F-3

Registration No.             

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM F-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

VIRYANET LTD.

(Exact name of registrant as specified in its charter)

Israel	Not Applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

8 HaMarpe St.

Har Hotzvim

P.O. Box 45041

Jerusalem 91450, Israel

972-2-584-1000

(Address and Telephone Number of Registrant’s principal executive offices)

ViryaNet Limited

Albert A. Gabrielli

Chief Financial Officer

2 Willow Street

Southborough, MA 01745-1027

Tel: (508) 490-8600

(Name, address and telephone number of agent for service)

Copies to:

David S. Glatt

Raanan Lerner

Meitar Liquornik Geva & Leshem Brandwein

16 Abba Hillel Silver Rd.

Ramat Gan 52506, Israel

Tel: 972-3-610-3100

Approximate date of commencement of the proposed sale of the securities to the public: From time to time after the Registration Statement becomes effective.

If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. ¨

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box. ¨

If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Calculation of Registration Fee

Title of Each Class of Securities To Be Registered	Proposed Maximum Amount to be Registered	Proposed Aggregate Price Per Unit	Proposed Maximum Aggregate Offering Price	Amount of Registration Fee
Ordinary Shares, par value NIS 1.0 per share	2,159,708	$1.85(1)	$3,995,460(1)	$427.51
Ordinary Shares, par value NIS 1.0 per share, issuable upon exercise of warrants (2)	329,365	$2.09(3)	$688,373(3)	$73.66
Ordinary Shares, par value NIS 1.0 per share, issuable upon conversion of notes (2)	1,578,232	$2.205(3)	$3,480,002(3)	$372.36

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) based on the average of the high and low prices of our Ordinary Shares as reported on The Nasdaq Capital Market System, formerly known as the Nasdaq Small Cap Market, on December 20, 2005.

(2) Pursuant to Rule 416 of the Securities Act of 1933, an additional indeterminate number of our Ordinary Shares issuable upon exercise of such warrants or conversion of such convertible notes by reason of any share dividend, stock split, recapitalization or similar transaction effected without the receipt of consideration which results in an increase in the number of outstanding Ordinary Shares.

(3) Calculated pursuant to Rule 457(g) under the Securities Act of 1933.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. NO SELLING SHAREHOLDER MAY SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED DECEMBER 22, 2005

PROSPECTUS

VIRYANET LTD.

4,067,305 Ordinary Shares

This prospectus relates to 4,067,305 of our Ordinary Shares that may be sold from time to time, by the selling shareholders identified in this prospectus (the “Selling Shareholders”), to whom we refer as the selling Shareholders. Of the shares being registered, 329,365 are subject to issuance upon the exercise of warrants and 1,578,232 are subject to issuance upon the conversion of convertible notes. The warrants and the convertible notes themselves are not being offered by this prospectus.

We will not receive any of the proceeds from the sale of the shares offered by this prospectus and we will pay all the expenses of registration of this offering; provided, however, that the Selling Shareholders shall bear their own underwriting discounts and commissions, selling or placement agent or broker fees and commissions and transfer taxes, if any, in connection with the sale of the shares. These shares may be offered from time to time by the Selling Shareholders through public or private transactions, on or off The Nasdaq Capital Market, at prevailing market prices or at privately negotiated prices, subject to certain volume limitations and other restrictions agreed to by the Selling Shareholders. The Selling Shareholders and any agent or broker-dealer that participates with the Selling Shareholders in the distribution of the Ordinary Shares may be considered “underwriters” within the meaning of the Securities Act of 1933, as amended, or the Securities Act, and, in that event, any commissions received by them and any profit on the resale of the shares may be considered underwriting commissions or discounts under the Securities Act. You should read both this prospectus and any prospectus supplement, together with the additional information described under the heading “Incorporation of Certain Documents by Reference” before you invest.

Our Ordinary Shares are quoted on The Nasdaq Capital Market under the symbol “VRYA.” The last reported sale price of our Ordinary Shares on The Nasdaq Capital Market on December 21, 2005 was $1.95 per share.

We have agreed to indemnify the Selling Shareholders against certain liabilities, including liabilities under the Securities Act.

The securities offered hereby involve a high degree of risk. See “ Risk Factors” beginning on page 4 of this prospectus to read about factors you should consider before purchasing these securities.

Neither the Securities and Exchange Commission, the Israeli Securities Authority nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is December     , 2005

TABLE OF CONTENTS

	Page
Special Note Regarding Forward-Looking Information	4
The Company	4
Risk Factors	4
Offer and Listing	12
Reasons for the Offer and Use of Proceeds	12
Selling Shareholders	12
Timetable and Plan of Distribution	15
Legal Matters	16
Experts	16
Where You Can Find More Information	16
Information Incorporated by Reference	17
Enforceability of Civil Liabilities	17

Unless the context otherwