ViryaNet G4 offers tools to implement, configure, utilize, and maintain its
full functionality, including:



| |  |  | Software Lifecycle Management
| | - |  | -----------------------------

Solutions

ViryaNet G4 provides our customers with best practices and specific
out-of-the-box content with unique capabilities for the most challenging environments, enabling continuous field service operational excellence.



| |  |  | BPM Blueprint for Mobile Workforce Management
| | - |  | ---------------------------------------------



| |  |  | Smart Meter for Utilities
| | - |  | -------------------------

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



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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IT solutions and information provider which was acquired by Schnieder Electric S.A.in 2011. Telvent markets, sells, and services
ViryaNet solutions in the utilities, oil and gas, and telecommunications markets in Spain, Portugal and Latin America
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

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 against companies such as, but
not limited to, Service Power Technologies, Oracle, Ventyx (acquired in 2010 by ABB Ltd.), ClickSoftware Ltd and TOA Technologies. 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.

We compete against two primary types of field service solutions: Field service optimization vendors that focus on customer/engineer process optimization, which means getting the right technician to the
right place at the right time, and End-to-end field service management vendors that look across the entire set of service processes (across verticals or applying vertical/industry focus).

We would normally apply a best-of-breed strategy using our product secret sauce when competing against the first group, and leverage our partners strategy when competing against the second.

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, such as those in southeast Asia, 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.

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 (1)     |  | Country (and State, if applicable) of Incorporation
|ViryaNet, Inc.             |  | Delaware, USA                                      
|Utility Partners, Inc. (*) |  | Delaware, USA                                      
|iMedeon, Inc. (*)(**)      |  | Georgia, USA                                       



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

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

(1) In April 2007, we formally
dissolved our Japanese subsidiary, ViryaNet Japan KK. In December 2011 we sold our Australian subsidiary ViryaNet Pty Ltd, and filed an application for striking off our United Kingdom subsidiary ViryaNet Europe Ltd., which became effective in April
2012.



22



---

##### Table of Contents

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 average rent of approximately $137,000. The lease agreement for these premises expires on October 31, 2014.

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

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 our subsidiary and its landlord, with an annual rent of approximately $20,000.



|Item 4A. | Unresolved Staff Comments
|-------- | -------------------------

Not applicable



|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 G4 Product Suite, 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 G4 Product Suite, 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 (Software Revenue Recognition) and ASC 605-35-05 (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.

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



23



---

##### Table of Contents

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 North America, with the balance generated by customers in the European and Asia Pacific regions. The percentage of revenues derived from North
America increased from 84.8% in 2010 to 90.0% in 2011, whereas the percentage of revenues derived from the Asia Pacific region decreased from 7.4% of total revenues in 2010 to 2.7% of total revenues in 2011, due to our completion in 2011 of a large
project in Asia that started in 2010. The percentage of revenues derived from Europe in 2011 was 7.3%, similar to the 7.8% in 2010. Achieving future growth in the percentage of revenues derived from Europe and Asia Pacific will depend upon the
degree of success of our partners in Europe, principally GE Energy and Vodafone, 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 in Item 3, 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 (Goodwill and Other Intangible Assets). The cost of our acquired technology was fully amortized as of December 31, 2009 and no amortization cost was included in the cost of revenues in 2010 or 2011. 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) facilities and 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.

Because our cost of maintenance and services includes all of the above-described
categories of expenses and is therefore substantially higher than our cost of software licenses, our gross margin from maintenance and services is substantially lower than our gross margin from software licenses.

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 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) facilities and 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. The cost of our customer relationship was fully amortized as of
December 31, 2010, and no amortization cost was included in the cost of revenues in 2011.

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) facilities and
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.



24



---

##### Table of Contents

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. 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, or 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 transactions 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 2010, the NIS
appreciated relative to the dollar by approximately 6%, whereas in 2011 the NIS depreciated relative to the dollar by approximately 7.7% (in each case, measured based on the change in the currency exchange rate from the start to the end of the
year). The Israeli consumer price index furthermore increased during 2010 and 2011 at the rate of 2.7% and 2.2% respectively, thereby escalating the adverse effect that the appreciation of the NIS had upon the dollar-measured cost of our Israeli
operations in 2010, and mitigating the positive impact that the depreciation of the NIS had upon the dollar-measured cost of our Israeli operations in 2011. 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 expenses, net in our consolidated financial statements includes the
impact of these factors as well as traditional interest income or expense.

Seasonality

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

Recently Issued Accounting Standards

In September 2011, the Financial Accounting
Standards Board, or FASB, issued a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to
perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that
its fair value is less than its carrying amount. This accounting standard update will be effective for us beginning January 1, 2012 and early adoption is permitted. We did not elect to early adopt it and we do not expect the adoption of this
new guidance will have a material impact on our financial statements.

In June 2011, the FASB issued guidance to require an entity to present
the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates
the option to present the components of other comprehensive income as part of the statement of equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. In December 2011, the FASB indefinitely deferred
certain provisions of this guidance. We do not expect the adoption of this new guidance will have a material impact on our financial statements.

In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and
International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements, and will become effective for the Company
beginning January 1, 2012. We do not expect the adoption of this new guidance will have a material impact on our financial statements.



25



---

##### Table of Contents

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, or 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.

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.

Arrangements 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 ASC 605-35-05 (Construction-Type and Production-Type Contracts,), 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.

We classify revenue as either software
license revenue or services revenue. We allocate revenue to each of these items based on the VSOE established for elements in each revenue arrangement and apply the residual method in arrangements in which VSOE was established for all undelivered
elements. If we are unable to establish the VSOE for all undelivered elements, we first allocate revenue to any undelivered elements for which the VSOE has been established and then allocate revenue to the undelivered element for which the VSOE has
not been established based on the residual method.



26



---

##### Table of Contents

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 of three months. As of December 31, 2011 and 2010, 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 2010 and 2011, 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 through our Australian subsidiary ViryaNet Pty Ltd. As a result the sale of ViryaNet Pty in December 2011,
the goodwill and all other assets and liabilities related to our Australian subsidiary were eliminated from our balance sheet as of December 31, 2011.

Acquisition related intangible assets result from our 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. As of December 31, 2010, all other intangible assets (excluding goodwill) were fully amortized.

We test
goodwill for impairment annually on the last day of our 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 our 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 our company represents a single reporting unit, which is equivalent to the consolidated company. 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, than a step-one test performed on our equity carrying value basis.

Our consolidated company represents a single reporting unit, and because of that, our companys estimated fair value is compared to its 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
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 our company and have similar operating
characteristics as our company. We estimated our 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.



27



---

##### Table of Contents

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 our 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 our company as a reporting unit as of December 31, 2011 was substantially in excess of its enterprise book value.
Therefore, no impairment of goodwill was recorded.

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 (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 reviewed the long lived assets and determined that the unamortized portion of our
long-lived assets, other than goodwill, of approximately $0.1 million, is not subject to an impairment charge as of year-end 2011. All other intangible assets (excluding goodwill) were fully amortized as of December 31, 2010.

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 (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 2009, 2010 or 2011. During 2009, 2010 and 2011, 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, 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. Our company and our 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.



28



---

##### Table of Contents

Operating Results

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



|                                                                |  |                         |       |   |      |  |       |      |  |  |       |  
|--------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                                                |  | Year Ended December 31, |      
|                                                                |  | 2009                    |       |   | 2010 |  |       | 2011 | 
|Revenues:                                                       |  |                         |       |   |      |  |       |      |  |  |       |  
|Software license                                                |  |                         | 14.9  | % |      |  | 15.3  | %    |  |  | 16.0  | %
|Maintenance and services                                        |  |                         | 85.1  |   |      |  | 84.7  |      |  |  | 84.0  |  
|                                                                |  |                         |       |   |      |  |       |      |  |  |       |  
|Total revenues:                                                 |  |                         | 100.0 |   |      |  | 100.0 |      |  |  | 100.0 |  
|Cost of revenues:                                               |  |                         |       |   |      |  |       |      |  |  |       |  
|Software licenses                                               |  |                         | 0.6   |   |      |  | 0.7   |      |  |  | 0.6   |  
|Maintenance and services                                        |  |                         | 36.8  |   |      |  | 37.6  |      |  |  | 36.3  |  
|                                                                |  |                         |       |   |      |  |       |      |  |  |       |  
|Total costs of revenues                                         |  |                         | 37.4  |   |      |  | 38.3  |      |  |  | 36.9  |  
|Gross profit                                                    |  |                         | 62.6  |   |      |  | 61.7  |      |  |  | 63.1  |  
|                                                                |  |                         |       |   |      |  |       |      |  |  |       |  
|Operating expenses:                                             |  |                         |       |   |      |  |       |      |  |  |       |  
|Research and development                                        |  |                         | 10.6  |   |      |  | 9.8   |      |  |  | 16.7  |  
|Sales and marketing                                             |  |                         | 26.1  |   |      |  | 27.0  |      |  |  | 29.4  |  
|General and administrative                                      |  |                         | 16.9  |   |      |  | 15.0  |      |  |  | 17.7  |  
|                                                                |  |                         |       |   |      |  |       |      |  |  |       |  
|Total operating expenses                                        |  |                         | 53.6  |   |      |  | 51.8  |      |  |  | 63.8  |  
|Operating income (loss)                                         |  |                         | 9.0   |   |      |  | 9.9   |      |  |  | (0.7  | )
|Financial expenses, net                                         |  |                         | 1.6   |   |      |  | 2.3   |      |  |  | 1.3   |  
|Income (loss) from continuing operations before income taxes    |  |                         | 7.4   |   |      |  | 7.6   |      |  |  | (2.0  | )
|Taxes on income                                                 |  |                         | 0.5   |   |      |  | 0.6   |      |  |  | 0.0   |  
|Income (loss) from continuing operations                        |  |                         | 6.9   |   |      |  | 7.0   |      |  |  | (2.1  | )
|Discontinued operations                                         |  |                         |       |   |      |  |       |      |  |  |       |  
|Loss from discontinued operation net of income tax              |  |                         | (1.8  | ) |      |  | (0.5  | )    |  |  | (1.4  | )
|Gain on disposal of discontinued operations net of income taxes |  |                         |      |   |      |  |      |      |  |  | 1.3   |  
|Net income (loss) from discontinued operations                  |  |                         | (1.8  | ) |      |  | (0.5  | )    |  |  | (0.1  | )
|Net income (loss)                                               |  |                         | 5.1   |   |      |  | 6.5   |      |  |  | (2.2  | )
|                                                                |  |                         |       |   |      |  |       |      |  |  |       |  



29



---

##### Table of Contents

For purposes of the above and below tables, we have reclassified our historical results of operations to
remove the operations of disposed entities from our revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations.

The following table sets forth statements of operations data for each of the three years in the three-year period ended December 31, 2011 (in thousands):



|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|--------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                |  | 2009 |       |   | 2010 |   |        | 2011 | 
|Statement of Operations Data:                                   |  |      |       |   |      |   |        |      |  |   |       |  
|Revenues:                                                       |  |      |       |   |      |   |        |      |  |   |       |  
|Software licenses                                               |  | $    | 1,453 |   |      | $ | 1,574  |      |  | $ | 1,549 |  
|Maintenance and services                                        |  |      | 8,298 |   |      |   | 8,735  |      |  |   | 8,122 |  
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Total revenues                                                  |  |      | 9,751 |   |      |   | 10,309 |      |  |   | 9,671 |  
|Cost of revenues:                                               |  |      |       |   |      |   |        |      |  |   |       |  
|Software licenses                                               |  |      | 62    |   |      |   | 68     |      |  |   | 56    |  
|Maintenance and services                                        |  |      | 3,591 |   |      |   | 3,873  |      |  |   | 3,513 |  
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Total cost of revenues                                          |  |      | 3,653 |   |      |   | 3,941  |      |  |   | 3,569 |  
|Gross profit                                                    |  |      | 6,098 |   |      |   | 6,368  |      |  |   | 6,102 |  
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Operating expenses:                                             |  |      |       |   |      |   |        |      |  |   |       |  
|Research and development, net                                   |  |      | 1,029 |   |      |   | 1,010  |      |  |   | 1,614 |  
|Sales and marketing                                             |  |      | 2,546 |   |      |   | 2,782  |      |  |   | 2,847 |  
|General and administrative                                      |  |      | 1,648 |   |      |   | 1,551  |      |  |   | 1,708 |  
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Total operating expenses                                        |  |      | 5,223 |   |      |   | 5,343  |      |  |   | 6,169 |  
|Operating income (loss)                                         |  |      | 875   |   |      |   | 1,025  |      |  |   | (67   | )
|Financial expenses, net                                         |  |      | 155   |   |      |   | 237    |      |  |   | 129   |  
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Income (loss) from continuing operations before taxes           |  |      | 720   |   |      |   | 788    |      |  |   | (196  | )
|Taxes on income                                                 |  |      | 47    |   |      |   | 69     |      |  |   | 9     |  
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Net income (loss) after taxes                                   |  | $    | 673   |   |      | $ | 719    |      |  | $ | (205  | )
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Discontinued operations                                         |  |      |       |   |      |   |        |      |  |   |       |  
|Loss from discontinued operation net of income tax              |  |      | (177  | ) |      |   | (50    | )    |  |   | (136  | )
|Gain on disposal of discontinued operations net of income taxes |  |      |      |   |      |   |       |      |  |   | 122   |  
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  
|Net income (loss) from discontinued operations                  |  |      | (177  | ) |      |   | (50    | )    |  |   | (14   | )
|Net income (loss)                                               |  |      | 496   |   |      |   | 669    |      |  |   | (219  | )
|                                                                |  |      |       |   |      |   |        |      |  |   |       |  

Geographic Distribution

Tabular information concerning the distribution of our revenues according to region, stated as a percentage of our total revenues, for each of the three years in the three year period ended
December 31, 2011, is set forth in Item 4. Information on the Company Markets above.

Comparison of Fiscal Years
Ended December 31, 2010 and 2011

Revenues

Our total revenues decreased by approximately $0.6 million or 6.2% from $10.3 million in 2010 to $9.7 million in 2011. The decrease in revenues is attributable to a decline in revenues from maintenance
and services by approximately $0.6 million, from $8.7 million to $8.1 million, while license revenues in 2011 remained at the same level as in 2010, at $1.5 million. From a geographic perspective, our revenues in North America remained steady in
2010 and 2011, constituting $8.7 million in each such year. Our revenues from the Asia Pacific region decreased by $0.5 million, from $0.8 million in 2010 to $0.3 million in 2011, due to a large implementation project in Asia conducted in 2010 that
was not replaced by a similar project in 2011. Revenues in Europe declined slightly, from $0.8 million in 2010 to $0.7 in 2011. From a channels perspective, the contribution of revenue from indirect sales decreased, from 43% of sales in 2010, to 29%
of sales in 2011, whereas direct sales contribution increased from 57% of revenue in 2010 to 71% of revenue in 2011. Direct sales increased by $1.0 million in 2011, while indirect sales decreased by $1.6 million in 2011, in each case, compared to
the prior year, resulting from a higher number of direct sales consummated during 2011.

Software License Revenues

As alluded to above, software license revenues remained at the same level of 2010 in 2011, at $1.5 million, comprised mostly of North American-based
revenues in both years.



30



---

##### Table of Contents

As a percentage of total revenues, software licenses constituted 16% of total revenues in 2011, which was
slightly higher than the 15.3% of revenues in 2010. There were no rate changes in our license fees that had a material impact on our license revenues.

Maintenance and Services Revenues

As alluded to above, our maintenance and services
revenues decreased by 7% in 2011, due mainly to completion of an implementation project conducted in Asia in 2010, which was not replaced by a similarly-sized project in 2011.

As a percentage of total revenues, maintenance and services constituted 84% of total revenues in 2011, which was similar to the 84.7% of total revenues in 2010. 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 9.4%, from $3.9 million in 2010 to $3.5 million in 2011, based on the combined impact of changes in cost of software
licenses and cost of maintenance and services, as further explained below.

Cost of Software Licenses

The cost of software license revenue did not change significantly from 2010 to 2011, and the cost of software license revenue as a percent of software
license revenue slightly decreased from 4.3% in 2010 to 3.6% in 2011.

Cost of Maintenance and Services

The cost of maintenance and services revenue decreased from 2010 to 2011, by 9.3%, or $0.4 million, primarily as a result of (i) allocation of
maintenance and service personnel to other departments, at a cost of $0.3 million, (ii) a decrease of $0.2 million in third party software support cost, offset, in part, by (iii) $0.1 million of base salary increases. Maintenance and
services revenue costs as a percentage of maintenance and services revenues decreased moderately, from 44.3% in 2010 to 43.3% in 2011.

Operating Expenses

Research and
Development Expenses

Our net research and development expenses rose by $0.6 million, from $1.0 million in 2010 to $1.6 million in
2011, as we increased our investment in R&D projects during 2011. The increase in 2011 was due to (i) allocation of personnel from other departments to our research and development department, at a cost of $0.3 million, (ii) $0.1
million of base salary increases and (iii) hiring of new employees at a cost of $0.2 million. Our net research and development expenses increased significantly as a percentage of revenues, from 9.8% of revenues in 2010 to 16.7% in 2011.

We expect that we will continue to devote a significant portion of our revenues to research and development to enhance our existing products,
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 remained at a similar
level $2.8 million in each of 2010 and 2011, constituting 29.4% of revenues in 2011, compared to 27% of revenues in 2010. Base salary increases of $0.1 million and increase in marketing programs of $0.1 million in 2011 were offset by a
$0.1 million reduction in amortization costs due to the expiration in 2010 of acquired customer relations related to our acquisition of Utility Partners.

General and Administrative Expenses

Our general and administrative expenses were
$1.7 million, or 17.7% of revenues, in 2011, compared to $1.6 million, or 15.0% of revenues, in 2010, a moderate increase of $0.1 million due to salary increases during 2011.

Financial Expenses, net

Financial expenses, net, decreased from $0.24 million in
2010 to $0.13 million in 2011. This decrease was primarily attributable to the depreciation of the NIS relative to the U.S. dollar in 2011 compared to an appreciation of the NIS relative to the U.S. dollar in 2010, offset, in part, by an increase in
interest and factoring fees in 2011 compared to 2010.

Discontinued Operations

As described previously, we disposed of our subsidiaries in Australia (ViryaNet Pty) and the UK (ViryaNet Europe) during 2011. We incurred in 2011 a loss
of $0.14 million from discontinued operations, which was greater than the loss of $0.05 million in 2010, due to increased operating expenses in 2011. The sale of ViryaNet Pty and the disposal of ViryaNet Europe resulted in a gain from disposal of
discontinued operations of $0.12 million in 2011.



31



---

##### Table of Contents

Comparison of Fiscal Years Ended December 31, 2009 and 2010

Revenues

Our total revenues increased by
approximately $0.6 million or 5.7% from $9.7 million in 2009 to $10.3 million in 2010. Revenues from maintenance and services rose by approximately $0.4 million, from $8.3 million to $8.7 million, which was accompanied by an increase in revenues
from software licenses of $0.1 million, from $1.5 million in 2010 to $1.6 million in 2011. From a geographic perspective, our revenues in North America decreased by $0.3 million, from $9 million to $8.7 million, due mostly to a large implementation
project that was completed in 2009. Our revenues from the Asia Pacific region increased by $0.5 million, from $0.3 million in 2009 to $0.8 million in 2010, due to a large implementation project conducted in 2010. Revenues in Europe increased by $0.4
million, from $0.4 million in 2009 to $0.8 million in 2010 due to two license transactions in Europe that were closed in 2010. From a channels perspective, the contribution of revenue from indirect sales increased from 31% of sales 2009, to 43% of
sales in 2010, whereas direct sales contribution decreased from 69% of revenue in 2009 to 57% of revenue in 2010. The volume of indirect sales increased by $1.4 million in 2010, while direct sales volume decreased by $0.9 million in 2010, in each
case compared to the prior year.

Software License Revenues

As alluded to above, software license revenues increased by 8.3% in 2010, from $1.5 million in 2009 to $1.6 million in 2010. This increase of $0.1 million was attributable to an increase in license deals
in Europe closed during 2010.

As a percentage of total revenues, software licenses constituted 15.3% of total revenues in 2010, which was
slightly higher than the 14.9% of revenues in 2009. There were no rate changes in our license fees that had a material impact on our license revenues.

Maintenance and Services Revenues

As alluded to above, our maintenance and services
revenues increased by 5.3% in 2010, due to a large implementation projects conducted in 2010 in the Asia Pacific region, offset partially by a completion of a large implementation project in 2009 in the U.S.

As a percentage of total revenues, maintenance and services constituted 84.7% of total revenues in 2010, which was similar to the 85.1% of total revenues
in 2009. 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 increased by 7.9%, from $3.7 million in 2009 to $3.9 million in 2010, resulting from the rise in cost of
maintenance and services, as further explained below.

Cost of Software Licenses

The cost of software licenses was similar in both 2009 and 2010 $0.06 million in each such year.

Cost of Maintenance and Services

The
cost of maintenance and services increased from 2009 to 2010, by 7.9%, or $0.3 million, primarily as a result of (i) $0.1 million of base salary increases and cost of new headcount recruitment, (ii) an increase of $0.1 million related to
the depreciation in the average value of the New Israeli Shekel against the US dollar in 2010 and (iii) allocation of personnel from other departments in 2010, at a cost of $0.1 million. Maintenance and services costs as a percentage of
maintenance and services revenues increased moderately, from 43.3% in 2009 to 44.3% in 2010.

Operating Expenses

Research and Development Expenses

Our net research and development expenses remained unchanged in 2010 relative to 2009, constituting of $1.0 million in each year. In 2010, an increase of
$0.1 million due to allocation of research and development personnel to professional services was offset by a $0.1 million decrease in funding for a research and development project by one of our customers. Our net research and development expenses
declined slightly as a percentage of revenues, from 10.6% of revenues in 2009 to 9.8% in 2010.

We expect that we will continue to devote a
portion of our revenues to research and development to enhance our existing products, 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 increased from $2.5 million, or 26.1% of revenues, in 2009, to $2.8 million, or 27% of revenues in 2010, a year over year increase of $0.3 million or 9.3%. This increase
was primarily attributable to (i) marketing programs and related travel expenses of $0.2 million and (ii) $0.1 million of salary increases and additional sales and marketing personnel costs.



32



---

##### Table of Contents

General and Administrative Expenses

Our general and administrative expenses were $1.5 million, or 15.0% of revenues, in 2010, compared to $1.6 million, or 16.9% of revenues, in 2009, a slight decrease of $0.1 million due to a reduction in
insurance costs and other fees.

Financial Expenses, net

Financial expenses, net, increased from $0.16 million in 2009 to $0.24 million in 2010. This increase was primarily attributable to the greater appreciation of the NIS relative to the U.S. dollar in 2010
compared to 2009.

Discontinued operations

As described previously, we disposed of our subsidiaries in Australia (ViryaNet Pty) and the UK (ViryaNet Europe) during 2011. We have reclassified our historical results of operations to remove the
operations of these entities from our revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations. We incurred in 2010 a loss of $0.05 million from discontinued operations, which
was less than the loss of $0.18 million in 2009, due to higher revenues in 2010.

Effective Corporate Tax Rate

Our effective corporate tax rate reflects a mix of the United States and Israeli statutory tax rates on our United States and Israeli income. Following
the tax reform enacted in 2003, an Israeli company is subject to tax on its worldwide income. An Israeli company that is subject to Israeli taxes on the income of its non-Israeli subsidiaries will receive a credit for income taxes paid by the
subsidiary in its country of residence, subject to certain conditions. Israeli taxpayers are also subject to tax on income from a controlled foreign corporation, according to which an Israeli company may become subject to Israeli taxes on certain
income of a non-Israeli subsidiary, if such subsidiarys primary source of income is passive income (such as interest, dividends, royalties, rental income, or capital gains).

On January 1, 2006, an additional tax reform was enacted relating primarily to profits from investments. The main goal of the reform was to unify the tax rates applicable to profits from investments,
such as interest, capital gains and dividends. In addition, under the reform, the tax rate applicable to companies was reduced to 26% in 2009, 25% in 2010 and 24% in 2011. Under an amendment to the Israeli Income Tax Ordinance enacted in July 2009,
the corporate tax rate was scheduled to be further reduced to 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016. On December 5, 2011, the Law for Change in the Tax Burden (Legislative Amendments) (Taxes), 2011, or the Tax
Burden Law, was published by the Israeli Parliament, or the Knesset. The Tax Burden Law cancelled the scheduled progressive reduction of the corporate tax rate and instead fixed the corporate tax rate at 25% for 2012 and onwards.

In 2009, 2010 and 2011, the main reconciling item of the statutory tax rate (26% in 2009, 25% in 2010 and 24% in 2011) to the effective tax rate for our
company (6.53% in 2009, 8.76% in 2010 and (4.59%) in 2011) was tax loss carryforwards and other deferred tax assets for which a full valuation allowance was provided.

As of December 31, 2011, we had net operating loss carry forwards for tax reporting purposes of approximately $62.6 million in the United States and $33.2 million in Israel. 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.

Liquidity and Capital Resources

How We Have Financed
Our Business

On September 19, 2000, we completed our initial public offering, or 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, convertible notes and
warrants. The transaction consisted of the following:

On December 19, 2007, we completed a private placement to a group of new financial
investors, to whom we refer as 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



33



---

##### Table of Contents

Share, subject to our shareholders approval. The convertible notes have no maturity date and can only be converted into Ordinary Shares. On January 31, 2008, our shareholders approved
the issuance of the $439,000 convertible note and the warrants mentioned above. The warrants expired in December 2010.

On June 30, 2011,
we entered into a share purchase agreement with Jerusalem Technology Investments Ltd,, or the Investor, a company with which two of our directorsSamuel HaCohen and Vladimir Morgenstern and one of our major shareholders (Jerusalem
High-tech Founders, Ltd.) are affiliated. Pursuant to the agreement, the Investor committed to invest $250,000 in our company for 250,000 of our Ordinary Shares, reflecting a price of $1.00 per Ordinary Share, within 31 days from the date of the
agreement. To date, the Investor has made a total investment of $125,000 under the share purchase agreement ($50,000 in June 2011 and $75,000 in February 2012). This equity financing constituted an extraordinary transaction with an entity in which
two of our directors possessed a personal interest and therefore required and received the approval of our audit committee and Board of Directors pursuant to the provisions of the Companies Law.

We have also obtained convertible debt financing from LibertyView Special Opportunities Fund, L.P., or LibertyView, in August 2005, for which we have an
outstanding face-amount obligation of $480,000 that is due in full in August 2013. The debt bears interest of 7.5%, payable quarterly, 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.

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 related waivers granted to us by the bank on September 28, 2008 (as described below) and the conversion of the short-term loan to a long-term loan, we paid 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%.

On December 18, 2011 Bank Hapoalim agreed to convert a short term credit in the amount of $0.36 million and a long-term loan balance in the amount of $0.1 million to a long-term loan in the total
amount of $0.46 million, payable in 11 monthly payments starting February 6, 2013. The interest is payable monthly starting January 6, 2012 at a rate of a one month LIBOR plus 5.7%.

As of March 31, 2012, our aggregate outstanding borrowings with Bank Hapoalim was approximately $1 million, which consisted of (i) short-term borrowings of approximately $0.1 million which 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 $0.4 million with interest rate of 3 months LIBOR plus 3.25% and $0.5
million with interest rate of 1 months LIBOR plus 5.7%.

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 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 July 10, 2011 we received from Bank Hapoalim a waiver of these covenants for the remaining quarters of 2011 and for the first quarter of 2012. In connection with this waiver we agreed to pay fees
of $15,000 to the bank.



34



---

##### Table of Contents

On March 12, 2012 we received from Bank Hapoalim a waiver of our bank covenants for the remaining
quarters of 2012 and for the first quarter of 2013. In connection with the waiver we paid fees of $7,500 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, we have not succeeded at complying with the bank covenants since they were modified by Bank
Hapoalin in 2007. In the event that we are unable to maintain compliance with the bank covenants, we will 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 and Bank Otsar Ha-Hayal, which may be subject to immediate repayment if we do not meet our repayment schedule or meet specified
conditions.

Government Guaranteed Bank Financing

A new source of cash that we only recently began to draw upon is a government-guaranteed business loan. On June 28, 2011 we received an approval from
the State Guaranteed Medium Business Assistance Fund, or the Fund, for a loan in the amount of NIS 2,100,000 (approximately $606,411, based on the exchange rate of NIS 3.463: US$1 reported by the Bank of Israel on June 28, 2011), guaranteed by the
Israeli government. The disbursement of the loan to us was contingent upon our securing an equity investment of at least NIS 500,000. The required equity investment may be executed in one of two manners: (i) a restricted shareholders loan
payable after five years, or (ii) an equity investment in which the investors receive our shares.

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

The balance of the loan, or NIS 1,350,000, was disbursed to us on September 6, 2011. The loan bears annual interest at the rate of the Israeli prime
rate, plus 3.5%, payable monthly starting October 7, 2011 and the principal is payable in 49 equal monthly payments of NIS 32,545 each (which includes the interest as well), beginning on September 8, 2012. Since we did not initially
receive the equity investment balance of NIS 330,000 as of the date of the disbursement of the loan balance, on September 6, 2011, as required under the loan terms set by the Fund, Bank Otsar Ha-Hayal restricted our access to an amount of
$140,000 in cash from the loan proceeds until such time as we receive the equity investment balance of NIS 330,000.

The loan is guaranteed by
the Israeli government, based on an approval from Israels State Guaranteed Medium Business Assistance Fund, and by a personal guarantee of Samuel HaCohen, our Chairman of the Board of Directors.

As of March 31, 2012, our aggregate outstanding borrowings from Bank Otsar Ha-Hayal under Fund-guaranteed loans were approximately $0.6 million,
which consist of the two portions of the loan described above, in a total amount of NIS 2,100,000.

Sale of Receivables

From time to time, we sell receivables to financial and other institutions under arrangements in which a factoring company pays us the
amount of the accounts receivable, less an agreed upon commission and interest, 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, 2011, we had cash and cash equivalents of $104,000, compared to $97,000 as of December 31, 2010. In summary, in 2011, net cash provided by operating activities was $135,000,
and an additional $146,000 of net cash was provided by financing activities; these amounts were offset, in part, by $275,000 of net cash used in investing activities.

In 2011, net cash provided by operating activities was $0.13 million, reflecting primarily our net loss of $0.2 million, while eliminating $0.1 million gain from disposal of subsidiaries, and adjusted to
account for non-cash items, including (i) an increase of $0.6 million in other accounts payable, (ii) an increase of $0.3 million in trade payables, (iii) a decrease of $0.2 million in trade and other receivables and (iv) a
decrease of $0.9 million in deferred revenue, while also reflecting the following additional adjustments for non-cash items: (x) depreciation and amortization of $0.1 million, and (y) stock based compensation of $0.1.



35



---

##### Table of Contents

In 2010, net cash provided by operating activities was $0.33 million, reflecting primarily our net income
from operations of $0.7 million, adjusted to account for non-cash items, including (i) a decrease of $0.2 million in other accounts payable, (ii) a decrease of $0.1 million in trade payables, and (iii) an increase of $0.5 million in
trade receivables, and also reflecting the following additional non-cash items: (x) depreciation and amortization of $0.3 million, and (y) stock based compensation of $0.2.

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 2011 net cash used in investing activities was $275,000, reflecting cash use for purchase of property and equipment and a long-term receivable. In 2010 and 2009, net cash used in investing activities
was $100,000 and $7,000, respectively, reflecting cash use for purchase of property and equipment.

Net cash provided by financing activities
during 2011 was $0.15 million, which included $0.55 million of cash proceeds from new bank loans, $0.19 million from a short-term bank credit and $0.05 million from an equity investment in our company, offset in part by $0.5 million of cash used for
repayment of long-term bank loans and $0.14 million of cash that was classified as restricted cash.

Net cash used in financing activities
during 2010 was $0.3 million, which included $0.45 million of cash used for repayments of short-term and long-term bank loans and a decrease of $0.1 million in short-term bank credit, offset, partially, by cash proceeds of $0.25 million from a new
long term bank loan. Net cash used in financing activities during 2009 was $0.35 million, which included $0.45 million of cash used for repayments of short-term and long-term bank loans, offset, in part, by $0.1 million of cash provided by an
increase in short-term bank credit.

Future Cash Needs

In addition to our need to continue to meet our payment obligations to Bank Hapoalim and Bank Otsar Ha-Hayal under the terms of our debt arrangements and to LibertyView under the terms of the convertible
debt that we issued to it, 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 2012. Our ability to achieve 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, such as the government-guaranteed loan described above. 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 OTCQB 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 2009, 2010 and 2011 were $1.0 million, $1.0 million and $1.6 million, respectively (see the risk factor titled 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 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 pursuant to the Research and Development Law. 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.



36



---

##### Table of Contents

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.

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 payments to the OCS pursuant to the provisions of
the Research and Development Law and related regulations, as 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.

During 2001, 2002 and 2003, we received grants from the OCS in an aggregate amount of $372,000. During 2009, 2010, and 2011 we made
royalty payments of $700, $3,500 and $2,800, respectively, to the OCS in respect of these grants. As of December 31, 2011, we have an outstanding contingent liability to pay royalties in the amount of approximately $400,000, 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 2010, our total revenues increased by 5.7% compared to 2009. This increase was largely attributable to a growth of 5.3% in our maintenance and
services revenues, from $8.3 million in 2009 to $8.7 million in 2010, and to a lesser extent, to an increase of 8.3% in our software license revenues, from $1.5 million in 2009 to $1.6 million in 2010. The growth of our maintenance and services
revenues, which was a good indicator of existing and new customers continuous interest in additional services projects, did not add favorably to our gross margins, due to an increase in our employee compensation costs and unfavorable currency
exchange rates changes in 2010.

Contrary to 2010, in 2011, our total revenues declined by 6.1% compared to 2010, while our software license
revenues in 2011 remained similar to 2010, constituting $1.5 million and 16% of our total revenues. This provided an indication that despite reduction in implementation projects, there is buying interest in our products. The decline in our services
revenues in 2011 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 2010 and did not contribute as much revenue
in 2011.

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, 2010 and 2011, 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, 2010 and 2011 is an increase in the volatility of currency exchange rates, particularly the U.S. dollar- New Israeli Shekel. As described elsewhere in this annual report, our revenues
and financial results generally are reported in U.S. dollars, yet in 2011, a significant portion approximately 30% of our expenses were incurred in New Israeli Shekels. 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. The recent significant fluctuations in exchange rates make it difficult for us to decipher a unidirectional trend, but the mere existence of such



37



---

##### Table of Contents

fluctuations increases the likelihood that our operating results may also fluctuate in an erratic fashion as a result thereof. The NIS-U.S. dollar exchange rate, which increased from NIS
3.549 per U.S. dollar at the end of 2010 to NIS 3.821 per U.S. dollar at the end of 2011, has declined slightly thus far in 2012, falling to 3.715 at the end of March 2012.

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.

Tabular Disclosure of Contractual Obligations

Contractual Obligations as of December 31, 2011 (1)



|                                  |  |                                          |       |  |                |   |     |            |  |   |              |  |  |                 |     |  |  |   |   | 
|--------------------------------- |  | ---------------------------------------- | ----- |  | -------------- | - | --- | ---------- |  | - | ------------ |  |  | --------------- | --- |  |  | - | - | 
|                                  |  | Payments due by Period(US$ in
thousands) |      
|                                  |  | Total                                    |       |  | LessThan 1Year |   |     | 1  3Years |  |   | 3  5  Years |  |  | MoreThan 5Years |    
|Short-term bank debt              |  | $                                        | 115   |  |                | $ | 115 |            |  | $ |             |  |  | $               |    |  |  | $ |  | 
|Long-term bank debt (1)           |  | $                                        | 1,499 |  |                | $ | 498 |            |  | $ | 751          |  |  | $               | 250 |  |  | $ |  | 
|Long-term convertible debt (1)    |  | $                                        | 480   |  |                | $ |    |            |  | $ | 480          |  |  | $               |    |  |  | $ |  | 
|Operating leases (2)              |  | $                                        | 1,420 |  |                | $ | 362 |            |  | $ | 672          |  |  | $               | 386 |  |  | $ |  | 
|Accrued severance pay, net (3)    |  | $                                        | 434   |  |                | $ |    |            |  | $ |             |  |  | $               |    |  |  | $ |  | 
|Uncertain income tax position (4) |  | $                                        | 40    |  |                | $ |    |            |  | $ |             |  |  | $               |    |  |  | $ |  | 
|Total Contractual Obligations:    |  | $                                        | 3,988 |  |                | $ | 975 |            |  | $ | 1,903        |  |  | $               | 636 |  |  | $ |  | 



|(1) | See Liquidity and Capital Resources-Bank Financing for a description of our long-term bank debt
|--- | -------------------------------------------------------------------------------------------------

|(2) | Includes payments under non-cancelable operating lease agreements for facilities and automobiles.
|--- | -------------------------------------------------------------------------------------------------

|(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 of the Notes to Consolidated Financial Statements included elsewhere in this annual report for further
information regarding accrued severance pay.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | This row reflects our uncertain income tax position under ASC 740-10. ASC 740-10 relates to a situation in which income taxes are due upon settlement and we are unable
to reasonably estimate the ultimate amount or timing of settlement. See Note 13 of the Notes to Consolidated Financial Statements included elsewhere in this annual report 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    |  |     | 54 |  |          | Executive Chairman of the Board of Directors
|Memy Ish-Shalom      |  |     | 52 |  |          | President and Chief Executive Officer       
|Yohanan Engelhardt   |  |     | 54 |  |          | Chief Financial Officer                     
|Nir Diskin           |  |     | 46 |  |          | Vice President, Engineering                 
|Vladimir Morgenstern |  |     | 54 |  |          | Director                                    
|Arie Ovadia          |  |     | 63 |  |          | Director                                    
|Nati Perry           |  |     | 58 |  |          | Director                                    
|Austin W. Lewis IV   |  |     | 36 |  |          | Director                                    
|Andy Ben-Artzy       |  |     | 66 |  |          | Director                                    



38



---

##### Table of Contents

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 at
Waltham-based Guardium, Inc., a leader in real-time enterprise database monitoring and protection (acquired by IBM). 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.

Yohanan Engelhardt was appointed as our chief financial officer in May 2012. Prior to that, beginning in 1996, Mr. Engelhardt served as our
Vice President of Finance. Prior to joining ViryaNet, from 1994 to 1996, Mr. Engelhardt served as the chief financial officer of Aryt Industries, which develops, manufactures, and markets electronic products for the military market through its
subsidiary Reshef Technologies. From 1990 to 1994 Mr. Engelhardt served as the chief financial officer of Keter Publishing House. Mr. Engelhardt is a Certified Public Accountant in both the United States and Israel and holds a B.A. in
Accounting and Economics from the Hebrew University of Jerusalem.

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.

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.

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 IV currently 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



39



---

##### Table of Contents

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

Telvent Investments, S.L., or Telvent, the holder of 297,081 of our Ordinary Shares, possesses the right to designate a member of our Board of Directors. Telvents previous appointee, Javier Garoz
Neira, resigned in 2011 and as of the date of this annual report, no director has been appointed on behalf of Telvent.

Other than as
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 that we paid to our directors and executive officers as a group in salaries, fees, commissions and bonuses for the year ended
December 31, 2011 was approximately $1.3 million, including $0.2 million to two former officers. The aggregate amount set aside or accrued during 2011 to provide pension, retirement or similar benefits for our directors and executive officers,
pursuant to any existing plan provided by and/or contributed to by us, was approximately $24,000.

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 attended for each of the four
(4) scheduled meetings of each of the Board of Directors and Audit Committee during each calendar year, whether 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.

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

In February 2010, our shareholders authorized 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.

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

In March 2011, we granted 75,000 restricted
shares, in the aggregate, to our directors.

All restricted shares that we granted in 2010 and 2011 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 or within the first year after the 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 our 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/Renewal
Of Current Term of Office            
|Samuel I. HaCohen             |  | Executive Chairman of the Board of Directors        |  | March 1998            |  | upon 6 months advance notice                            
|Memy Ish-Shalom               |  | President and Chief Executive Officer               |  | January 2006          |  | upon 3 months advance notice                            
|Yohanan Engelhardt
Nir Diskin |  | Chief Financial Officer
Vice President, Engineering |  | May 2012January 2006  |  | upon 3 months advance notice
upon 30 days advance notice
|Vladimir Morgenstern (3)      |  | Director                                            |  | July 1999             |  | 2012 Annual Meeting                                     
|Arie Ovadia (1),(2)           |  | Director                                            |  | December 2006         |  | 2012 Annual Meeting                                     
|Nati Perry (2) (3)            |  | Director                                            |  | December 2007         |  | 2012 Annual Meeting                                     
|Austin W. Lewis IV (3)        |  | Director                                            |  | February 2010         |  | 2012 Annual Meeting                                     
|Andy Ben-Artzy (1) (2)        |  | Director                                            |  | February 2010         |  | 2013 Annual Meeting                                     



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



40



---

##### Table of Contents

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

|(3) | Member of Compensation 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 six 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 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 Requirement

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 is a relative of the controlling shareholder of the company or if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subject, 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 or one of certain other prohibited relationships with the
company or any person or entity controlling (or relative of such controlling person), controlled by or under common control with the company (or, in the case of a company with no controlling shareholder, any affiliation or one of certain other
prohibited relationships with a person serving as chairman of the board, chief executive officer, a substantial shareholder or the most senior office holder in the companys finance department). The term affiliation and the similar
types of prohibited relationships include:



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



| |  |  | a business or professional relationship, even if not maintained on a regular basis (but excluding a de minimis level relationship);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | service as an office holder (as defined in the Companies Law and described below under Exculpation, Insurance and Indemnification of Directors
and Officers).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

If, at the time of election of an external director, all other directors who are not the
companys controlling persons or their relatives are of the same gender, the external director to be elected must be of the other gender.

Pursuant to the Companies Law, all external directors must have accounting and financial expertise or professional qualifications, and at least one
external director must have accounting and financial expertise. A director with accounting and financial expertise is a director that 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 to deeply understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have
professional qualifications 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 has completed other higher education, all
in the field of business of the company or relevant for his/her position, or (iii) has at least five 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.

We believe that both of our external directors possess both
professional qualifications and accounting and financial expertise.

Conflicts of Interest

No person may serve as an external director if the persons position or other business activities create, or may create, a conflict of interest with
the persons responsibilities as an external director or may otherwise interfere with the persons ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange.
A person may furthermore not continue to serve as an external director if he or she accepts, during his or her tenure as an external director, direct or indirect compensation from the company for his or her role as a director, other than amounts
prescribed under the Companies Law regulations (as described below) or indemnification, the companys undertaking to indemnify such person, exemption and insurance coverage.



41



---

##### Table of Contents

Following the termination of an external directors service on a board of directors, such former
external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholders control, including engagement to serve as an
executive officer or director of the company or a company controlled by its controlling shareholder or employment by, or providing services to, any such company for consideration, either directly or indirectly, including through a corporation
controlled by the former external director, for a period of two years (such prohibition also applies to other relatives of the former external director for a period of one year).

How External Directors Are Elected

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



| |  |  | the majority voted in favor of election includes a majority of the shares held by non-controlling shareholders who do not have a personal interest in
the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting (abstentions are disregarded in this calculation), or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the total number of shares held by non-controlling, disinterested shareholders (as described in the previous bullet-point) voted against the election
of the director does not exceed two percent (2%) 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 general meeting of shareholders for up to two
additional three year terms, provided that his or her service for each such additional term is recommended by one or more shareholders holding at least one percent (1%) of the companys voting rights and is approved by a majority at a
shareholders meeting, which majority must include both criteria described above with respect to his or her initial election.

Committee
Service; Compensation

Each committee of a companys board of directors is required to include at least one external director and the
audit committee must include all of the external directors.

An external director is entitled to compensation as provided in regulations
promulgated under the Companies Law and is otherwise prohibited from receiving any compensation, directly or indirectly, in connection with services provided as an external director or otherwise to the company.

Qualifications of Directors Generally Under the Companies Law

Under the Companies Law, the board of directors of a publicly traded company is required to make a determination as to the minimum number of directors (not merely external directors) who must have
accounting and financial expertise (according to the same criteria described above with respect to external directors under External Directors). In accordance with the Companies Law, the determination of the board should be based
on, among other things, the type of the company, its size, the volume and complexity of its activities and the number of directors. Based on the foregoing considerations, our Board of Directors determined that the number of directors with financial
and accounting expertise in our company shall not be less than one. As described above under External Directors, currently each of Messrs. Ovadia and Ben-Artzy has been determined by our Board of Directors to possess such
accounting and financial expertise.

Unaffiliated Directors Under the Companies Law

Under a recent amendment to the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. An
unaffiliated director is defined as an external director and as a director who meets the following criteria:



| |  |  | he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli
resident (which does not apply to companies whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years
in the service shall not be deemed to interrupt the continuation of the service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The foregoing amendment to the Companies
Law further provides that a company may also elect to impose, via the adoption of a propose set of corporate governance rules, certain independence requirements with respect to the composition of the board of directors as a whole. Those
requirements, if undertaken by a company, mandate that (i) if the company has no controlling shareholder or no shareholder that holds at least 25% of the companys voting rights, most of the members of the board must be unaffiliated
directors, whereas (ii) if the company has a controlling shareholder or a shareholder that holds at least 25% of the voting rights, then at least one-third of the directors need to be unaffiliated directors.

As of the date of this annual report, we have not elected to impose these additional board independence requirements.



42



---

##### Table of Contents

Audit Committee

The Companies Law requires public companies such as ours to appoint an audit committee comprised of at least three directors, including all of the external directors, one of whom must serve as chairman of
the committee. The chairman of the board of directors, or any director employed by or otherwise providing services to the company or to a controlling shareholder or any entity controlled by a controlling shareholder, may not be a member 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.

Role of Audit Committee under Companies Law

Under the Companies Law (under an amendment
adopted in 2011), our audit committee is responsible for (i) determining whether there are delinquencies in the business management practices of the company, including consultation with the companys internal auditor or the independent
auditor, and making recommendations to the board to improve such practices, (ii) determining whether to approve certain related party transactions (including compensation of office holders (as defined below)) or transactions in which an office
holder has a personal interest and whether such transaction is material, (iii) where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to the board and propose
amendments thereto, (iv) examine the companys internal controls and internal auditors performance, including whether the internal auditor has sufficient resources and tools to dispose of his responsibilities (taking into
consideration the companys special needs and size), (v) examine the scope of the companys auditors work and compensation and submit its recommendation with respect thereto to the corporate organ considering the appointment
thereof (either the board or the general meeting of shareholders) and (vi) determine procedures with respect to the treatment of company employees complaints as to the management of the companys business and the protection to be
provided to such employees.

Conflicts of Interest

An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, or take any other action required under the Companies Law, unless at the time of
approval a majority of the committees members are present, of whom a majority consist of unaffiliated directors and at least one of them is an external director.

Role of Audit Committee under U.S. law

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.

Pursuant to other responsibilities with which it is charged under the
Sarbanes-Oxley Act, our audit committee assists our 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 our 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.

Internal Auditor

Under the
Companies Law, the board of directors should appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the companys actions comply with the law and orderly
business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder, or an interested party (i.e., a holder of 5% or more of the voting rights in the company or of the issued share capital,
the chief executive officer of the company or any of its directors, or a person who has the authority to appoint the companys chief executive officer or any of its directors), or a relative of an office holder or of an interested party. In
addition, the companys independent auditor or its representative may not serve as the companys internal auditor.

Compensation Committee

Our board
of directors has appointed a compensation committee, which advises the board on matters concerning the compensation of our employees and consultants and on such other matters for which the board may request the committees advice. The
compensation committee has an exclusively advisory role, and our board does not delegate any of its ultimate authority to the committee; thus, the committee does not have the authority to pass any resolutions which bind our company in any manner
whatsoever.

Messrs. Lewis, Morgenstern, and Perry are the members of our compensation committee.



43



---

##### Table of Contents

Exculpation, Insurance and Indemnification of Directors and Officers

The Companies Law codifies certain requirements and optional provisions that apply in our relationship with our office holders. An office
holder is defined in the Companies Law as a (i) director, (ii) general manager, (iii) chief business manager, (iv) deputy general manager, (v) vice general manager, (vi) another manager directly subordinate to the
general manager or (viii) any other person assuming the responsibilities of any of the forgoing positions without regard to such persons title. Our office holders consist of the individuals listed in the table under Directors and
Senior Management, which is displayed under Item 6. Directors, Senior Management and Employees. Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his or her duty
of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, with respect to a breach of his duty of care, provided, however, that such a breach is not related to a distribution of a dividend
or any other distribution by the company.

We have entered into an undertaking to indemnify our office holders in specified limited categories
of events and in specified amounts, subject to the limitations set by the Companies Law and our Articles of Association, and have furthermore obtained directors and officers insurance. For more information, see Directors and Officers
Insurance and Indemnification of Office Holders under Item 7 below.

Employees

As of December 31, 2011, we had 23 employees in Israel, and 37 in the United States. Of our 60 employees, 12 were engaged in
research and development, 15 in sales, marketing and business development, 25 in professional services and technical support and 8 in finance, administration and operations.

As of December 31, 2010, we had 22 employees in Israel, 39 in the United States and 7 in Australia. Of our 68 employees, 10 were engaged in research and development, 13 in sales, marketing and
business development, 36 in professional services and technical support and 9 in finance, administration and operations.

As of
December 31, 2009, we had 21 employees in Israel, 36 in the United States and 7 in Australia. Of our 64 employees as of such time, 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 are 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 April 5, 2012, the aggregate number of our Ordinary Shares (including 326,797 Ordinary Shares which may be issued upon
conversion of Preferred A Shares at a one-for-one ratio and including 363,636 Ordinary Shares that may be issued upon exercise of options and warrants, conversion of convertible notes and vesting of restricted shares that are exercisable,
convertible or that have vested, or that will become exercisable, convertible or will vest within 60 days of April 5, 2012) that are beneficially owned by our directors and executive officers as a group was 1,721,904, constituting 44.2%
beneficial ownership interest in our company (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
April 5, 2012).

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. and Ordinary Shares that are held by Jerusalem Technology Investments Ltd., since two of their
respective affiliates serve on our Board of Directors and, 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), and (ii) Ordinary Shares, 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. The aggregate number of our Ordinary Shares beneficially owned by our directors and executive officers as a group excludes the 297,081 Ordinary Shares
held by Telvent since none of our current directors and officers is affiliated with Telvent (despite its above-described general Board designation rights). See Item 7- Major Shareholders and Related Party Transactions below for more
details concerning the beneficial ownership of our Ordinary Shares by our individual directors and executive officers. Other than as detailed in Item 7 below, none of our directors and executive officers beneficially owns more than 1% of our
outstanding shares.

As of April 5, 2012, under our equity compensation plans, 22,986 restricted Ordinary Shares, granted to our
directors and executive officers, had not yet been released from restrictions and will not be released from restriction within 60 days of April 5, 2012. The restricted Ordinary Shares had been granted for no consideration. Also as of April 5,
2012, no options were outstanding that had been granted to our directors and executive officers under our equity compensation plans.



44



---

##### Table of Contents

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 291,466 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. All options granted under those 1996, 1997, 1998 and 1999 plans have expired.

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, which we refer to collectively as 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 April 5, 2012, grants of restricted shares
relating to a total of 26,319 Ordinary Shares, in the aggregate, were outstanding under the 2005 Share Option Plans, and 170,451 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 April 5, 2012 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 April 5,
2012. 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 3,892,111 Ordinary Shares outstanding as of April 5, 2012, which include 326,798 Ordinary Shares
issuable upon conversion of an equivalent number of Preferred A Shares.



45



---

##### Table of Contents

Ordinary Shares Beneficially Owned



|                                                                                                                                                     |  |        |           |     |                 |  |      |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | --------- | --- | --------------- |  | ---- | -
|Name and Address                                                                                                                                     |  | Number |           |     | Percent ofClass | 
|Lewis Opportunity Fund Group
45 Rockefeller Center
Suite 2570 New York, NY 10111                                                                     |  |        | 800,272   | (1) |                 |  | 18.8 | %
|Jerusalem High-tech Founders, Ltd.
c/o Hamotal Insurance Agency
9 HaRatom Street Har Hotzvim Jerusalem 41450
Israel                                  |  |        | 502,354   | (2) |                 |  | 12.9 | %
|LibertyView Special Opportunities Fund, LP
LibertyView Capital Management
Neuberger Berman, LLC
111 River Street  Suite 1000
Hoboken, NJ 07030-5776 |  |        | 431,202   | (3) |                 |  | 11.0 | %
|Memy Ish-Shalom                                                                                                                                      |  |        | 247,586   |     |                 |  | 6.4  | %
|1 Grant Road, Westborough, MA, 01581                                                                                                                 |  |        |           |     |                 |  |      |  
|Telvent Investments, S.L.                                                                                                                            |  |        | 297,081   |     |                 |  | 7.6  | %
|Valgrande 6, 28108 Alcobendas, Madrid, Spain                                                                                                         |  |        |           |     |                 |  |      |  
|All directors and executive officers as a group (9 persons)                                                                                          |  |        | 1,721,904 | (4) |                 |  | 44.2 | %



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

(i) 325,605 Ordinary
Shares and (ii) 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;

(iii) 91,031 Ordinary Shares held by LAM Opportunity Fund LP;

(iv) 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

(v) 20,000 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) 125,000 Ordinary Shares held by Jerusalem Technology Investments Ltd., an
affiliate of Jerusalem High-tech Founders Ltd., (iii) 53,225 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 (iv) 322,814 Preferred A Shares, which can be converted to Ordinary Shares on a one-for-one basis at any time, held by Jerusalem High-tech Founders Ltd.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes (i) 387,665 Ordinary Shares, and (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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 April 5, 2012. 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) 469,995 shares or 12.1% of our
outstanding shares beneficially owned by Samuel HaCohen, the Executive Chairman of our Board of Directors, out of which (a) 20,866 Ordinary Shares are held directly by Mr. HaCohen and (b) 322,814 Preferred A Shares and 1,315 Ordinary
Shares are held by Jerusalem High-tech Founders Ltd (Jerusalem High-tech) and 125,000 Ordinary Shares that are held by Jerusalem Technology Investments Ltd (Jerusalem Technology), an affiliate of Jerusalem High-tech Founders
Ltd., which Mr. HaCohen may be deemed to beneficially own due to his status as an affiliate of Jerusalem High-tech and Jerusalem Technology; (ii) 481,488 shares or 12.4% of our outstanding shares beneficially owned by Vladimir Morgenstern,
a director of ours, out of which (a) 32,359 Ordinary Shares are held directly by Mr. Morgenstern, and (b) 322,814 Preferred A Shares and 1,315 Ordinary Shares are held by Jerusalem High-tech and 125,000 Ordinary Shares that are held
by Jerusalem Technology which Mr. Morgenstern may be deemed to beneficially own due to his status as an affiliate of Jerusalem High-tech and Jerusalem Technology (the 322,814 Preferred A Shares, 1,315 Ordinary Shares held by Jerusalem High-tech
and the 125,000 Ordinary Shares beneficially owned by Jerusalem Technology are included only once under the aggregate directors and executive officers beneficial ownership); (iii) 247,586 Ordinary Shares or 6.4% of our Ordinary Shares
held by Memy Ish-Shalom, our president and chief executive officer; (iv) 800,272 shares or 18.8% of our outstanding shares, beneficially owned by Austin W. Lewis IV, a director of ours, out of which (a) 20,000 Ordinary Shares are held by
Mr. Lewis, and (b) 780,272 Ordinary Shares are beneficially owned by Lewis Opportunity Fund Group and its affiliates (as described in footnotes 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; (v) 92,282
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



46



---

##### Table of Contents

| | Ordinary Shares or 2.4% of our Ordinary Shares held by Yohanan Engelhardt, our chief financial officer and (vi) 40,000 Ordinary Shares or 1% of our Ordinary Shares held by Nati Perry, a member of
our Board of Directors. The number of shares in this row which are counted as beneficially owned by our executive officers and directors excludes the 297,081 Ordinary Shares held by Telvent since none of our current directors or officers is
affiliated with Telvent (despite its general Board appointment rights).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 April 5, 2011, there were 129 holders of record of our Ordinary
Shares (including Ordinary Shares issuable upon conversion of our outstanding Preferred A Shares), of which 91 record holders holding 2,622,143, or approximately 67%, 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 37% of our outstanding shares).

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

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

Except as described below (under Related Party Transactions), during the past three years there have been no significant changes in the
percentage ownership of major shareholders.

Related Party Transactions

Debt Owed by an Officer of a Former Subsidiary

On December 31, 2011, we completed the sale of 100% of the common stock of ViryaNet Pty, to Hosking Family Trust, owned by the former general manager of ViryaNet Pty, Mark Hosking, to whom we refer
as the Buyer, for consideration of $340,000. The consideration is being paid as follows; $100,000 was due on January 2, 2012, and the balance of $240,000 will be paid over a period of four years in equal quarterly installments starting
March 31, 2012, and bears a fixed annual interest of 3.5%, paid quarterly (we refer to these deferred payments as the Long-term Receivable). The Long-term Receivable repayment is secured through a personal guarantee provided by the Buyer as
security for the full repayment of the Long-term Receivable. This transaction constituted an extraordinary transaction with the Buyer who possessed a personal interest and was therefore approved by our audit committee and Board of Directors in
accordance with the requirements of the Companies Law.

Equity Financing

On June 30, 2011, we entered into a share purchase agreement with Jerusalem Technology Investments Ltd., or the Investor, a company with which two of our directorsSamuel HaCohen and Vladimir
Morgenstern and one of our major shareholders (Jerusalem High-tech Founders, Ltd.) are affiliated. Pursuant to the agreement, the Investor committed to invest $250,000 in our company for 250,000 of our Ordinary Shares, reflecting a price of
$1.00 per Ordinary Share, within 31 days from the date of the agreement, To date, the Investor has made a total investment of $125,000 under the share purchase agreement ($50,000 in June 2011 and $75,000 in February 2012). This equity financing
constituted an extraordinary transaction with an entity in which two of our directors possessed a personal interest and therefore required, and received, the approval of our audit committee and Board of Directors pursuant to the provisions of the
Companies Law.

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 repayment 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 our 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 (as defined under the Companies Law and described under
Exculpation, Insurance and Indemnification of Directors and Officers in Item 6 above) 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



47



---

##### Table of Contents

| |  |  | 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.

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 April 30, 2012, 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, 2011                       |  | $    | 1.15 |  |     | $ | 0.42 | 
|December 31, 2010                       |  |      | 1.50 |  |     |   | 0.60 | 
|December 31, 2009                       |  |      | 1.50 |  |     |   | 0.10 | 
|December 31, 2008                       |  |      | 1.90 |  |     |   | 0.15 | 
|December 31, 2007                       |  |      | 4.40 |  |     |   | 1.01 | 
|Quarters:                               |  |      |      |  |     |   |      | 
|2012                                    |  |      |      |  |     |   |      | 
|First Quarter, ended March 31, 2012     |  |      | 1.00 |  |     |   | 0.45 | 
|2011                                    |  |      |      |  |     |   |      | 
|Fourth Quarter, ended December 31, 2011 |  |      | 0.86 |  |     |   | 0.42 | 
|Third Quarter, ended September 30, 2011 |  |      | 0.85 |  |     |   | 0.55 | 
|Second Quarter, ended June 30, 2011     |  |      | 1.10 |  |     |   | 0.56 | 
|First Quarter, ended March 31, 2011     |  |      | 1.15 |  |     |   | 0.75 | 
|2010                                    |  |      |      |  |     |   |      | 
|Fourth Quarter, ended December 31, 2010 |  |      | 0.95 |  |     |   | 0.70 | 
|Third Quarter, ended September 30, 2010 |  |      | 0.85 |  |     |   | 0.60 | 
|Second Quarter, ended June 30, 2010     |  |      | 1.11 |  |     |   | 0.80 | 
|First Quarter, ended March 31, 2010     |  |      | 1.50 |  |     |   | 0.62 | 



48



---

##### Table of Contents

|                       |  |      |      |  |     |  |      | 
|---------------------- |  | ---- | ---- |  | --- |  | ---- | 
|Most Recent Six Months |  | High |      |  | Low | 
|April 2012             |  |      | 1.00 |  |     |  | 1.00 | 
|March 2012             |  |      | 1.00 |  |     |  | 0.90 | 
|February 2012          |  |      | 0.95 |  |     |  | 0.55 | 
|January 2012           |  |      | 0.59 |  |     |  | 0.45 | 
|December 2011          |  |      | 0.58 |  |     |  | 0.42 | 
|November 2011          |  |      | 0.86 |  |     |  | 0.51 | 

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 the 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, and, in April 2010, upon the launch by OTC Markets Group of its new OTCQB marketplace for reporting issuers who are current in their Exchange Act reports, our Ordinary Shares began to be quoted in that
marketplace under the ticker symbol VRYAF as well. In October 2010, our Ordinary Shares ceased to be quoted on the OTCBB, and are currently quoted only on the OTCQB under the ticker symbol VRYAF.

For further information, see Risk FactorsOur Ordinary Shares are quoted on the OTCQB, 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

Our 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.

Approval of Transactions Involving Directors and Office Holders

Any director is generally entitled to attend and vote at any meeting of our Board of Directors. The Companies Law requires, however, that a director or
other office holder of a company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. The disclosure must be
made to our Board of Directors and/or shareholders a reasonable period of time prior to the meeting at which the transaction is to be discussed. A personal interest, as defined under the Companies Law, includes any personal interest held by the
office holders spouse, siblings, parents, grandparents or descendants; spouses descendants, siblings or parents; and the spouses of any of the foregoing, and also includes any interest held by any corporation in which the office holder
owns 5% or more of the share capital, is a director or general manager or in which he or she has the right to appoint at least one director or the general manager. A personal interest furthermore includes the personal interest of a person for whom
the office holder holds a voting proxy or the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the
matter.

In the case of a transaction which is not an extraordinary transaction (as defined below) and does not involve the compensation of
the director or other office holder, after the director or other office holder complies with the above disclosure requirement, only approval by our Board of Directors is required unless the articles of association of the company provide otherwise
(ours do not provide otherwise). If the transaction is



49



---

##### Table of Contents

an extraordinary transaction, then, in addition to any approval required by our Articles of Association, the transaction must be approved by both our Audit Committee and our Board of Directors.
An office holder who has a personal interest in a matter that is considered at a meeting of our Board of Directors or the Audit Committee may not be present at the meeting or vote on the matter, subject to certain exceptions, including an allowance
for him or her to be present in order to present the transaction, if the chairman of our Board of Directors or Audit Committee (as applicable) determines that such presentation by him or her is necessary. If the majority of the members of our Board
of Directors or Audit Committee, as applicable, have a personal interest in a transaction, they may all be present for the presentation of, and voting upon, the transaction, but it must also then be approved by our shareholders. Notwithstanding
having been approved in compliance with the foregoing processes, any transaction in which an office holder has a personal interest must, in addition, not be adverse to our companys interest in order for it to be properly approved.

An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have a
material impact on a companys profitability, assets or liabilities.

Board Meetings

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.

Right to receive dividends and other distributions

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.

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.



50



---

##### Table of Contents

Shareholder voting rights and procedures

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,
is entitled to one vote for each Ordinary Share of which he or she is the holder, and the vote of a majority of the voting power of shareholders who are present and voting at a meeting is generally required to approve a given matter.

Under the Companies Law, a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights in the
company if no other shareholder owns more than 50% of the voting rights in the company, must disclose its interest in a prospective transaction with the company. Extraordinary transactions with a controlling shareholder or in which a controlling
shareholder has a personal interest, or a transaction with a controlling shareholder or his or her relative, directly or indirectly, including for receipt of services from an entity controlled by him or her (or his or her relative), and the terms of
engagement and compensation of a controlling shareholder who is an office holder or an employee of the company, require the approval of the audit committee, the board of directors and the shareholders of the company. The shareholder approval must
include the holders of a majority of the shares held by all shareholders who have no personal interest in the transaction and are voting on the subject matter (with abstentions being disregarded) or, alternatively, the total shares of shareholders
who have no personal interest in the transaction and who vote against the transaction must not represent more than two percent (2%) of the voting rights in the company. To the extent that any such transaction with a controlling shareholder is
for a period extending beyond three years, approval is required once every three years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto. In certain cases provided in
regulations promulgated under the Companies Law, shareholder approval is not required.

The approvals of the board of directors and
shareholders are required for a private placement of securities (or a series of related private placements during a 12-month period or that are part of one continuous transaction or transactions conditioned upon each other) in which:



| |  |  | the securities issued represent at least 20% of the companys actual voting power prior to the issuance of such securities, and such issuance
increases the relative holdings of a 5% shareholder or causes any person to become a 5% shareholder, and the consideration in the transaction (or a portion thereof) is not in cash or in securities listed on a recognized stock exchange, or is not at
a fair market value; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a person would become, as a result of such transaction, a controlling shareholder of the company.
| | - |  | -------------------------------------------------------------------------------------------------

The foregoing approval rules for private placements do not apply to a company like ours, whose securities were offered only outside of Israel or are
listed or quoted only outside of Israel.

Further, under the Companies Law (as described under Item 6. Directors, Senior Management and
Employees Board Practices External Directors How External Directors Are Elected), the appointment of external directors requires, in addition to a majority of the ordinary shares voting and approving the appointment, that
either (a) the approving majority must include a majority of the shares of shareholders that are not controlling shareholders of the company and who do not have a personal interest in the election of the external director (other than a personal
interest not deriving from a relationship with a controlling shareholder) and who are present and voting (with abstentions being disregarded), or (b) the shares of such non-controlling, non-interested shareholders that vote against the
appointment may not constitute more than two percent (2%) of our total voting rights. In addition, as described below (see Changes of rights attached to our shares in this Item 10), under our Articles of Association, the
alteration of the rights, privileges, preferences or obligations of any class of our share capital requires a simple majority of the class so affected), in addition to the ordinary majority of all classes of shares voting together as a single class
at a shareholder meeting.

A further exception to the simple majority shareholder vote requirement is a resolution for the voluntary winding
up, or other reorganization of, the company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by voting deed and voting on the
resolution, provided that such shareholders constitute more than 50% of the shareholders voting on such matter.

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

Under the Companies Law, 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



51



---

##### Table of Contents

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 and
1/3%) 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.

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. The Companies Law permits merger transactions if approved by each partys board of directors and shareholders. In order for shareholder approval to be
obtained for a merger, a majority of the shares present and voting, excluding shares held by the other party to the merger, or by any person holding at least 25% of the means of control of the other party to the merger, or anyone acting on behalf of
either of them, including any of their affiliates, must be voted in favor of the merger. If, however, the merger involves a merger with a companys own controlling shareholder or if the controlling shareholder has a personal interest in the
merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling shareholders (as described above in this Item 10 under Shareholder voting rights and
procedures). In the event that the merger transaction has not been approved by either of the above-described special majorities (as applicable), the holders of at least 25% of the voting rights of the company may apply to a court for approval
of the merger. The court may approve the merger if it is found that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of
either party to the proposed merger, the court may delay or prevent the merger. A merger may not be consummated unless at least 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of
Companies and 30 days have passed from the date of the approval of the shareholders of the merging companies.

The Companies Law further
provides that the foregoing approval requirements will not apply to shareholders of a wholly-owned subsidiary in a rollup merger transaction, or to the shareholders of the acquirer in a merger or acquisition transaction if:



| |  |  | the transaction does not involve an amendment to the acquirers memorandum or articles of association;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the transaction does not contemplate the issuance of more than 20% of the voting rights of the acquirer which would result in any shareholder becoming
a controlling shareholder; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no cross ownership of shares of the merging companies, as described above.
| | - |  | -------------------------------------------------------------------------------------

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 greater-than 45% shareholder of the company, unless there already is a greater-than 45% shareholder of the company. The foregoing provisions do
not apply to:



| |  |  | a private placement in which the companys shareholders approved such holder owning 25% or more of the voting rights in the company (if there is
no other shareholder that holds 25% or more of the voting rights in the company); or more than 45% of the voting rights in the company (if there is no other shareholder that holds more than 45% of the voting rights in the company); or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a purchase from an existing holder of 25% or more of the voting rights in the company that results in another person becoming a holder of 25% or more
of the voting rights in the company or a purchase from an existing holder of more than 45% of the voting rights in the company that results in another person becoming a holder of more than 45% of the voting rights in the company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



52



---

##### Table of Contents

The Companies Law also provides that if following any acquisition of shares, the acquirer holds 90% or more
of the companys shares or of a class of shares, the acquisition must be made by means of a tender offer for all of the target companys shares or all of the shares of the class, as applicable, not held by the acquirer. An acquirer who
wishes to eliminate all minority shareholders must do so by way of a tender offer and hold, following consummation of the tender offer, more than 95% of all of the companys outstanding shares (and provided that a majority of the offerees that
do not have a personal interest in such tender offer shall have approved it, which condition shall not apply if, following consummation of the tender offer, the acquirer holds at least 98% of all of the companys outstanding shares). If,
however, following consummation of the tender offer the acquirer would hold 95% or less of the companys outstanding shares, the acquirer may not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares of the
target company. Appraisal rights are available with respect to a successfully completed full tender offer for a period of six months after such completion and the acquirer may provide in the tender offer documents that a shareholder that accepts the
offer may not seek appraisal rights.

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

The following is a discussion of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on
new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts. The discussion is not
intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.

Holders
of our Ordinary Shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of Ordinary Shares, including, in particular, the effect of any foreign, state or
local taxes.

United States Federal Income Tax Consideration

Subject to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a U.S. Holder arising from the purchase,
ownership and sale of our Ordinary Shares. For this purpose, a U.S. Holder is a holder of Ordinary Shares that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful permanent
resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a
partnership that is not treated as a U.S. person under any applicable U.S. Treasury Regulations) created or organized under the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the
income of which is includable in gross income for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or
more U.S. persons have authority to control all substantial decisions of the trust; (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations; or (6) any person otherwise
subject to U.S. federal income tax on a net income basis in respect of our Ordinary Shares, if such status as a U.S. Holder is not overridden pursuant to the provisions of an applicable tax treaty. This summary is for general information purposes
only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase our Ordinary Shares. This summary generally considers only U.S. Holders that will own our
Ordinary Shares as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a
taxpayers status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, administrative and
judicial interpretations thereof, and the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended, or the U.S.- Israel Tax Treaty, all as in effect as of the date
hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. The Company will not seek a ruling from the U.S. Internal Revenue Service, or the IRS, with regard to the U.S.
federal income tax treatment of an investment in our Ordinary Shares by U.S Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.



53



---

##### Table of Contents

This discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to
a particular shareholder based on such shareholders particular circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local or foreign tax considerations. In addition, this discussion does not
address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or financial services entity; (2) a broker or dealer in
securities or foreign currency; (3) a person who acquired our Ordinary Shares in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder
that holds our Ordinary Shares as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate
investment trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional currency other than the U.S. dollar. This discussion does not address
the U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, Ordinary Shares representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of persons who hold Ordinary
Shares through a partnership or other pass-through entity are not considered. Each prospective investor is advised to consult such persons own tax advisor with respect to the specific U.S. federal and state income tax consequences to such
person of purchasing, holding or disposing of our Ordinary Shares, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.

Distributions on Ordinary Shares

Subject to the discussion under the heading Passive
Foreign Investment Companies below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on Ordinary Shares (including the amount of any Israeli tax withheld on the date of the
distribution), to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be
treated first as a non-taxable return of capital, reducing the U.S. Holders tax basis for our Ordinary Shares to the extent thereof, and then capital gain.

Corporate holders generally will not be allowed a deduction for dividends received. 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, 2012, 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 U.S.-Israel Tax Treaty
satisfies this requirement and we believe we are eligible for the benefits of that treaty.

In addition, our dividends, if distributed, will
be qualified dividend income if our Ordinary Shares are readily tradable on NASDAQ or another established securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is
paid or in the prior year, as a passive foreign investment company, or PFIC. A U.S. Holder will not be entitled to the preferential rate: (i) if the U.S. Holder has not held our Ordinary Shares or ADRs for at least 61 days of the 121 day period
beginning on the date which is 60 days before the ex-dividend date, or (ii) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished
its risk of loss on our Ordinary Shares are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as investment income pursuant to Code section 163(d)(4) will not be eligible
for the preferential rate of taxation. The amount of a distribution with respect to our Ordinary Shares will be measured by the amount of the fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any
Israeli taxes withheld therefrom. (See discussion above under Non-U.S. Holders of Ordinary Shares.) Cash distributions paid by us in NIS will be included in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of
exchange in effect on the date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. Holder subsequently
converts the NIS, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.

Distributions paid by us will generally be foreign source income for U.S. foreign tax credit purposes. Subject to the limitations set forth in the Code, U.S. Holders may elect to claim a foreign tax
credit against their U.S. income tax liability for Israeli income tax withheld from distributions received in respect of our Ordinary Shares. In general, these rules limit the amount allowable as a foreign tax credit in any year to the amount of
ordinary U.S. federal income tax for the year attributable to foreign source taxable income. This limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. Holder whose creditable foreign taxes during the
year do not exceed $300, or $600 for joint filers, if such individuals gross income for the taxable year from non-U.S. sources consists solely of certain passive income. A U.S. Holder will be denied a foreign tax credit with respect to Israeli
income tax withheld from dividends received with respect to our Ordinary Shares if such U.S. Holder has not held our Ordinary Shares for at least 16 days out of the 31-day period beginning on the date that is 15 days before the ex-dividend date or
to the extent that such U.S. Holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any day during which a U.S. Holder has substantially diminished his or her risk of loss with
respect to our Ordinary Shares will not count toward meeting the 16-day holding period. A U.S. Holder will also be denied a foreign tax credit if the U.S. Holder holds our Ordinary Shares in an arrangement in which the U.S. Holders reasonably
expected economic profit is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S. Holders should consult with their own tax advisors
to determine whether, and to what extent, they are entitled to such credit. U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxes withheld, provided such U.S. Holders itemize their
deductions.



54



---

##### Table of Contents

Medicare Contribution Tax

For taxable years beginning after December 31, 2012, U.S. Holders who are individuals, estates or trusts will generally be required to pay a new 3.8% Medicare tax on their net investment income
(including dividends on and gains from the sale or other disposition of our Ordinary Shares), or, in the case of estates and trusts, on their net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only to the
extent that the U.S. Holders total adjusted income exceeds applicable thresholds.

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

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 be classified 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.



55



---

##### Table of Contents

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.

Based upon our income, assets and activities, we believe that we are not currently, and have not been in prior years, a PFIC for U.S. federal income tax
purposes. However, 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 increases to 31% for taxable years beginning after December 31, 2012) 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.

Under the Hiring Incentives to Restore Employment Act of 2010 (to which we
refer as the HIRE Act), some payments to foreign financial institutions in respect of accounts of U.S. shareholders at such financial institutions may be subject to withholding at a rate of 30%. IRS guidance indicates that when final
regulations are issued, they will provide that such withholding will only apply to distributions paid on or after January 1, 2014, and to other withholdable payments (including payments of gross proceeds from a sale or other
disposition of our Ordinary Shares) made on or after January 1, 2015. U.S. Holders should consult their tax advisors regarding the effect, if any, of the HIRE Act on their ownership and disposition of our Ordinary Shares. See Non-U.S. Holders
of Ordinary Shares.

Non-U.S. Holders of Ordinary Shares

Except as provided below, an individual, corporation, estate or trust that is not a U.S. Holder generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and
the proceeds from the disposition of, our Ordinary Shares. A non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend paid on our Ordinary Shares or the proceeds from the disposition of our Ordinary Shares if:
(1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States or, in the case of a non-U.S. Holder that is a resident of a country which has an income tax treaty with the United
States, such item is attributable to a permanent establishment or, in the case of gain realized by an individual non-U.S. Holder, a fixed place of business in the United States; (2) in the case of a disposition of our Ordinary Shares, the
individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and other specified conditions are met; (3) the non-U.S. Holder is subject to U.S. federal income tax pursuant to the provisions of
the U.S. tax law applicable to U.S. expatriates. In general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our Ordinary Shares if payment is made through a paying agent, or office of a foreign
broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides on an applicable Form W-8 (or a substantially
similar form) a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. A U.S. related person for these purposes is a person with one or more current relationships with the United States.



56



---

##### Table of Contents

The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against
such holders U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.

The HIRE Act may impose withholding taxes on some types of payments made to foreign financial institutions and some other non-U.S. entities. Under the HIRE Act, the failure to comply with
additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to U.S. Holders that own Ordinary Shares through foreign accounts or foreign
intermediaries and specified non-U.S. Holders. The HIRE Act imposes a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of, Ordinary Shares paid from the United States to a foreign financial institution or to
a foreign nonfinancial entity, unless (i) the foreign financial institution undertakes specified diligence and reporting obligations or (ii) the foreign nonfinancial entity either certifies it does not have any substantial U.S. owners or
furnishes identifying information regarding each substantial U.S. owner. In addition, if the payee is a foreign financial institution, it generally must enter into an agreement with the U.S. Treasury that requires, among other things, that it
undertake to identify accounts held by specified U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to other specified account holders. IRS guidance indicates that when
final regulations are issued they will provide that such withholding will only apply to distributions paid on or after January 1, 2014, and to other withholdable payments (including payments of gross proceeds from a sale or other
disposition of our Ordinary Shares) made on or after January 1, 2015. You should consult your tax advisor regarding the HIRE Act.

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 generally subject to corporate tax at the rate of 24% for the 2011 tax year. The corporate tax rate was scheduled to decline to 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and onwards. On December 5, 2011,
the Israeli Parliament (the Knesset) passed the Law for Tax Burden Reform (Legislative Amendments), 2011, or the Tax Burden Law, which, among other changes, effective from 2012 canceled the scheduled progressive reduction in the corporate tax rate
for 2012 and onward, and increased the corporate tax rate to 25% in 2012 and subsequent years. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise, as
discussed below, may be considerably less.

Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969

An Industrial Enterprise is defined as an enterprise whose major activity, in a given tax year, is industrial production. Under the Law for
the Encouragement of Industry (Taxes), 5672-1969, generally referred to as the Industry Encouragement Law, an Industrial Company is defined as a company resident in Israel that derives at least 90% of its income in a given tax year
(exclusive of income from specified government loans) is derived from an Industrial Enterprise owned by it.

Under the Industry
Encouragement Law, Industrial Companies are entitled to certain tax benefits, including:



| |  |  | Deduction of the cost of purchases of patents or the right to use a patent or know how used for the development or promotion of the Industrial
Enterprise, over an eight-year period, commencing on the year in which such rights were first exercised;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The right to elect, under specified conditions, to file a consolidated tax return with other related Israeli industrial companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accelerated depreciation rates on equipment and buildings; and
| | - |  | --------------------------------------------------------------



| |  |  | A straight-line deduction of expenses related to a public offering over a threeyear period commencing on the year of offering.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

Under some tax laws and regulations, an Industrial Enterprise may be eligible for special depreciation rates for machinery,
equipment and buildings. These rates differ based on various factors, including the date on which the operations begin and the number of work shifts. An Industrial Company owning an Approved Enterprise may choose between these special depreciation
rates and the depreciation rates available to the Approved Enterprise.

Eligibility for benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. Even though we believe that we currently qualify as an industrial company within the definition of the Industry Encouragement Law, we cannot assure you that the Israeli tax
authority will agree or that we will continue to qualify as an industrial company or be able to take advantage of any of the benefits described above under the Industry Encouragement Law in the future.



57



---

##### Table of Contents

Tax Benefits under the Law for the Encouragement of Capital Investments, 1959

The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in production
facilities (or other eligible assets).

The Investment Law was significantly amended on April 1, 2005 (to which we refer as the 2005
Amendment) and as of January 1, 2011 (to which we refer as the 2011 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remained in
force, but any benefits granted subsequently were subject to the provisions of the 2005 Amendment. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to
the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 may choose to continue to enjoy such benefits, provided that certain conditions are met, or instead may elect to forego such
benefits and elect for the benefits of the 2011 Amendment.

The following discussion is a summary of the Investment Law prior to the 2005
Amendment and 2011 Amendment as well as the relevant changes contained in such amendments.

Tax Benefits Before the 2005 Amendment

An investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to
as an Approved Enterprise, is entitled to certain benefits. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment is made or the
election of the grantee. A company that wished to receive benefits had to receive an approval from the Investment Center of the Israel Ministry of Industry, Trade and Labor, or the Investment Center. Each certificate of approval for an Approved
Enterprise relates to a specific investment program, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. The tax benefits from any certificate of approval relate only to taxable
profits attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits.

A company owning an Approved Enterprise may elect to forego certain government grants extended to Approved Enterprises in return for an alternative package of tax benefits, or the Alternative Benefits
Program. Under the Alternative Benefits Program, a companys undistributed income derived from an Approved Enterprise is exempt from corporate tax for a period of between two and ten years, or the Exemption Period, beginning with the first year
the company derives taxable income under the program after the commencement of production, depending on the geographic location of the Approved Enterprise within Israel. After the Exemption Period, the company will be eligible for the reduced tax
rates of 10%-25%, depending on the extent of foreign investment in the company. These tax benefits are granted for a limited period not exceeding seven years, or ten years for a company whose foreign investment level exceeds 25%, from the first year
in which the Approved Enterprise has taxable income, after the year in which production commenced (as determined by the Investment Center). However, the period of benefits may in no event exceed the lesser of twelve years from the year in which the
production commenced (as determined by the Investment Center) or fourteen years from the year of receipt of Approved Enterprise status, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its
capital investments is approved, the companys effective tax rate reflects a weighted combination of the applicable rates.

The tax
benefits under the Investment Law also apply to a companys income that is generated from (i) the grant of a right of use with respect to know-how developed by the Approved Enterprise, (ii) income generated from royalties and
(iii) income derived from a service which is ancillary to such right of use or royalties, provided that such income is generated within the Approved Enterprises ordinary course of business. The tax benefits under the Investment Law are
generally not available with respect to income derived from products manufactured outside of Israel.

A company that has an Approved
Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors Company, or FIC. An FIC that is eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law,
of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly
or indirectly, by persons who are not residents of Israel. The determination as to whether or not a company qualifies as an FIC is made on an annual basis. An FIC that has an Approved Enterprise program will be eligible for an extension of the
period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. If a company that has an
Approved Enterprise program is a wholly-owned subsidiary of another company, then the percentage of foreign investments is determined based on the percentage of foreign investment in the parent company.

The following table sets forth the tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program.



|                                    |  |          |    |  
|----------------------------------- |  | -------- | -- | -
|Percentage of non-Israeli ownership |  | Tax Rate |   
|Over 25% but less than 49%          |  |          | 25 | %
|49% or more but less than 74%       |  |          | 20 | %
|74% or more but less than 90%       |  |          | 15 | %
|90% or more                         |  |          | 10 | %



58



---

##### Table of Contents

Dividends paid out of income generated by an Approved Enterprise (or out of dividends received from a
company whose income is generated by an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at the lower rate under an applicable tax treaty. This withholding tax is deductible at source by the company. The 15% tax
rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to twelve years thereafter. After such period, the withholding tax is applied at a rate of up to 30%, or at the lower
rate under an applicable tax treaty. In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply. Under the Investment Law, a company that has participated in an Alternative Benefits Program is not obligated
to distribute retained profits, and may generally decide from which years profits to declare dividends. In addition, a company that pays a dividend out of tax-exempt income generated by its Approved Enterprise will be required to recapture the
deferred corporate income tax applicable to the amount distributed (grossed up to reflect such tax) at the rate which would have been applicable to such income had such income not been exempted from tax under the Investment Law. This rate generally
ranges from 10% to 25%, depending on the extent of non-Israeli shareholdings in the company.

The Investment Law also provides that an
Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. This benefit is an incentive granted by the Israeli government regardless of whether the alternative
benefits program is elected.

The entitlement to the above benefits is based upon the fulfillment of the conditions stipulated by the law, the
regulations published thereunder and the instruments of approval for the specific investments in the Approved Enterprise. In the event of failure to comply with these conditions, we would be required to refund the amount of tax benefits, plus a
Consumer Price Index (CPI) linkage adjustment and interest.

Our third Approved Enterprise program under the Investment Law, before the 2005
Amendment, which was approved in April 1998 and which entitled us to some tax benefits, subject to certain conditions, expired in April 2012. Our production facilities had, in the past, been granted Approved Enterprise status under the
Investment Law, for two additional investment programs, which were approved in February 1989 and March 1995, but which had subsequently expired.

Because we currently have no taxable income, the benefits from our April 1998 Approved Enterprise program were not utilized prior to the programs expiration in April 2012. Income derived from this
program, for which we had elected the Alternative Benefits Program, was to be exempted from tax for a period of ten years, starting in the first year in which we generate taxable income from the Approved Enterprise, subject to a condition that we
would have a certain minimum number of professional employees. We did not meet this condition and since the status of Approved Enterprise has expired for this investment program, we are not entitled to any future benefits under this investment
program or any other investment program.

The termination or reduction of these tax benefits would likely increase our tax liability. 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 to which we would have been entitled, the amount of any taxable income that we may earn, and the amount of
accumulated losses for income tax purposes that we may carry forward from previous years.

Tax Benefits Subsequent to the 2005 Amendment

The 2005 Amendment includes revisions to the criteria for investments qualified to receive tax benefits. This amendment applies to new
investment programs and investment programs commencing in 2004 and thereafter, but does not apply to investment programs approved prior to March 31, 2005. However, the 2005 Amendment provides that terms and benefits included in any certificate
of approval already granted will remain subject to the provisions of the Investment Law as they were on the date of such approval. The tax benefits available under any instrument of approval relate only to taxable profits attributable to the
specific program and are contingent upon meeting the criteria set out in the instrument of approval. Furthermore, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. However, the 2005 Amendment limits
the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions that generally require that at least 25% of the Approved Enterprises income
will be derived from export.

Pursuant to the 2005 Amendment, it is no longer necessary for a company to obtain the advance approval of the
Investment Center in order to receive tax benefits. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the 2005 Amendment
(we refer to the facilities subject to such a claim as a Benefited Enterprise). Companies may, at their discretion, in order to provide greater certainty, elect to apply for a pre-ruling from the Israeli tax authority regarding their eligibility for
benefits under the 2005 Amendment. The Investment Law includes provisions attempting to ensure that a company will not enjoy both government grants and tax benefits for the same investment program.

Tax benefits are available under the 2005 Amendment for production facilities (or other eligible facilities), which are generally required to derive more
than 25% of their business income from export to specific markets with a population of at least 12 million people. In order to receive the tax benefits, the amendment states that the company must make an investment in fixed assets in the
Benefited Enterprise that meets all the conditions set out in the amendment for tax benefits and that exceeds a minimum amount specified in the Investment Law. Such



59



---

##### Table of Contents

investment allows the company to receive a Benefited Enterprise status and may be made over a period of no more than three years ending at the end of the year in which the company requested to
have the tax benefits apply to the Benefited Enterprise, to which we refer as the Year of Election. Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a
Benefited Enterprise and the companys effective tax rate will be the result of a weighted-average of the applicable rates. In the case of an expansion of existing facilities, the minimum investment required in order to qualify as a Benefited
Enterprise is required to exceed a minimum amount or certain percentage of the companys production assets, determined as of the end of the year before the expansion.

The duration of tax benefits is subject to a limitation of seven to ten years from the Commencement Year (the Commencement Year being defined as the later of: (i) the first tax year in which the
company had derived income for tax purposes from the Benefited Enterprise or (ii) the Year of Election) provided that 12 years have not elapsed from the first day of the Year of Election. The tax benefits granted to a Benefited Enterprise are
determined, as applicable to its geographic location within Israel, according to one of the following new tax routes, which may be applicable to the company:



| |  |  | Similar to the currently available Alternative Benefits Program, exemption from corporate tax on undistributed income for a period of two to ten years,
depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be
granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax Exemption Period, such income will be subject to
corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the dividend that may be distributed. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the
Benefited Enterprise; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on
income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Investment Law also provides that a Benefited Enterprise is entitled to accelerated depreciation on its property and
equipment that are productive assets as defined in 2005 Amendment.

The benefits available to a Benefited Enterprise are subject to the
fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, then it may be required to refund the amount of tax benefits, together with the CPI linkage adjustment and interest, or
other monetary penalty.

Tax Benefits Under the 2011 Amendment

The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and instead introduced new benefits for income generated by a
Preferred Company through its Preferred Enterprise (as such term is defined in the Investment Law) effective as of January 1, 2011 and onward. A Preferred Company is defined as either (i) a company incorporated in Israel and
not fully owned by a governmental entity or (ii) a limited partnership (a) that was registered under the Israeli Partnerships Ordinance and (b) all limited partners of which are companies incorporated in Israel, but not all of them
are governmental entities, which, in the case of the company and limited partnership referenced in clauses (i) and (ii), have, among other things, Preferred Enterprise status and are controlled and managed from Israel. Pursuant to the 2011
Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income derived by its Preferred Enterprise in 2011-2012, unless the Preferred Enterprise is located in a specified development zone, in
which case the rate will be 10%. Such corporate tax rate will be reduced to 12.5% and 7%, respectively, in 2013-2014 and to 12% and 6% in 2015 and thereafter, respectively. Income derived by a Preferred Company from a Special Preferred
Enterprise (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone.

Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 15% or
such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax will be withheld.

Furthermore, the 2011 Amendment provides relief with respect to tax paid on a dividend received by an Israeli company from profits of an Approved or Benefited Enterprise that was accrued during the
benefits period according to the Investment Law prior to its amendment, if the company distributing the dividend notifies the Israeli Tax Authority by June 30, 2015 that it is applying the provisions of the 2011 Amendment and the dividend is
distributed after the date of the notice.

The 2011 Amendment also provided transitional provisions to address companies already enjoying
current benefits. These transitional provisions provide, among other things, that: (i) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise that chose to receive grants before the 2011 Amendment
came into effect will remain subject to the provisions of the Investment Law as in effect on the date of such approval, while, provided that certain conditions are met, the 25% tax rate applied to income derived by an Approved Enterprise during the
benefit period will be replaced with the regular corporate income tax rate (24% in 2011 and 25% in 2012), unless a request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of
January 1, 2011 (such request should be made by way of an application to the Israeli Tax Authority by June 30, 2011 and may not be withdrawn); and



60



---

##### Table of Contents

(ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which had participated in an Alternative Benefits Program, before the 2011 Amendment
came into effect will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met. However, a company that has such an Approved Enterprise can file a request with the
Israeli Tax Authority, according to which its income derived as of January 1, 2011 will be subject to the provisions of the Investment Law, as amended in 2011; and (iii) a Benefited Enterprise can elect to continue to benefit from the
benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met, or file a request with the Israeli Tax Authority according to which its income derived as of January 1, 2011 will be subject to the
provisions of the Investment Law as amended in 2011.

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 prior to 2004 and we have been able to deduct in the past, for
tax purposes, a portion of our research and development expenses net of grants received from the OCS. Other research and development expenses that are not approved may be deducted for tax purposes in 3 equal installments during a 3-year period and
since 2004, all of our research and development expenses in Israel have been deducted for tax purpose over a 3-year period.

Capital Gains
Tax on Sales of Our Ordinary Shares

Israeli law generally imposes a capital gain tax on the sale of any capital assets by residents of
Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between
Israel and the shareholders country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the
relevant assets purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the
excess of the total capital gain over the inflationary surplus.

As of January 1, 2006, real gain is generally subject to tax at the
corporate tax rate (24% in 2011 and 25% as of 2012) if generated by a company, or at the rate of 20% if generated by an individual from an asset purchased on or after January 1, 2003, unless such individual shareholder claims a deduction for
financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such individual shareholder is considered a substantial shareholder at any time during the 12-month
period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 25%. Pursuant to the Tax Burden Law, the capital gain tax rate
applicable to individuals was raised from 20% to 25% (and from 25% to 30%) from 2012 and onwards. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an
initial public offering (that may be subject to a different tax arrangement).

Notwithstanding the foregoing, non-Israeli residents are exempt
from Israeli capital gain tax on any gains derived from the sale of shares of Israeli companies publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel, provided, inter-alia, that (i) such
capital gains are not derived from a permanent establishment in Israel, (ii) such shareholders are not subject to the Adjustments Law, and (iii) such shareholders did not acquire their shares prior to an initial public offering. However,
non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues
or profits of such non-Israeli corporation, whether directly or indirectly. In some instances where our shareholders may be liable to Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be subject to the
withholding of Israeli tax at the source.

Pursuant to the U.S.- Israel Tax Treaty, the sale, exchange or disposition of Ordinary Shares by a
person who (i) holds our Ordinary Shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty, and (iii) is entitled to claim the benefits afforded to such person by
the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if, among others, (i) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, (ii) the shareholder, being an individual, has been present in Israel for a period or periods aggregating to 183
days or more during the taxable year, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the sale, exchange or disposition of Ordinary Shares would be subject
to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.



61



---

##### Table of Contents

Taxation of Non-Resident Holders of Shares

Non-residents of Israel (either individuals or corporations) are generally subject to income tax on the receipt of dividends paid on non-publicly traded shares at the rate of 20% (25% as of 2012), or 25%
(30% as of 2012) if the dividend recipient is a shareholder that is considered 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. Dividends paid on publicly traded shares, like our Ordinary Shares, to non-Israeli residents, although subject to the same tax rates applicable to dividends paid for non-publicly traded shares, are
generally subject to Israeli withholding tax at a rate of 20% (25% as of 2012, so long as the shares are registered with a nominee company) (whether the recipient is a substantial shareholder or not), unless a different rate is provided
under an applicable tax treaty. However, distribution of dividends attributed to an Approved Enterprise, Benefited Enterprise or Preferred Enterprise to non-Israeli residents (either individuals or corporations) is subject to withholding tax at a
rate of 15%, unless a reduced tax rate is provided under an applicable tax treaty. An average rate will be set in case the dividend is distributed from mixed types of income (regular and Approved/ Benefited/ Preferred income).

Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of our Ordinary Shares who is a Treaty U.S. Resident is 25%. However,
generally, the maximum rate of withholding tax on dividends, not generated by an Approved Enterprise, that are paid to a U.S. corporation holding at least 10% or more of our outstanding voting capital from the start of the tax year preceding
the distribution of the dividend up until (and including) the distribution of the dividend, is 12.5%, provided that not more than 25% of our gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding
the foregoing, dividends generated by an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise are subject to withholding tax at the rate of 15% for such a U.S. corporate shareholder, provided that the condition related to our gross
income for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income derived from an Approved Enterprise, Benefited Enterprise or Preferred 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. U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for Untied States federal
income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.

For
information with respect to the applicability of Israeli capital gains taxes on the sale of Ordinary Shares by United States residents, see above  Capital Gains Tax on Sales of Our Ordinary Shares.

Documents on Display

We are subject to the informational requirements of the Exchange Act, applicable to foreign private issuers, and fulfill the obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission, or SEC. You may read and copy any document we file with the SEC without charge at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. 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
|-------- | ----------------------------------------------------------

Exchange Rate Risks

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

In 2011, 98% of our revenues and 70%
of our expenses were denominated in U.S. dollars. The net effect of the change in value of the U.S. dollar against other currencies in 2011 was an increase in our expenses (excluding financial expenses) of approximately $0.1 million. The net effect
of such changes in currency value on our revenues was immaterial.



62



---

##### Table of Contents

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

An increase of 10% in the value of the NIS relative to the
dollar in the year ended December 31, 2011 would have resulted in a net decrease in the dollar reporting value of our operating income of approximately $130,000, due to the adverse impact to our operating margins that we would experience as a
result of such an increase. On the other hand, a 10% decrease in value of the NIS relative to the dollar in the year ended December 31, 2011 would have caused a net increase in the dollar reporting value of our operating income of approximately
$130,000 for 2011, due to the favorable effect on our operating margins that would result from such devaluation of the NIS.

In addition, we
have a balance sheet exposure arising from assets and liabilities denominated in NIS. Any change of the exchange rates between the U.S. dollar and the NIS may create financial gain or loss. In 2011 the net effect of the change in value of the U.S.
dollar against the NIS resulting from balance sheet exposure was a decrease in financial expenses of $0.1 million.

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

An
instantaneous 10% depreciation in the NIS from their levels against the dollar as of December 31, 2011, with all other variables held constant, would decrease the fair value of our assets denominated in NIS, held at December 31, 2011, by
approximately $0.10 million and decrease the fair value of our liabilities denominated in NIS, held at December 31, 2011, by approximately $0.28 million, thereby causing a net increase in our shareholders equity of $0.18 million. On the
other hand, an instantaneous 10% appreciation in the NIS from its level against the dollar as of December 31, 2011, with all other variables held constant, would increase the fair value of our assets denominated in NIS, held at
December 31, 2011, by approximately $0.10 million and increase the fair value of our liabilities denominated in NIS, held at December 31, 2011, by approximately $0.28 million, thereby causing a net decrease in our shareholders equity
of $0.18 million.

Interest Rate Risks

As of December 31, 2011, we had long-term bank loans in the amount of $1.6 million that were subject to variable interest rates adjustable in accordance with LIBOR and the Israeli prime rate. Any
significant increase in LIBOR and the Israeli prime rate may have an adverse effect on our financial expenses and financial condition. Our exposure to fluctuations in LIBOR can be quantified as follows:

An increase in LIBOR by three hundred (300) basis points over the course of the entirety of the year ended December 31, 2011 would have
increased our financial expense related to our long-term bank loans by $0.03 million.



|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 15. | 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), our Chief Executive Officer (who serves as our co-principal
executive officer), and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2011. Based on this evaluation,
such principal executive and financial officers have concluded that, as of such date, our disclosure controls and procedures were effective.

(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). Our management,
with the participation of the Executive Chairman of our Board of Directors (who serves as our co-principal executive officer), our Chief Executive Officer (who serves as our co-principal executive officer), and our Chief Financial Officer, assessed
the effectiveness of our internal control over financial reporting as of December 31, 2011 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, our management has concluded that our internal control over financial reporting was effective as
of December 31, 2011.

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.



63



---

##### Table of Contents

(c)Attestation Report of the Registered Public Accounting Firm. Not applicable.

(d)Changes in Internal Control Over Financial Reporting.

Based on the evaluation conducted by it, with the participation of the Executive Chairman of our Board of Directors (who serves as our co-principal executive officer), our Chief Executive Officer (who
serves as our co-principal executive officer) and our Chief Financial Officer, pursuant to Rules 13a-15(d) and 15d-15(d) promulgated under the Exchange Act, our management (including such officers) has concluded that there has been no change in our
internal control over financial reporting that occurred during 2011, 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 us or calling us as follows:

ViryaNet, Inc.

112 Turnpike Road

Westborough, MA 01581

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, 2011 and 2010 and billed us
aggregate fees for professional services as described below:

Audit Fees

Audit fees in 2011 and 2010 amounted to $65,000 and $60,000, respectively, which primarily related to professional services rendered by Arik Eshel,
CPA & Assoc., PC in connection with the audit of our financial statements for such fiscal years and review of our interim financial statements for fiscal quarters of 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 2011 or 2010 (aside from the fees included under Audit Fees above).

Tax Fees

Tax fees
amounted to $17,000 and $10,000 in 2011 and 2010, 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 2011 or 2010 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 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. All such services for 2011 and 2010 were pre-approved by the Audit Committee in
accordance with these procedures.



64



---

##### Table of Contents

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

Not applicable.



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

Not applicable.



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

Not applicable.



|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.



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



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



65



---

##### Table of Contents

|     |  |                                                                                                                                                                                      |  |                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                     
|4.6  |  | Lease for approximately 6,000 square feet of office space in Jerusalem, Israel                                                                                                       |  | Filed as Exhibit 4.12.3 to the Companys annual report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.  
|     |  |                                                                                                                                                                                     
|4.7  |  | Lease for approximately 13,807 square feet in Southborough, Massachusetts.                                                                                                           |  | Filed as Exhibit 10.15 to the Companys Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.                 
|     |  |                                                                                                                                                                                     
|4.8  |  | Second Amendment and Extension of Lease for approximately 10,000 square feet of office space in Southborough, Massachusetts                                                          |  | Filed as Exhibit 4(a)(29) to the Companys annual report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.
|     |  |                                                                                                                                                                                     
|4.9  |  | Form of Indemnification Agreement entered into with directors and officers of the Company.                                                                                           |  | Filed as Exhibit 10.16 to the Companys Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.                 
|     |  |                                                                                                                                                                                     
|4.11 |  | The Companys 2005 International Share Option and Restricted Share Plan. and Isareli Share Option and Restricted Share Plan                                                          |  | Filed as Exhibit 4(c)(8) to the Companys annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by reference. 
|     |  |                                                                                                                                                                                     
|4.12 |  | Lease for approximately 10,372 square feet in Westborough, Massachusetts                                                                                                             |  | Filed as Exhibit 4.12 to the Companys annual report on Form 20-F for the year ended December 31, 2010 and incorporated herein by reference.    
|     |  |                                                                                                                                                                                     
|4.13 |  | Share Purchase Agreement dated as of June 30, 2011, by and Between the Company and Jerusalem Technology
Investments Ltd.                                                             |  | Filed as Exhibit 4.12 to the Companys annual report on Form 20-F for the year ended December 31, 2010 and incorporated herein by reference.    
|     |  |                                                                                                                                                                                     
|4.14 |  | Loan agreement with Bank Hapoalim dated December 18, 2011                                                                                                                            |  | Translated from the original Hebrew document. Filed herewith.                                                                                   
|     |  |                                                                                                                                                                                     
|4.15 |  | Loan agreements with Bank Otsar Ha-Hayal Dated July 6, 2011 and September 6, 2011                                                                                                    |  | Translated from the Original Hebrew document. Filed herewith.                                                                                   
|     |  |                                                                                                                                                                                     
|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) pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act                                     |  | Filed herewith                                                                                                                                  
|     |  |                                                                                                                                                                                     
|12.3 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act                                                                            |  | Filed herewith                                                                                                                                  
|     |  |                                                                                                                                                                                     
|13   |  | Certification of Chief Executive Officer, Executive Chairman and Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section
1350 |  | Filed herewith                                                                                                                                  
|     |  |                                                                                                                                                                                     
|15.1 |  | Consent of Arik Eshel, CPA & Assoc., PC                                                                                                                                              |  | Filed herewith                                                                                                                                  
|     |  |                                                                                                                                                                                     
|15.2 |  | Consent of Nexia ASR, for the audit of ViryaNet Pty Ltd.                                                                                                                             |  | Filed herewith                                                                                                                                  



66



---

##### Table of Contents

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 President and Chief Executive Officer

Date: May 14th, 2012



67



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011

IN U.S. DOLLARS

INDEX



|                                                        |  |      |           | 
|------------------------------------------------------- |  | ---- | --------- | 
|                                                        |  | Page |          
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  |      | F-2       | 
|                                                        | 
|Consolidated Balance Sheets                             |  |      | F-3-F-4   | 
|                                                        | 
|Consolidated Statements of Operations                   |  |      | F-5       | 
|                                                        | 
|Statements of Changes in Shareholders Equity           |  |      | F-6-F-8   | 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  |      | F-9-F-10  | 
|                                                        | 
|Notes to Consolidated Financial Statements              |  |      | F-11-F-40 | 







F-1



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES



LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

VIRYANET LTD.

We have audited the accompanying consolidated balance
sheets of ViryaNet Ltd. and its subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income (loss), shareholders equity (deficit), and cash flows for
each of the three years in the period ended December 31, 2011. 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, for each of the two years in the period ended December 31, 2010, during which that subsidiary generated revenue amounting to 7.0 percent of the
related consolidated totals of the Company. As of December 31, 2010, that subsidiarys assets constituted 9.8 percent of the consolidated total assets of the Company. The financial statements of that subsidiary as of, and for the two years
period ended, December 31, 2010 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 that subsidiary as of, and for the two years period ended,
December 31, 2010, is based solely on the report of the other auditors. The subsidiary was sold in 2011 and its results have been reclassified as discontinued operations in the Companys consolidated statements of operations.

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 as to 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 the Company as of December 31, 2011 and 2010, and its results of operations and cash flows for each of the three years in the period
ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

ARIK ESHEL,
CPA & ASSOCIATES., PC

New York, New York

May 14, 2012



F-2



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



U.S. dollars in thousands



|                                               |  |              |       |  |      |   |       | 
|---------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                               |  | December 31, |      
|                                               |  | 2010         |       |  | 2011 |  
|Assets                                         |  |              |       |  |      |   |       | 
|CURRENT ASSETS:                                |  |              |       |  |      |   |       | 
|Cash and cash equivalents                      |  | $            | 97    |  |      | $ | 104   | 
|Restricted cash                                |  |              |      |  |      |   | 140   | 
|Trade receivables                              |  |              | 592   |  |      |   | 511   | 
|Unbilled receivables                           |  |              | 474   |  |      |   | 367   | 
|Other accounts receivable and prepaid expenses |  |              | 200   |  |      |   | 271   | 
|                                               |  |              |       |  |      |   |       | 
|Total current assets                           |  |              | 1,363 |  |      |   | 1,393 | 
|                                               |  |              |       |  |      |   |       | 
|NON - CURRENT ASSETS:                          |  |              |       |  |      |   |       | 
|Severance pay fund                             |  |              | 1,018 |  |      |   | 1,001 | 
|Long-term receivable                           |  |              |      |  |      |   | 183   | 
|Other                                          |  |              | 20    |  |      |   | 25    | 
|                                               |  |              |       |  |      |   |       | 
|Total non - current assets                     |  |              | 1,038 |  |      |   | 1,209 | 
|                                               |  |              |       |  |      |   |       | 
|PROPERTY AND EQUIPMENT, net                    |  |              | 106   |  |      |   | 93    | 
|                                               |  |              |       |  |      |   |       | 
|GOODWILL                                       |  |              | 7,253 |  |      |   | 6,516 | 
|                                               |  |              |       |  |      |   |       | 
|Total assets                                   |  | $            | 9,760 |  |      | $ | 9,211 | 
|                                               |  |              |       |  |      |   |       | 



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

F-3



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



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



|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                                                                    |  | December 31, |         
|                                                                                                                                                                                                                                                    |  | 2010         |          |   | 2011 |  
|Liabilities and shareholders equity                                                                                                                                                                                                                |  |              |          |   |      |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                                                                                                |  |              |          |   |      |   |          |  
|Short-term bank credit                                                                                                                                                                                                                              |  | $            | 288      |   |      | $ | 115      |  
|Current maturities of long-term bank loans                                                                                                                                                                                                          |  |              | 500      |   |      |   | 498      |  
|Trade payables                                                                                                                                                                                                                                      |  |              | 386      |   |      |   | 717      |  
|Deferred revenues                                                                                                                                                                                                                                   |  |              | 3,356    |   |      |   | 2,587    |  
|Other accounts payable and accrued expenses                                                                                                                                                                                                         |  |              | 1,872    |   |      |   | 2,004    |  
|Convertible debt                                                                                                                                                                                                                                    |  |              | 517      |   |      |   |         |  
|Loan from related party                                                                                                                                                                                                                             |  |              | 79       |   |      |   |         |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                                                                           |  |              | 6,998    |   |      |   | 5,921    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                                                              |  |              |          |   |      |   |          |  
|Long-term bank loan, net of current maturities                                                                                                                                                                                                      |  |              | 589      |   |      |   | 1,001    |  
|Long-term convertible debt                                                                                                                                                                                                                          |  |              |         |   |      |   | 502      |  
|Long-term deferred revenues                                                                                                                                                                                                                         |  |              | 317      |   |      |   |         |  
|Long-term deferred rent payable                                                                                                                                                                                                                     |  |              |         |   |      |   | 82       |  
|Accrued severance pay                                                                                                                                                                                                                               |  |              | 1,499    |   |      |   | 1,435    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total long-term liabilities                                                                                                                                                                                                                         |  |              | 2,405    |   |      |   | 3,020    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|SHAREHOLDERS EQUITY:                                                                                                                                                                                                                               |  |              |          |   |      |   |          |  
|Share capital -                                                                                                                                                                                                                                     |  |              |          |   |      |   |          |  
|Ordinary Shares of NIS 5.0 par value - Authorized: 6,600,000 shares at December 31, 2010 and 2011; Issued and outstanding:
3,235,083 and 3,451,948 shares at December 31, 2010 and 2011, respectively                                               |  |              | 3,981    |   |      |   | 4,286    |  
|Preferred A Shares of NIS 5.0 par value - Authorized: 400,000 shares at December 31, 2010 and 2011; Issued and outstanding:
326,797 shares at December 31, 2010 and 2011. Aggregate liquidation preference of $ 2,500 at December 31, 2010 and 2011 |  |              | 369      |   |      |   | 369      |  
|Additional paid-in capital                                                                                                                                                                                                                          |  |              | 116,456  |   |      |   | 116,338  |  
|Accumulated other comprehensive income                                                                                                                                                                                                              |  |              | 55       |   |      |   |         |  
|Accumulated deficit                                                                                                                                                                                                                                 |  |              | (120,504 | ) |      |   | (120,723 | )
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total shareholders equity                                                                                                                                                                                                                          |  |              | 357      |   |      |   | 270      |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total liabilities and shareholders equity                                                                                                                                                                                                          |  | $            | 9,760    |   |      | $ | 9,211    |  
|                                                                                                                                                                                                                                                    |  |              |          |   |      |   |          |  

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



F-4



---

##### 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, |          
|                                                                                          |  | 2009                    |           |   | 2010 |   |             | 2011 | 
|REVENUES:                                                                                 |  |                         |           |   |      |   |             |      |  |   |           |  
|Software licenses                                                                         |  | $                       | 1,453     |   |      | $ | 1,574       |      |  | $ | 1,549     |  
|Maintenance and services                                                                  |  |                         | 8,298     |   |      |   | 8,735       |      |  |   | 8,122     |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|Total revenues                                                                            |  |                         | 9,751     |   |      |   | 10,309      |      |  |   | 9,671     |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|COST OF REVENUES:                                                                         |  |                         |           |   |      |   |             |      |  |   |           |  
|Software licenses                                                                         |  |                         | 62        |   |      |   | 68          |      |  |   | 56        |  
|Maintenance and services                                                                  |  |                         | 3,591     |   |      |   | 3,873       |      |  |   | 3,513     |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|Total cost of revenues                                                                    |  |                         | 3,653     |   |      |   | 3,941       |      |  |   | 3,569     |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|GROSS PROFIT                                                                              |  |                         | 6,098     |   |      |   | 6,368       |      |  |   | 6,102     |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|OPERATING EXPENSES:                                                                       |  |                         |           |   |      |   |             |      |  |   |           |  
|Research and development                                                                  |  |                         | 1,029     |   |      |   | 1,010       |      |  |   | 1,614     |  
|Selling and marketing                                                                     |  |                         | 2,546     |   |      |   | 2,782       |      |  |   | 2,847     |  
|General and administrative                                                                |  |                         | 1,648     |   |      |   | 1,551       |      |  |   | 1,708     |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|Total operating expenses                                                                  |  |                         | 5,223     |   |      |   | 5,343       |      |  |   | 6,169     |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|OPERATING INCOME (LOSS)                                                                   |  |                         | 875       |   |      |   | 1,025       |      |  |   | (67       | )
|FINANCIAL EXPENSES, net                                                                   |  |                         | 155       |   |      |   | 237         |      |  |   | 129       |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                              |  |                         | 720       |   |      |   | 788         |      |  |   | (196      | )
|TAXES ON INCOME                                                                           |  |                         | 47        |   |      |   | 69          |      |  |   | 9         |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                                  |  | $                       | 673       |   |      | $ | 719         |      |  | $ | (205      | )
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|DISCONTINUED OPERATIONS:                                                                  |  |                         |           |   |      |   |             |      |  |   |           |  
|Loss from discontinued operation net of income tax of $0                                  |  |                         | (177      | ) |      |   | (50         | )    |  |   | (136      | )
|Gain on disposal of discontinued operations net of income taxes of $0                     |  |                         |          |   |      |   |            |      |  |   | 122       |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS                                            |  |                         | (177      | ) |      |   | (50         | )    |  |   | (14       | )
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|NET INCOME (LOSS)                                                                         |  | $                       | 496       |   |      | $ | 669         |      |  | $ | (219      | )
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|BASIC NET EARNINGS (LOSS) PER SHARE                                                       |  |                         |           |   |      |   |             |      |  |   |           |  
|Continuing operations                                                                     |  | $                       | 0.21      |   |      | $ | 0.20        |      |  | $ | (0.06     | )
|Discontinued operations                                                                   |  |                         | (0.05     | ) |      |   | (0.01       | )    |  |   | 0.00      |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|Net income (loss)                                                                         |  | $                       | 0.16      |   |      | $ | 0. 19       |      |  | $ | (0.06     | )
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|DILUTED NET EARNINGS (LOSS) PER SHARE                                                     |  |                         |           |   |      |   |             |      |  |   |           |  
|Continuing operations                                                                     |  | $                       | 0.19      |   |      | $ | 0.18        |      |  | $ | (0.06     | )
|Discontinued operations                                                                   |  |                         | (0.05     | ) |      |   | (0.01       | )    |  |   | 0.00      |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|Net income (loss)                                                                         |  | $                       | 0.14      |   |      | $ | 0.17        |      |  | $ | (0.06     | )
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|Weighted average number of shares used in computing basic net earnings (loss) per share   |  |                         | 3,176,831 |   |      |   | 3,467,302   |      |  |   | 3,671,547 |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  
|Weighted average number of shares used in computing diluted net earnings (loss) per share |  |                         | 3,540,467 |   |      |   | 3,3,884,201 |      |  |   | 3,671,547 |  
|                                                                                          |  |                         |           |   |      |   |             |      |  |   |           |  

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



F-5



---

##### 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 (deficit) |         
|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-6



---

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



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

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



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 |   |       | Additionalpaid-in |  |  | Accumulated
othercomprehensive |  |  | Accumulated |     |  | Totalcomprehensive |   |         | Total shareholders | 
|                                                             |  | Number          |           |  | Amount           |   |       | Number            |  |  | Amount                         |  |  | capital     |     |  | income (loss)      |   |         | deficit             |  |   | income (loss) |   |  | equity |         
|Balance as of January 1, 2011                                |  |                 | 3,235,083 |  |                  |   | 3,981 |                   |  |  | 326,797                        |  |  |             | 369 |  |                    |   | 116,456 |                     |  |   | 55            |   |  |        | (120,504 | ) |  |   |      |   |  |   | 357  |  
|Stock based compensation                                     |  |                 |          |  |                  |   |      |                   |  |  |                               |  |  |             |    |  |                    |   | 102     |                     |  |   |              |   |  |        |         |   |  |   |      |   |  |   | 102  |  
|Release of restricted shares to employees and directors, net |  |                 | 123,861   |  |                  |   | 172   |                   |  |  |                               |  |  |             |    |  |                    |   | (172    | )                   |  |   |              |   |  |        |         |   |  |   |      |   |  |   |     |  
|Issuance of shares, in connection with interest expenses     |  |                 | 43,005    |  |                  |   | 61    |                   |  |  |                                |  |  |             |     |  |                    |   | (25     | )                   |  |   |               |   |  |        |          |   |  |   |      |   |  |   | 36   |  
|Issuance of shares to an investor                            |  |                 | 50,000    |  |                  |   | 72    |                   |  |  |                                |  |  |             |     |  |                    |   | (23     | )                   |  |   |               |   |  |        |          |   |  |   |      |   |  |   | 49   |  
|Comprehensive income:                                        |  |                 |           |  |                  |   |       |                   |  |  |                                |  |  |             |     |  |                    |   |         |                     |  |   |               |   |  |        |          |   |  |   |      |   |  |   |      |  
|Foreign currency translation adjustments                     |  |                 |          |  |                  |   |      |                   |  |  |                               |  |  |             |    |  |                    |   |        |                     |  |   | (55           | ) |  |        |         |   |  | $ | (55  | ) |  |   | (55  | )
|Net income                                                   |  |                 |          |  |                  |   |      |                   |  |  |                               |  |  |             |    |  |                    |   |        |                     |  |   |              |   |  |        | (219     | ) |  |   | (219 | ) |  |   | (219 | )
|                                                             |  |                 |           |  |                  |   |       |                   |  |  |                                |  |  |             |     |  |                    |   |         |                     |  |   |               |   |  |        |          |   |  |   |      |   |  |   |      |  
|Total comprehensive income                                   |  |                 |           |  |                  |   |       |                   |  |  |                                |  |  |             |     |  |                    |   |         |                     |  |   |               |   |  |        |          |   |  | $ | (274 | ) |  |   |      |  
|                                                             |  |                 |           |  |                  |   |       |                   |  |  |                                |  |  |             |     |  |                    |   |         |                     |  |   |               |   |  |        |          |   |  |   |      |   |  |   |      |  
|Balance as of December 31, 2011                              |  |                 | 3,451,949 |  |                  | $ | 4,286 |                   |  |  | 326,797                        |  |  | $           | 369 |  |                    | $ | 116,338 |                     |  | $ | *)           |   |  | $      | (120,723 | ) |  |   |      |   |  | $ | 270  |  
|                                                             |  |                 |           |  |                  |   |       |                   |  |  |                                |  |  |             |     |  |                    |   |         |                     |  |   |               |   |  |        |          |   |  |   |      |   |  |   |      |  



|*) | 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

CONSOLIDATED STATEMENTS OF CASH FLOWS



U.S. dollars in thousands

|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|-------------------------------------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                                       |  | Year ended December 31, |     
|                                                                                       |  | 2009                    |      |   | 2010 |   |      | 2011 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                  |  |                         |      |   |      |   |      |      |  |   |      |  
|Net income (loss)                                                                      |  | $                       | 496  |   |      | $ | 669  |      |  | $ | (219 | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities:   |  |                         |      |   |      |   |      |      |  |   |      |  
|Depreciation and amortization                                                          |  |                         | 512  |   |      |   | 313  |      |  |   | 91   |  
|Amortization of convertible notes premium, discounts and beneficial conversion feature |  |                         | (13  | ) |      |   | (13  | )    |  |   | (15  | )
|Accrued severance pay, net                                                             |  |                         | (121 | ) |      |   | 17   |      |  |   | (31  | )
|Stock based compensation related to directors and employees                            |  |                         | 156  |   |      |   | 95   |      |  |   | 102  |  
|Stock based compensation related to shares to consultants                              |  |                         |     |   |      |   | 39   |      |  |   |     |  
|Interest expenses paid in shares                                                       |  |                         |     |   |      |   | 72   |      |  |   | 36   |  
|Increase in other assets                                                               |  |                         |     |   |      |   |     |      |  |   | (5   | )
|Decrease (increase) in trade receivables, net and unbilled receivables                 |  |                         | 248  |   |      |   | (512 | )    |  |   | 84   |  
|Decrease (increase) in other accounts receivable and prepaid expenses                  |  |                         | 20   |   |      |   | (63  | )    |  |   | 86   |  
|Increase (decrease) in trade payables                                                  |  |                         | (200 | ) |      |   | (145 | )    |  |   | 356  |  
|Increase (decrease) in long-term and short-term deferred revenues, net                 |  |                         | (714 | ) |      |   | 39   |      |  |   | (913 | )
|Increase (decrease) in other accounts payable and accrued expenses                     |  |                         | 48   |   |      |   | (186 | )    |  |   | 603  |  
|Increase in long-term deferred rent payables                                           |  |                         |     |   |      |   |     |      |  |   | 82   |  
|Gain from disposal of subsidiaries                                                     |  |                         |     |   |      |   |     |      |  |   | (122 | )
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|Net cash provided by operating activities                                              |  |                         | 432  |   |      |   | 325  |      |  |   | 135  |  
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                  |  |                         |      |   |      |   |      |      |  |   |      |  
|Purchase of property and equipment                                                     |  |                         | (7   | ) |      |   | (100 | )    |  |   | (83  | )
|Long-term receivable                                                                   |  |                         |     |   |      |   |     |      |  |   | (192 | )
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|Net cash used in investing activities                                                  |  |                         | (7   | ) |      |   | (100 | )    |  |   | (275 | )
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                  |  |                         |      |   |      |   |      |      |  |   |      |  
|Short-term bank credit                                                                 |  |                         | 100  |   |      |   | (92  | )    |  |   | 186  |  
|Restricted cash                                                                        |  |                         |     |   |      |   |     |      |  |   | (140 | )
|Repayment of long-term loan                                                            |  |                         | (450 | ) |      |   | (450 | )    |  |   | (500 | )
|Proceeds from issuance of share capital                                                |  |                         |     |   |      |   |     |      |  |   | 50   |  
|Proceeds from long-term loan                                                           |  |                         |     |   |      |   | 250  |      |  |   | 550  |  
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|Net cash provided by (used in) financing activities                                    |  |                         | (350 | ) |      |   | (292 | )    |  |   | 146  |  
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                |  |                         | (62  | ) |      |   | 8    |      |  |   | 1    |  
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   |  |                         | 13   |   |      |   | (59  | )    |  |   | 7    |  
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                                     |  |                         | 143  |   |      |   | 156  |      |  |   | 97   |  
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|CASH AND CASH EQUIVALENTS AT THE END OF YEAR                                           |  | $                       | 156  |   |      | $ | 97   |      |  | $ | 104  |  
|                                                                                       |  |                         |      |   |      |   |      |      |  |   |      |  

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



F-9



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



U.S. dollars in thousands



SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:



|                                                                                                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                                                                                                         |  | Year ended December 31, |    
|                                                                                                                         |  | 2009                    |     |  | 2010 |   |     | 2011 | 
|Supplemental disclosure of cash flow activities:                                                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Cash paid during the year for:                                                                                           |  |                         |     |  |      |   |     |      |  |   |     | 
|Interest                                                                                                                 |  | $                       | 113 |  |      | $ | 103 |      |  | $ | 136 | 
|                                                                                                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Income tax                                                                                                               |  | $                       | 27  |  |      | $ | 79  |      |  | $ | 28  | 
|                                                                                                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Supplemental disclosure of non-cash investing and financing activities:                                                  |  |                         |     |  |      |   |     |      |  |   |     | 
|Refinancing of short-term bank debt on a long-term basis                                                                 |  | $                       |    |  |      | $ |    |      |  | $ | 360 | 
|                                                                                                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Conversion to shares of accrued interest expenses, waivers and deferred charges related to the convertible debt and
note |  | $                       |    |  |      | $ | 72  |      |  | $ | 36  | 
|                                                                                                                         |  |                         |     |  |      |   |     |      |  |   |     | 

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



F-10



---

##### 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., an Israeli corporation (the Company), 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 three wholly-owned subsidiaries in the United States (ViryaNet Inc. and its subsidiaries iMedeon Inc., which is not active, and Utility Partners
Inc. (collectively, ViryaNet U.S.)). During the year ended December 31, 2011, ViryaNet Inc sold ViryaNet PTY Ltd., its subsidiary in Australia (ViryaNet Australia), and the Company decided to strike off its wholly
inactive subsidiary in the U.K., ViryaNet Europe Ltd, (ViryaNet Europe), by filing an application with the U.K. Companies House in December 2011, which became effective in April 2012 (see Note 3).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | The Companys sales are generated in North America, Europe, and Asia-Pacific. As for major customers, see Note 14.
| | -- | ------------------------------------------------------------------------------------------------------------------



| | d) | The Company devotes substantial efforts towards activities such as research and development, and marketing and selling its products. In the course of such activities,
the Company and its subsidiaries have generated variable levels of revenues and operating results over the past several years and have not achieved positive working capital. There is no assurance that profitable operations or positive cash flows
from operations can be achieved on a continuing basis.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:

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

Use of estimates:

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Estimates are used for, but not limited to, collectability 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 and goodwill. Actual results could differ from those estimates.



F-11



---

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



Functional currency:

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

Restricted cash:

Restricted cash is a cash deposit the availability of which is contingent upon the Companys securing an equity investment (see Note 9).

Property and equipment:

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



|                                             |  |                                                                                     
|-------------------------------------------- |  | ------------------------------------------------------------------------------------
|                                             |  | %                                                                                   
|Computers, peripheral equipment and software |  | 33                                                                                  
|Office furniture and equipment               |  | 6 - 25                                                                              
|Leasehold improvements                       |  | Depreciated evenly over the shorter of the termof 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.



F-12



---

##### 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 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 were amortized using a method of
amortization that reflected the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. All finite-lived intangible assets were fully amortized as of December 31, 2010.

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



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

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

In September 2011, the Financial Accounting Standards Board (FASB) issued guidance on testing goodwill for impairment. The new
guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company did not elect to adopt early this
accounting guidance for its goodwill impairment test for fiscal 2011.

Under the existing standard (prior to the new guidance),
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 an 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 the consolidated Company represents a single reporting unit. The Companys
management believes that a step-one test performed on an enterprise value basis (equity value plus debt, less cash and cash equivalents) provides a better indication as to whether a potential impairment of goodwill exists and whether a step-two test
should be performed, than a step-one test performed on the Companys equity carrying value basis.

Because the
consolidated Company (including its subsidiaries) represents a single reporting unit, in performing step one of the impairment test, the consolidated Companys estimated fair value is compared to the consolidated Companys enterprise book
value as a whole. If the reporting units (i.e., the consolidated Company) estimated fair value is equal to or greater than its enterprise book value, no impairment of goodwill exists and the test is complete at the first step. However, if the
consolidated Companys enterprise book value is greater than its 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.



F-13



---

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



The estimated fair value of goodwill is determined by using an income approach. The
income approach estimates fair value based on the reporting units (i.e., the consolidated Companys) estimated future cash flows, 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 concerning matters such as discount rates, revenue projections, profit margin projections and terminal
value multiples.

The Company estimated its discount rates based 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.

The estimated fair value obtained by using the income approach is compared to fair value obtained under a market approach for reasonableness. The market approach estimates fair value by applying sales,
earnings and cash flow multiples to a reporting units operating performance. The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics as the relevant reporting unit (in this
case, the consolidated Company). The market approach requires the Company to make a series of assumptions relating to, among other things, the selection of comparable companies, comparable transactions and transaction premiums.

The estimated fair value of the consolidated Company as a reporting unit as of December 31, 2011 was substantially in excess of its
enterprise book value. Therefore, no impairment of goodwill was recorded.

Long-Lived Assets:

The Company reviews long-lived assets, such as property and equipment, and intangible assets, for impairment whenever events indicate that
the carrying amounts might not be recoverable. Recoverability of property and equipment and other intangible assets is measured by comparing the projected undiscounted net cash flows associated with those assets to the assets 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 2009, 2010 and 2011, no impairment
losses were recorded. All other intangible assets (excluding goodwill) were fully amortized as of December 31, 2010.

Income taxes:

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

The Company accounts for uncertain tax positions in accordance with the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), an interpretation of ASC 740, using a two-step approach. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is
more likely than not that the position will be



F-14



---

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



sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of
being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes.

As of December 31, 2010 and December 31, 2011, the Company recognized approximately $59 and $40, respectively, for unrecognized
tax benefits, interest and penalties, which are included in other accounts payable and accrued expenses in the accompanying balance sheets.

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

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 to the end user by the reseller
or the system integrator.

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

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

ASC 985-605-15 generally
requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the respective 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 an undelivered element 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.



F-15



---

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



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

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

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

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount
of the estimated loss on the entire contract. As of December 31, 2009, 2010 and 2011, 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 a right-of-return to its customers. The Company
generally provides a warranty period of three months. As of December 31, 2011 and 2010, the Companys provision for warranty cost was immaterial.

Advertising Costs:

The Company records advertising expenses as incurred,
which amounted to approximately $74, $33, and $14 in the years ended December 31, 2011, 2010, and 2009, respectively, and which have been included as part of selling and marketing expenses.

Research and development costs:

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



F-16



---

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



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 period between the date on which the products achieve technological feasibility and the date on which 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, trade receivables and long-term receivable.

The majority of the Companys cash
and cash equivalents are invested in dollar instruments with major banks in the United States and Israel. 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 North America,
Europe, Australia and the Far East. The Company and its subsidiaries perform ongoing credit evaluations of their customers and insure certain trade receivables under foreign trade risks insurance.

The Company and its subsidiaries had no off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option
contracts or other foreign hedging arrangements, as of December 31, 2011.

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 and financial information
available on such customers. In managements opinion, the allowance for doubtful accounts adequately covers anticipated losses with respect to the Companys accounts receivable. No allowance for doubtful accounts was required for the years
ended December 31, 2010 and 2011.

Long term convertible debt:

The Company presents the outstanding principal amount of its long term convertible debt 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 10). Accrued interest on the convertible debt is included in other accounts payable and accrued expenses. Since the first contractual redemption date was July 15, 2011, which is
less than twelve months from the prior balance sheet date, the convertible debt was reclassified as a short-term liability as of



F-17



---

##### 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 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)



December 31, 2010. The long-term convertible debt which is due on August 3, 2013, more than twelve months from the balance sheet date of December 31, 2011, was classified as a
long-term liability as of December 31, 2011.

Convertible note:

The Company presents the outstanding principal amount of a convertible note that it issued (see Note 12b) as a separate component in
shareholders equity in accordance with ASC Topic 815 (Derivatives and Hedging) and ASC Topic 480 (Distinguishing Liabilities from Equity). The convertible note is classified as an equity component since it has no
repayment date, does not bear any interest, and may only be converted into the Companys ordinary shares, par value NIS 5.0 per share (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 income or loss from continuing operations and from discontinued operations 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 and potentially dilutive
securities, as calculated using the treasury stock method, outstanding during the period. Potentially dilutive securities include shares issuable upon conversion of the convertible debt represented by the convertible note.

Outstanding stock options and unvested restricted shares, warrants and shares issuable upon conversion of the long-term convertible debt
have been excluded from the calculation of basic and diluted net earnings or loss per share to the extent that such securities are anti-dilutive. The total weighted-average number of shares excluded from the calculation of diluted net earnings or
loss per share was 828,030 ,719,666 and 464,256 for the years ended December 31, 2009, 2010 and 2011, respectively.



F-18



---

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



The following table summarizes information related to the computation of basic and
diluted net earnings (loss) per share for the years indicated (U.S. dollars in thousands, except share and per share data).



|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------------- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                                                                                                             |  | Year ended December 31 |          
|                                                                                                             |  | 2009                   |           |   | 2010 |  |           | 2011 | 
|Income (loss) from continuing operations attributable to ordinary shares                                     |  |                        | 673       |   |      |  | 719       |      |  |  | (205      | )
|Loss from discontinued operations attributable to ordinary shares                                            |  |                        | (177      | ) |      |  | (50       | )    |  |  | (14       | )
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           |  
|Net income (loss) attributable to ordinary shares                                                            |  |                        | 496       |   |      |  | 669       |      |  |  | (219      | )
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           |  
|Weighted average number of shares outstanding used in basic earnings (loss) per share calculation            |  |                        | 3,176,831 |   |      |  | 3,467,302 |      |  |  | 3,671,547 |  
|Potential shares issuable upon conversion of convertible note                                                |  |                        | 363,636   |   |      |  | 363,636   |      |  |  |          |  
|Additional shares underlying unvested stock                                                                  |  |                        |          |   |      |  | 53,263    |      |  |  |          |  
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           |  
|Weighted average number of ordinary shares outstanding used in diluted earnings (loss) per share calculation |  |                        | 3,540,467 |   |      |  | 3,884,201 |      |  |  | 3,671,547 |  
|                                                                                                             |  |                        |           |   |      |  |           |      |  |  |           |  
|BASIC NET EARNINGS (LOSS) PER SHARE (US$)                                                                    |  |                        |           |   |      |  |           |      |  |  |           |  
|Continuing operations                                                                                        |  |                        | 0.21      |   |      |  | 0.20      |      |  |  | (0.06     | )
|Discontinued operations                                                                                      |  |                        | (0.05     | ) |      |  | (0.01     | )    |  |  | 0.00      |  
|Net income (loss)                                                                                            |  |                        | 0.16      |   |      |  | 0. 19     |      |  |  | (0.06     | )
|DILUTED NET EARNINGS (LOSS) PER SHARE (US$)                                                                  |  |                        |           |   |      |  |           |      |  |  |           |  
|Continuing operations                                                                                        |  |                        | 0.19      |   |      |  | 0.18      |      |  |  | (0.06     | )
|Discontinued operations                                                                                      |  |                        | (0.05     | ) |      |  | (0.01     | )    |  |  | 0.00      |  
|Net income (loss)                                                                                            |  |                        | 0.14      |   |      |  | 0.17      |      |  |  | (0.06     | )

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 statements of operations.



F-19



---

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



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

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

The following table summarizes the various categories of expense recognized for share-based compensation
as a result of the application of ASC 718:



|                                       |  |      |     |  |      |   |    |      |  |   |     | 
|-------------------------------------- |  | ---- | --- |  | ---- | - | -- | ---- |  | - | --- | 
|                                       |  | 2009 |     |  | 2010 |   |    | 2011 | 
|Cost of revenues                       |  | $    | 14  |  |      | $ | 4  |      |  | $ |    | 
|Research and development cost          |  |      | 5   |  |      |   | 2  |      |  |   |    | 
|Selling and marketing expenses         |  |      | 5   |  |      |   | 39 |      |  |   | 5   | 
|General and administrative expenses    |  |      | 132 |  |      |   | 50 |      |  |   | 97  | 
|                                       |  |      |     |  |      |   |    |      |  |   |     | 
|Total stock-based compensation expense |  | $    | 156 |  |      | $ | 95 |      |  | $ | 102 | 
|                                       |  |      |     |  |      |   |    |      |  |   |     | 

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 2009, 2010 or 2011.

All restricted shares granted to employees in 2009, 2010 and 2011 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, 2010 and 2011 was $0.40, $0.72 and $1.10, respectively.

Severance pay:

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

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

Severance expenses for the years ended December 31, 2009, 2010 and 2011 amounted to approximately $83, $97 and $92 respectively.



F-20



---

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



Sale of receivables:

From time to time, the Company sells certain of its accounts receivable to financial institutions, within the normal course of business.
Where such sales constitute a true sale, as determined in ASC Topic 860 (Transfers and Servicing), the relevant receivable is derecognized and cash recorded. Where receivables are sold and the transfer of the rights to future cash
receipts are related to underlying sales transactions for which the revenue has not been recognized but is ultimately expected to be recognized, the receivable is not derecognized and a liability is recorded as deferred revenue until the liability
is discharged through the recognition of the revenue.

The balance of sold receivables amounted to approximately $93 and $166
as of December 31, 2010 and 2011, respectively. Sales of accounts receivable, related to transactions for which revenue has been recognized, amounted to $45 and $45 as of December 31, 2010 and 2011, respectively, and sales of accounts
receivable, related to an annual renewal of support and maintenance transactions for which the revenue has been recorded as deferred revenue and is ultimately expected to be recognized as revenue, amounted to $48 and $121 as of December 31,
2010 and 2011, respectively.

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

Fair value of financial instruments:

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

The carrying amount reported in the balance sheet for cash and cash equivalents, trade receivables, unbilled receivables, other accounts
receivable, short-term bank credit, current portion of debt, trade payables and other accounts payable approximates their fair values due to the short-term maturity of such instruments. The carrying amount reported in the balance sheet for long-term
receivable approximates its fair value, considering the interest rates charged and the security received in connection with the receivable.

The carrying amount of the Companys borrowings under its long- term debt and convertible debt approximates fair value because the interest rates on the instruments fluctuate due to variable rates of
interest or represent borrowing rates that are also available in the market on similar terms.

Reclassification:

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

Impact of recently issued accounting standards:

In September 2011, FASB issued a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors
to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment,
that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update will be effective for the Company beginning January 1, 2012 and early adoption is permitted. The Company did not elect to
adopt it early and does not expect that the adoption of this new guidance will have a material impact on its financial statements.



F-21



---

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



In June 2011, FASB issued guidance to require an entity to present the total of
comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the option to
present the components of other comprehensive income as part of the statement of equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. In December 2011, FASB indefinitely deferred certain provisions
of this guidance. The Company does not expect that the adoption of this new guidance will have a material impact on its financial statements.

In May 2011, FASB issued guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International
Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements, and will become effective for the Company beginning
January 1, 2012. The Company does not expect that the adoption of this new guidance will have a material impact on its financial statements.

NOTE 3:- DISCONTINUED OPERATIONS

During fiscal year 2011, the Company decided to explore strategic alternatives to its direct sales activities in
Australia, which culminated in the sale of ViryaNet Australia, in order to focus on indirect channels in the Asia-Pacific region. ViryaNet Australias revenues and assets accounted for, and constituted (respectively) less than 10% of the
Companys consolidated revenues and assets during each of the last three fiscal years. On December 31, 2011, the Company completed the sale of 100% of the common stock of ViryaNet Australia to the Hosking Family Trust, owned by the former
general manager of ViryaNet Australia, Mark Hosking (the Buyer), for a consideration of $340. The consideration is to be paid as follows; $100 was due and paid on January 2, 2012 and the balance of $240 is to be paid over a period
of four years in equal quarterly installment starting March 31, 2012, and bears interest at a fixed annual rate of 3.5%, paid quarterly. The balance of the Buyers payment obligation is secured through a personal guarantee provided by the
Buyer. The Buyers payments during fiscal year 2012 in an aggregate amount of $157 are classified as current maturities within prepaid and other receivables in current assets, and the payments to be made beyond December 31, 2012, in an
aggregate amount of $183, are classified as a long-term receivable on the Companys consolidated balance sheets.

During
fiscal year 2011, the Company decided to strike off its wholly owned subsidiary in the U.K., ViryaNet Europe, due to inactivity, by filing an application with the U.K. Companies House in December 2011, which became effective in April 2012.



F-22



---

##### 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 3:- DISCONTINUED OPERATIONS (CONT.)



Information related to ViryaNet Australia and ViryaNet Europe (the Former
Subsidiaries) has been reflected in the accompanying consolidated financial statements as follows:



| |  |  | Balance sheets  As a result of the disposal of both Former Subsidiaries, there are no remaining assets and liabilities related to those Former
Subsidiaries in the Companys consolidated balance sheets as of December 31, 2011. The Former Subsidiaries assets and liabilities were included in the Companys consolidated balance sheets as of December 31, 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Statements of operations  The Former Subsidiaries loss from operations for the three year period ended December 31, 2011 has been
classified as discontinued operations. Loss from discontinued operations for the year ended December 31, 2011 also includes additional gain and loss on disposal of the Former Subsidiaries, as further described below.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Statements of cash flows  The Former Subsidiaries cash flows prior to their disposal for the three year period ended December 31, 2011
have been included in, and not separately reported from, the Companys cash flows. The consolidated statements of cash flows for the year ended December 31, 2011 also includes the effects of the disposal of the Former Subsidiaries.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sale and disposal of consolidated subsidiaries in which the Company has no continuing involvement are
classified as discontinued operations. The gains or losses on these transactions are classified within discontinued operations in the Companys consolidated statements of operations. The Company has also reclassified its historical results of
operations to remove the operations of these entities from its revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations.

Discontinued operations are as follows:



|                   |  |          |                |  |          |   |     |             |  |   |      |  
|------------------ |  | -------- | -------------- |  | -------- | - | --- | ----------- |  | - | ---- | -
|Subsidiary         |  | Location |                |  | Proceeds |   |     | Gain (Loss) | 
|ViryaNet Australia |  |          | Australia      |  |          | $ | 340 |             |  | $ | 250  |  
|ViryaNet Europe    |  |          | United Kingdom |  |          |   |    |             |  |   | (128 | )

The table below summarizes certain financial information with respect to the Companys discontinued
operations for the periods presented:



|                                                                               |  |                        |      |   |      |   |     |      |  |   |      |  
|------------------------------------------------------------------------------ |  | ---------------------- | ---- | - | ---- | - | --- | ---- |  | - | ---- | -
|                                                                               |  | Year ended December 31 |     
|                                                                               |  | 2009                   |      |   | 2010 |   |     | 2011 | 
|Revenues                                                                       |  | $                      | 676  |   |      | $ | 811 |      |  | $ | 790  |  
|                                                                               |  |                        |      |   |      |   |     |      |  |   |      |  
|Loss from discontinued operations (No income tax expense or benefit)           |  |                        | (177 | ) |      |   | (50 | )    |  |   | (136 | )
|Gain on disposal of discontinued operations (No income tax expense or benefit) |  |                        |     |   |      |   |    |      |  |   | 122  |  
|                                                                               |  |                        |      |   |      |   |     |      |  |   |      |  
|Total loss from disposal of discontinued operations                            |  | $                      | (177 | ) |      | $ | (50 | )    |  | $ | (14  | )
|                                                                               |  |                        |      |   |      |   |     |      |  |   |      |  



F-23



---

##### 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 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES



Other accounts receivable and prepaid expenses consisted of the following:



|                                               |  |              |     |  |      |   |     | 
|---------------------------------------------- |  | ------------ | --- |  | ---- | - | --- | 
|                                               |  | December 31, |    
|                                               |  | 2010         |     |  | 2011 |  
|Prepaid expenses                               |  | $            | 195 |  |      | $ | 61  | 
|Current maturities of long-term receivable (*) |  |              |     |  |      |   | 157 | 
|Government authorities                         |  |              | 5   |  |      |   | 53  | 
|                                               |  |              |     |  |      |   |     | 
|                                               |  | $            | 200 |  |      | $ | 271 | 
|                                               |  |              |     |  |      |   |     | 



|* | See Note 3
|- | ----------

NOTE 5:- PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:



|                                             |  |              |       |  |      |   |       | 
|-------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                             |  | December 31, |      
|                                             |  | 2010         |       |  | 2011 |  
|Cost:                                        |  |              |       |  |      |   |       | 
|Computers, peripheral equipment and software |  | $            | 1,733 |  |      | $ | 1,379 | 
|Office furniture and equipment               |  |              | 338   |  |      |   | 196   | 
|Leasehold improvements                       |  |              | 314   |  |      |   | 91    | 
|                                             |  |              |       |  |      |   |       | 
|                                             |  |              | 2,385 |  |      |   | 1,666 | 
|                                             |  |              |       |  |      |   |       | 
|Accumulated depreciation                     |  |              | 2,279 |  |      |   | 1,573 | 
|                                             |  |              |       |  |      |   |       | 
|Depreciated cost                             |  | $            | 106   |  |      | $ | 93    | 
|                                             |  |              |       |  |      |   |       | 

Depreciation expense for the years ended December 31, 2009, 2010 and 2011 was approximately $89, $83
and $45, respectively.

NOTE 6:- GOODWILL



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

The changes in
the carrying amount of goodwill for the years ended December 31, 2010 and 2011 were as follows:



|                                           |  |   |       |  
|------------------------------------------ |  | - | ----- | -
|Balance as of January 1, 2010              |  | $ | 7,169 |  
|Foreign currency translation adjustments   |  |   | 84    |  
|                                           |  |   |       |  
|Balance as of December 31, 2010            |  |   | 7,253 |  
|Decrease due to sale of ViryaNet Australia |  |   | (737  | )
|                                           |  |   |       |  
|Balance as of December 31, 2011            |  | $ | 6,516 |  
|                                           |  |   |       |  



F-24



---

##### 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 7:- SHORT-TERM BANK CREDIT



|         |  |                                                      |       |  |              |   |     |      |  |   |     | 
|-------- |  | ---------------------------------------------------- | ----- |  | ------------ | - | --- | ---- |  | - | --- | 
|         |  | Weighted AverageInterest Rate as
ofDecember 31, 2011 |       |  | December 31, |  
|Currency |  | %                                                    |       |  | 2010         |   |     | 2011 | 
|U.S. $   |  |                                                      | 11.50 |  |              | $ | 150 |      |  | $ |    | 
|NIS      |  |                                                      | 7.82  |  |              | $ | 138 |      |  | $ | 115 | 
|         |  |                                                      |       |  |              |   |     |      |  |   |     | 
|         |  |                                                      |       |  |              | $ | 288 |      |  | $ | 115 | 
|         |  |                                                      |       |  |              |   |     |      |  |   |     | 

The Company has credit facilities with Bank Hapoalim (the Bank) that enable it to borrow
funds under a revolving line of credit. The line of credit denominated in NIS currency accrues interest on the daily outstanding balance at the prime rate plus 3.3% per annum. During 2010 and 2011 the Company utilized a short-term credit
denominated in US dollars, which accrued interest at a fixed rate of 11.5%.

On December 18, 2011 the Bank agreed to convert
the short term credit in the amount of $360 and a long-term loan in the amount of $100 to a long-term loan in the amount of $460, payable in 11 monthly payments starting February 6, 2013 (see Note 9).

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

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

On July 10, 2011 the Company received from the
Bank a waiver of the bank covenants for the remaining quarters of 2011 and for the first quarter of 2012. In connection with the waiver the Company paid fees of $15 to the bank.

The Companys debt to the Bank is 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 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Other accounts payable and accrued expenses consisted of the following:



|                               |  |              |       |  |      |   |       | 
|------------------------------ |  | ------------ | ----- |  | ---- | - | ----- | 
|                               |  | December 31, |      
|                               |  | 2010         |       |  | 2011 |  
|Employees and payroll accruals |  | $            | 1,216 |  |      | $ | 1,383 | 
|Accrued expenses               |  |              | 656   |  |      |   | 621   | 
|                               |  |              |       |  |      |   |       | 
|                               |  | $            | 1,872 |  |      | $ | 2,004 | 
|                               |  |              |       |  |      |   |       | 



F-25



---

##### 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 9:- LONG-TERM BANK LOAN



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



|                          |  |          |  |                |  |              |      |   |      |   |       |  
|------------------------- |  | -------- |  | -------------- |  | ------------ | ---- | - | ---- | - | ----- | -
|                          |  |          |  | Interest       |  | December 31, |     
|Bank                      |  | Currency |  | Rate           |  | 2010         |      |   | 2011 |  
|Bank Hapoalim (1)         |  | U.S. $   |  | LIBOR*+ 3.25%  |  | $            | 889  |   |      | $ | 489   |  
|Bank Hapoalim (2)         |  | U.S. $   |  | LIBOR*+ 4.30%  |  |              | 200  |   |      |   |      |  
|Bank Hapoalim (3)         |  | U.S. $   |  | LIBOR**+ 5.70% |  |              |     |   |      |   | 460   |  
|Bank Otsar Hahayal (4a)   |  | NIS      |  | PRIME+3.50%    |  |              |     |   |      |   | 197   |  
|Bank Otsar Hahayal (4b)   |  | NIS      |  | PRIME+3.50%    |  |              |     |   |      |   | 353   |  
|Less - current maturities |  |          |  |                |  |              | (500 | ) |      |   | (498  | )
|                          |  |          |  |                |  |              |      |   |      |   |       |  
|                          |  |          |  |                |  | $            | 589  |   |      | $ | 1,001 |  
|                          |  |          |  |                |  |              |      |   |      |   |       |  



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

|** | 1 Month LIBOR
|-- | -------------

|(1) | Payable monthly through January 1, 2013.
|--- | ----------------------------------------

|(2) | On May 20, 2010, the Bank agreed to convert an outstanding short term credit in the amount of $250 to a long-term loan payable in 10 quarterly installments
commencing on September 2, 2010. The balance of the loan in the amount of $100 was converted on December 18, 2011 to a long-term loan (see (3) below).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | On December 18, 2011, the Bank agreed to convert an outstanding short term credit in the amount of $360 and a long-term loan balance in the amount of $100 to a
long-term loan in the total amount of $460, payable in 11 monthly payments starting February 6, 2013. The interest is payable monthly starting January 6, 2012. There was no gain or loss from the conversion. The conversion was accounted for
as a modification of debt under ASC 470-50-40-14.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | a. On June 28, 2011 the Company received an approval from the State Guaranteed Medium Business Assistance Fund (the Fund) for a loan in an amount of
NIS 2,100,000, guaranteed by the Israeli government. The disbursement of the loan to the Company was contingent upon its securing an equity investment of at least NIS 500,000. The required equity investment may be effected in one of two manners:
(i) a restricted shareholders loan payable after five years, or (ii) an equity investment in which the investors receive Company shares. The Company elected the equity investment route.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On July 7, 2011, following the receipt by the Company of NIS 170,000, or $50, via an equity investment by Jerusalem Technology
Investments pursuant to the share purchase agreement dated June 30, 2011 (see Note 12(c)), thereby meeting, in part, the condition for disbursement of the loan, the Company received part of the total amount approved to it under the loan
NIS 750,000 from the Funds participating bank, Bank Otsar Hahayal. The loan bears annual interest at the Israeli prime rate, plus 3.5% (equal to 8.57% as of the time of the initial loan disbursement), and the principal and interest are
payable in 49 equal monthly payments of NIS 18,080 each (which includes the interest as well), beginning on August 6, 2012. Interest is payable on a monthly basis beginning on August 6, 2011.

b. The balance of the loan, or NIS 1,350,000, was disbursed to the Company on September 6, 2011. The loan bears annual interest at
the Israeli prime rate, plus 3.5% (equal to 8.57% as of the time of the initial loan disbursement), and the principal and interest are payable in 49 equal monthly payments of NIS 32,545 each (which includes the interest as well), beginning on
September 8, 2012. Interest is payable on a monthly basis beginning on October 7, 2011.

c. Repayment of the loan is guaranteed
by the Israeli government and by a personal guarantee of Samuel HaCohen, the Companys Chairman of the Board of Directors.



F-26



---

##### 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 9:- LONG-TERM BANK LOAN (CONT.)



Since the Company did not yet receive the balance of NIS 330,000 in equity investments
as of the date of the disbursement of the loan balance (September 6, 2011), as required under the loan terms set by the Fund, Bank Otsar Hahayal restricted the Companys access to an amount of $140 in cash from the loan proceeds until such time
as the Company receives the remaining required NIS 330,000 of equity investments. This $140 amount is classified as restricted cash in the Companys current assets.



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



|      |  |              |       |  |      |   |       | 
|----- |  | ------------ | ----- |  | ---- | - | ----- | 
|      |  | December 31, |      
|      |  | 2010         |       |  | 2011 |  
|2011  |  | $            | 500   |  |      | $ |      | 
|2012  |  |              | 500   |  |      |   | 498   | 
|2013  |  |              | 89    |  |      |   | 619   | 
|2014  |  |              |      |  |      |   | 132   | 
|2015  |  |              |      |  |      |   | 144   | 
|2016  |  |              |      |  |      |   | 106   | 
|      |  |              |       |  |      |   |       | 
|Total |  | $            | 1,089 |  |      | $ | 1,499 | 
|      |  |              |       |  |      |   |       | 



| | c. | For details concerning charges, bank covenants and security interests, see Notes 7 and 11(c).
| | -- | ---------------------------------------------------------------------------------------------

NOTE 10:- LONG TERM CONVERTIBLE DEBT

Long  term convertible debt was as follows:



|                                        |  |          |     |   |              |   |     |      |  |   |     | 
|--------------------------------------- |  | -------- | --- | - | ------------ | - | --- | ---- |  | - | --- | 
|                                        |  | Interest |     |   | December 31, |  
|                                        |  | rate     |     |   | 2010         |   |     | 2011 | 
|Convertible debt:                       |  |          |     |   |              |   |     |      |  |   |     | 
|Par                                     |  |          | 7.5 | % |              | $ | 480 |      |  | $ | 480 | 
|Deemed premium, net *                   |  |          |     |   |              |   | 37  |      |  |   | 22  | 
|                                        |  |          |     |   |              |   |     |      |  |   |     | 
|Reclassification to current liabilities |  |          |     |   |              |   | 517 |      |  |   |    | 
|                                        |  |          |     |   |              |   |     |      |  |   |     | 
|                                        |  |          |     |   |              | $ |    |      |  | $ | 502 | 
|                                        |  |          |     |   |              |   |     |      |  |   |     | 



|* | Amortization of the deemed premium added to income was $13 and $15 annually for 2010 and 2011, respectively.
|- | ------------------------------------------------------------------------------------------------------------

The convertible debt owed to LibertyView Special Opportunities Fund, L.P. (LibertyView) bears interest at a rate of 7.5%,
payable quarterly, is due on August 3, 2013 and may be converted to the Companys 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 had the
option to request early repayment on July 15, 2011, which it did not.



F-27



---

##### 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 10:- LONG TERM CONVERTIBLE DEBT (CONT.)



As of December 31, 2011, the balance of the convertible debt in the amount of $ 502
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, 2011, and, as such, the debt can be called for repayment only on the next exit date, which is the due date, August 3, 2013.

Since the potential redemption date of July 15, 2011 was less than twelve months from the December 31, 2010 balance sheet date,
the convertible debt of $517 was classified as a short-term liability as of December 31, 2010.

NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES



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

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

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

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

Through December 31, 2011, the Company had paid or accrued royalties to the OCS in an amount of $31. As of December 31, 2011,
the total contingent liability to the OCS amounted to $400.



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

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

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



|                        |  |            |       | 
|----------------------- |  | ---------- | ----- | 
|Year ended December 31, |  | Facilities |      
|2012                    |  |            | 300   | 
|2013                    |  |            | 326   | 
|2014                    |  |            | 314   | 
|2015                    |  |            | 189   | 
|2016                    |  |            | 197   | 
|                        |  |            |       | 
|Total                   |  | $          | 1,326 | 
|                        |  |            |       | 



F-28



---

##### 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 11:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)



ViryaNet, Inc., the Companys US subsidiary located in Massachusetts, signed a new
office lease agreement in February 2011 and relocated its facilities in June 2011 to a new location in Westborough, Massachusetts. ViryaNet Inc. leases 10,372 square feet of office space, which is utilized primarily for administrative, marketing,
sales, service and technical support purposes, with an average annual rent of approximately $165, payable starting in January 2012. The non-cancellable lease agreement for these premises expires on December 31, 2016 and contains a rent
escalation clause. The long-term deferred rent payable in the balance sheet as of December 31, 2011 includes accrued fees for these facilities that are paid over the lease period.

Lease expenses in respect of facilities were approximately $349, $349 and $343 for the years ended December 31, 2009, 2010 and 2011,
respectively.

Lease expenses in respect of motor vehicles for the years ended December 31, 2009, 2010 and 2011 were
approximately $163, $165 and $150, respectively. In addition, as of December 31, 2011, future minimum rental payments for motor vehicles leased for the years 2012, 2013 and 2014 were $62, $29 and $3, respectively.



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



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



| | 2. | The Company obtained a bank guarantee in an amount of $69, in order to secure an office lease agreement.
| | -- | --------------------------------------------------------------------------------------------------------

NOTE 12:- SHAREHOLDERS EQUITY

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

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

General:



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

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



F-29



---

##### 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 12:- SHAREHOLDERS EQUITY (CONT.)



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

As of December 31, 2010 and
2011, the total amount of the convertible note of $ 600 was classified as equity in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities and ASC 480, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.



| | c. | On June 30, 2011, the Company entered into a share purchase agreement with Jerusalem Technology Investments Ltd, (the Investor), a company with which
two of the Companys directorsSamuel HaCohen and Vladimir Morgenstern and one of the Companys major shareholders (Jerusalem High-tech Founders, Ltd.) are affiliated. Pursuant to the agreement, the Investor committed to invest
in the Company an amount of $250 at a price of $1.00 per Ordinary Share, within 31 days from the date of the agreement, in return for 250,000 of our Ordinary Shares. 50,000 of those Ordinary Shares were issued on June 30, 2011, upon a payment
of $50 by the Investor. In February 2012, the Investor invested an additional $75, a portion of its total commitment. This equity financing constituted an extraordinary transaction with an entity in which two of the Companys directors
possessed a personal interest and was therefore approved by the Companys audit committee and Board of Directors in accordance with the requirements of the Israeli Companies Law.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | f. | During 2011 the Company issued 43,005 Ordinary Shares to investors in payment of interest expenses.
| | -- | ---------------------------------------------------------------------------------------------------

Stock  based compensation:



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

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



F-30



---

##### 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 12:- SHAREHOLDERS EQUITY (CONT.)



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

Any options that remain available for grants under any of the Companys Prior 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 Prior 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, 2011, an aggregate of 163,251 Ordinary Shares of the Company were available for future grant.



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



| | c. | During the year ended December 31, 2010, the Company granted to the Companys employees and directors 229,582 restricted shares. Of the restricted shares that
were granted, 83,000 shares were released in 2010 and 146,582 shares will be released ratably on an annual basis over a three-year release period, starting from the date of grant. Release of the restrictions from some of the restricted Shares is
subject to acceleration upon certain events such as a merger or acquisition. The Company has accounted for this award in accordance with ASC 718-10. The total grant date fair value of $165, reflecting the quoted market price of the Companys
Ordinary Shares as of the date of grant over the purchase price of $0, is recorded as compensation expense ratably over the release period of the restricted shares. Compensation expense of approximately $51 and $20 was recognized during the years
ended December 31, 2010 and 2011, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | During the year ended December 31, 2011, the Company granted to the Companys directors 75,000 restricted shares, which were released from restriction during
2011. The Company has accounted for this award in accordance with ASC 718-10. The total grant date fair value of $83, reflecting the quoted market price of the Companys Ordinary Shares as of the date of grant over the purchase price of $0, was
recorded as compensation expense ratably over the release period of the restricted shares. Compensation expense of approximately $83 was recognized during the year ended December 31, 2011.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



F-31



---

##### 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 12:- SHAREHOLDERS EQUITY (CONT.)



|                                    |  |                              |        |   |                                                 |  |      |                         |  |  |                               |  |  |   |       | 
|----------------------------------- |  | ---------------------------- | ------ | - | ----------------------------------------------- |  | ---- | ----------------------- |  |  | ----------------------------- |  |  | - | ----- | 
|                                    |  | Year ended December 31, 2011 |       
|                                    |  | Numberofoptions              |        |   | Weightedaverageremainingcontractualterm (years) |  |      | Aggregateintrinsicvalue |  |  | Weightedaverageexercise price | 
|Outstanding - beginning of the year |  |                              | 2,600  |   |                                                 |  |      |                         |  |  |                               |  |  | $ | 10.02 | 
|Expired                             |  |                              | (2,400 | ) |                                                 |  |      |                         |  |  |                               |  |  | $ | 10.00 | 
|Outstanding - end of the year       |  |                              | 200    |   |                                                 |  | 0.20 |                         |  |  |                              |  |  | $ | 10.30 | 
|                                    |  |                              |        |   |                                                 |  |      |                         |  |  |                               |  |  |   |       | 
|Vested and exercisable              |  |                              | 200    |   |                                                 |  | 0.20 |                         |  |  |                              |  |  | $ | 10.30 | 
|                                    |  |                              |        |   |                                                 |  |      |                         |  |  |                               |  |  |   |       | 

No options were exercised in 2009, 2010 and 2011. No compensation expense related to options was
recognized during the years ended December 31, 2009, 2010 and 2011.



| | f. | A summary of the status of the Companys restricted shares as of December 31, 2011, and changes during the year ended December 31, 2011, is presented
below:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                |  |        |          |   |                                       |   |      | 
|------------------------------- |  | ------ | -------- | - | ------------------------------------- | - | ---- | 
|Restricted shares               |  | Shares |          |   | Weightedaverage grant-date fair value |  
|Restricted at January 1, 2011   |  |        | 146,580  |   |                                       | $ | 0.72 | 
|Granted                         |  |        | 75,000   |   |                                       | $ | 1.10 | 
|Vested                          |  |        | (123,861 | ) |                                       | $ | 0.95 | 
|Forfeited                       |  |        | (48,414  | ) |                                       | $ | 0.72 | 
|                                |  |        |          |   |                                       |   |      | 
|Restricted at December 31, 2011 |  |        | 49,305   |   |                                       | $ | 0.72 | 
|                                |  |        |          |   |                                       |   |      | 

As of December 31, 2011, there was $14 of total unrecognized compensation cost related to restricted
shares compensation arrangements granted under the 2005 Plans. That cost is expected to be recognized over a period of 14 months. The total fair value of restricted shares released during the year ended December 31, 2011 was $118.

The weighted average grant date fair value of shares granted during 2009, 2010 and 2011 was $0.40, $0.72 and $1.10, respectively.



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

The Companys outstanding options that have been issued to consultants were as follows as of December 31, 2011:



|              |  |                           |       |  |                        |   |       |                    |  |  |                    |  |  |  |            | 
|------------- |  | ------------------------- | ----- |  | ---------------------- | - | ----- | ------------------ |  |  | ------------------ |  |  |  | ---------- | 
|Issuance date |  | Options forOrdinaryShares |       |  | Exerciseprice pershare |   |       | Optionsexercisable |  |  | Exercisablethrough | 
|March 2005    |  |                           | 7,000 |  |                        | $ | 10.30 |                    |  |  | 7,000              |  |  |  | March 2012 | 
|              |  |                           |       |  |                        |   |       |                    |  |  |                    |  |  |  |            | 

No compensation expense in respect of these options was recognized during the years ended
December 31, 2009, 2010 and 2011.



F-32



---

##### 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 12:- SHAREHOLDERS EQUITY (CONT.)



Warrants:

The Companys outstanding warrants that had been issued to investors and consultants were as follows as of December 31, 2011:



|              |  |                            |     |  |                        |   |      |                     |  |  |                     |  |  |  |                    | 
|------------- |  | -------------------------- | --- |  | ---------------------- | - | ---- | ------------------- |  |  | ------------------- |  |  |  | ------------------ | 
|Issuance date |  | Warrants forOrdinaryShares |     |  | Exerciseprice pershare |   |      | Warrantsexercisable |  |  | Exercisable through | 
|April 1998    |  |                            | 578 |  |                        | $ | 1.25 |                     |  |  | 578                 |  |  |  | No expiration date | 
|              |  |                            |     |  |                        |   |      |                     |  |  |                     |  |  |  |                    | 

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 13:- TAXES ON INCOME

The Company and its subsidiaries file federal and state income tax returns in the U.S., Israel, Australia and the U.K.
ViryaNet Ltd. may be subject to examination by the Israel tax authorities for fiscal years 2007 through 2011. ViryaNet Inc.s (the U.S. subsidiary) tax returns through 2009 were audited by the U.S. Internal Revenue Service (IRS)
which resulted in no incremental tax liability. ViryaNet Inc. may be subject to examination by the IRS for fiscal years 2010 through 2011. ViryaNet Australia and ViryaNet Europe were disposed during 2011 (see Note 3).

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

Changes in Israeli tax rates:

For tax years 2010 and 2011, Israeli companies were subject to corporate tax on their taxable income at the rate of 25% and 24%,
respectively. On December 5, 2011, the Knesset (Israels Parliament) passed a law that altered the tax burden (the Tax Burden Law), canceled the further planned gradual reduction in the corporate tax rates in Israel and
increased the corporate tax rate to 25% starting in 2012. The capital gains tax rate was increased under the Tax Burden Law to 25% as well. The changes in tax rates did not have an effect on the Companys tax position due to significant
accumulated losses for income tax purposes, for which a full valuation has been provided.



F-33



---

##### 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 13:- TAXES ON INCOME (CONT.)



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

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

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

Pursuant to the Investment Law, the Company elected for its investment program the
alternative benefits track and 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 was to be tax-exempt for a period of ten years commencing with the year in which the program first earns taxable income, subject to certain conditions.

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

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

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

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

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

On April 1, 2005, an amendment to the Investment Law came into effect (the 2005 Amendment), which significantly changed the provisions of the Investment Law. The 2005 Amendment limits the
scope of enterprises which may be approved by the Israeli Investment Center of the Ministry of Industry and Commerce (the Investment Center) by setting criteria for the approval of a facility as a Privileged Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprises income will be derived from export. Additionally, the 2005 Amendment enacted major changes in the manner in

which tax benefits are awarded under the Investment Law so that companies that choose the alternative benefits track no longer
require Investment Center approval in order to qualify for tax benefits. However, the 2005 Amendment provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the Investment Law as
they were on the date of such approval. Therefore the Companys sole remaining, existing Approved Enterprise will generally not be subject to the provisions of the 2005 Amendment. As a result of the 2005 Amendment, tax-exempt income
generated



F-34



---

##### 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 13:- TAXES ON INCOME (CONT.)



under the provisions of the amended Investment Law will subject the Company to taxes
upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income. As of December 31, 2011, the Company had not generated income under the provisions of the amended
Investment Law.

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

The tax benefits period for the April 1998 program has not
begun. However, the Approved Enterprise status of this program has expired in April 2012. Income derived from this program for which the Company has elected the alternative benefits track was to be 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 met this condition and
since the status of Approved Enterprise has expired for this investment program in April 2012, the Company is not entitled to any future benefits under this investment program or any other investment program.

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

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

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

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

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

Non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed in
Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding



F-35



---

##### 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 13:- TAXES ON INCOME (CONT.)



taxes. The Companys management has determined that it will not distribute any
amounts of its undistributed tax income as a dividend. The Company intends to reinvest the amount of such tax income. Accordingly, no deferred income taxes have been provided.

Net operating losses carryforward:

ViryaNet Ltd. has accumulated losses
for income tax purposes as of December 31, 2011 in an amount of approximately $33,177, which may be carried forward and offset against taxable income and capital gain in the future for an indefinite period.

ViryaNet Europe and ViryaNet Australia were disposed in 2011 and therefore, there are no accumulated losses carried forward related to
these subsidiaries (see Note 3).

As of December 31, 2011, the Companys U.S. subsidiary had a U.S. federal net
operating loss carryforward for income tax purposes in an amount of approximately $62,614. Net operating loss carryforward arising in taxable years beginning before August 6, 1997 can be carried forward and offset against taxable income for 15
years and expire between 2011 and 2012. Net operating loss carryforward arising in taxable years beginning after August 6, 1997 can be carried forward and offset against taxable income for 20 years, expiring between 2017 and 2031.

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.

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, |        
|                                          |  | 2010         |         |   | 2011 |  
|Deferred tax assets:                      |  |              |         |   |      |   |         |  
|U.S. net operating loss carryforward      |  | $            | 4,869   |   |      | $ | 23,355  |  
|Israeli net operating loss carryforward   |  |              | 6,490   |   |      |   | 8,294   |  
|U.K. net operating loss carryforward      |  |              | 2,864   |   |      |   |        |  
|Australia net operating loss carryforward |  |              | 275     |   |      |   |        |  
|Other reserve and allowances              |  |              | 723     |   |      |   | 814     |  
|                                          |  |              |         |   |      |   |         |  
|Total deferred tax assets                 |  |              | 15,221  |   |      |   | 32,463  |  
|Valuation allowance                       |  |              | (15,221 | ) |      |   | (32,463 | )
|                                          |  |              |         |   |      |   |         |  
|Net deferred tax assets                   |  | $            |        |   |      | $ |        |  
|                                          |  |              |         |   |      |   |         |  

As of December 31, 2011, the Company and its subsidiaries have provided valuation allowances in
respect of deferred tax assets resulting from tax loss carryforward and other temporary differences, due to the history of the Companys operating losses, which raises uncertainty concerning the Companys ability to realize these deferred
tax assets in the future. Management currently believes that it is more likely than not that the deferred tax assets relating to the loss carryforward and other temporary differences will not be realized in the foreseeable future.



F-36



---

##### 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 13:- TAXES ON INCOME (CONT.)



Deferred tax asset and valuation allowance in the U.S. increased in 2011 by $17,242,
principally due to adjustments of accumulated net operating losses available under the Internal Revenue Codes Section 382 limitation. In addition, tax rate changes enacted in Israel were principally responsible for the increase in the
deferred tax assets and corresponding valuation allowance by $1,804 for the year.

The reduction in U.K. and Australia net
operating loss carryforward resulted from the disposal of the subsidiaries in those jurisdictions during 2011 (see Note 3).

Net income (loss) consists of the following:



|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|----------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | --- | ---- |  | - | ---- | -
|                                                      |  | Year ended December 31, |      
|                                                      |  | 2009                    |       |   | 2010 |   |     | 2011 | 
|Income (loss) from continuing operations before taxes |  |                         |       |   |      |   |     |      |  |   |      |  
|Domestic                                              |  | $                       | (613  | ) |      | $ | 82  |      |  | $ | (424 | )
|Foreign                                               |  |                         | 1,333 |   |      |   | 706 |      |  |   | 228  |  
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Total                                                 |  | $                       | 720   |   |      | $ | 788 |      |  | $ | (196 | )
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Taxes on income                                       |  |                         |       |   |      |   |     |      |  |   |      |  
|Domestic                                              |  | $                       |      |   |      | $ |    |      |  | $ |     |  
|Foreign                                               |  |                         | 47    |   |      |   | 69  |      |  |   | 9    |  
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Total                                                 |  | $                       | 47    |   |      | $ | 69  |      |  | $ | 9    |  
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Income (loss) from continuing operations after taxes  |  |                         |       |   |      |   |     |      |  |   |      |  
|Domestic                                              |  | $                       | (613  | ) |      | $ | 82  |      |  | $ | (424 | )
|Foreign                                               |  |                         | 1,286 |   |      |   | 637 |      |  |   | 219  |  
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Total                                                 |  | $                       | 673   |   |      | $ | 719 |      |  | $ | 205  |  
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Income (loss) from discontinued operations            |  |                         |       |   |      |   |     |      |  |   |      |  
|Domestic                                              |  | $                       |      |   |      | $ |    |      |  | $ |     |  
|Foreign                                               |  |                         | (177  | ) |      |   | (50 | )    |  |   | (14  | )
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Total                                                 |  | $                       | (177  | ) |      | $ | (50 | )    |  | $ | (14  | )
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  
|Net income (loss)                                     |  |                         |       |   |      |   |     |      |  |   |      |  
|Domestic                                              |  | $                       | (613  | ) |      | $ | 82  |      |  | $ | (424 | )
|Foreign                                               |  |                         | 1,109 |   |      |   | 587 |      |  |   | 205  |  
|Total                                                 |  | $                       | 496   |   |      | $ | 669 |      |  | $ | (219 | )
|                                                      |  |                         |       |   |      |   |     |      |  |   |      |  

Reconciliation of theoretical tax expense (benefit) attributable to continuing operations to actual
tax expense (benefit):

In 2009, 2010 and 2011, the main reconciling item of the statutory tax rate of the Company (26% in
2009, and 25% in 2010 and 24% in 2011) to the effective tax rate (6.53% in 2009, 8.76% in 2010 and (4.59%) in 2011) is tax loss carryforwards and other deferred tax assets, for which a full valuation allowance was provided.



F-37



---

##### 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 14:- 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 has only one
operating segment. The Companys total revenues are attributable to geographic areas based on the location of the end customer.

The following table presents total revenues for the years ended December 31, 2009, 2010 and 2011 and long-lived assets as of December 31, 2009, 2010 and 2011:



|                           |  |               |       |  |                  |   |     |               |  |   |                  |  |  |               |     |  |                  |   |       |  |  |   |    | 
|-------------------------- |  | ------------- | ----- |  | ---------------- | - | --- | ------------- |  | - | ---------------- |  |  | ------------- | --- |  | ---------------- | - | ----- |  |  | - | -- | 
|                           |  | 2009          |       |  | 2010             |   |     | 2011          | 
|                           |  | Totalrevenues |       |  | Long-livedassets |   |     | Totalrevenues |  |   | Long-livedassets |  |  | Totalrevenues |     |  | Long-livedassets |  
|North America              |  | $             | 9,062 |  |                  | $ | 156 |               |  | $ | 8,742            |  |  | $             | 13  |  |                  | $ | 8,694 |  |  | $ | 34 | 
|Europe and the Middle East |  |               | 424   |  |                  |   | 17  |               |  |   | 802              |  |  |               | 87  |  |                  |   | 714   |  |  |   | 58 | 
|Asia Pacific               |  |               | 265   |  |                  |   | 127 |               |  |   | 765              |  |  |               | 6   |  |                  |   | 263   |  |  |   |   | 
|                           |  |               |       |  |                  |   |     |               |  |   |                  |  |  |               |     |  |                  |   |       |  |  |   |    | 
|                           |  | $             | 9,751 |  |                  | $ | 300 |               |  | $ | 10,309           |  |  | $             | 106 |  |                  | $ | 9,671 |  |  | $ | 92 | 
|                           |  |               |       |  |                  |   |     |               |  |   |                  |  |  |               |     |  |                  |   |       |  |  |   |    | 



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

There were no customers representing 10% or more of revenues in 2011. One customer represented approximately 11% of the Companys total revenues in each of 2010 and 2009.

NOTE 15:- FINANCIAL EXPENSES, NET



|                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|---------------------------------------- |  | ----------------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                         |  | Year ended December 31, |    
|                                         |  | 2009                    |     |  | 2010 |   |     | 2011 | 
|Income:                                  |  |                         |     |  |      |   |     |      |  |   |     | 
|Foreign currency translation adjustments |  |                         | 5   |  |      |   |    |      |  |   | 109 | 
|Other income                             |  |                         | 20  |  |      |   | 12  |      |  |   | 15  | 
|                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Total income                             |  |                         | 25  |  |      |   | 12  |      |  |   | 124 | 
|                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Expenses:                                |  |                         |     |  |      |   |     |      |  |   |     | 
|Interest and bank charges                |  |                         | 185 |  |      |   | 174 |      |  |   | 253 | 
|Foreign currency translation adjustments |  |                         |    |  |      |   | 80  |      |  |   |    | 
|                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Total expenses                           |  |                         | 185 |  |      |   | 254 |      |  |   | 253 | 
|                                         |  |                         |     |  |      |   |     |      |  |   |     | 
|Financial expenses, net                  |  | $                       | 160 |  |      | $ | 242 |      |  | $ | 129 | 
|                                         |  |                         |     |  |      |   |     |      |  |   |     | 



F-38



---

##### 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 16:- RELATED PARTY TRANSACTIONS



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



| | b) | On June 30, 2011, the Company entered into a share purchase agreement with Jerusalem Technology Investments Ltd (the Investor), a company with which
two of the Companys directorsSamuel HaCohen and Vladimir Morgenstern and one of the Companys major shareholders (Jerusalem High-tech Founders, Ltd.) ) are affiliated. Pursuant to the agreement, the Investor committed to
invest in the Company an amount of $250 at a price of $1.00 per Ordinary Share, within 31 days from the date of the agreement, in return for 250,000 of our Ordinary. 50,000 of those Ordinary Shares were issued on June 30, 2011, upon a payment
of $50 by the Investor. In February 2012, the Investor invested an additional $75 portion of its total commitment under the agreement. This equity financing constituted an extraordinary transaction with an entity in which two of the Companys
directors possessed a personal interest and was therefore approved by the Companys audit committee and Board of Directors in accordance with the requirements of the Companies Law.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | On December 31, 2011, the Company completed the sale of 100% of the common stock of ViryaNet Australia, to Hosking Family Trust, owned by the former general
manager of ViryaNet Australia, Mark Hosking (Buyer), for consideration of $340. The consideration is to be paid as follows; $100 is due on January 2, 2012 and the balance of $240 is to be paid over a period of four years in equal
quarterly installments starting March 31, 2012, and bears interest at a fixed annual rate of 3.5%, paid quarterly. The repayment of the balance owed is secured through a personal guarantee provided by the Buyer (see also Note 3). This
transaction constituted an extraordinary transaction with the Buyer, who possessed a personal interest and was therefore approved by the Companys audit committee and Board of Directors in accordance with the requirements of the Companies Law.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 16:- SUBSEQUENT EVENTS

In February 2012 the Company issued to the holder of the Companys long-term convertible debt 15,380 shares in
payment of interest expense.

In February 2012, the Company received an additional $75 of the total purchase price under its
share purchase agreement with Jerusalem Technology Investments Ltd. (see Note 12(c)).



F-39



---

##### Table of Contents

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



On March 12, 2012 the Company received from Bank Hapoalim a waiver of its bank covenants
(see Note 7) for the remaining quarters of 2012 and for the first quarter of 2013. In connection with the waiver the Company paid fees of $8 to the bank.







F-40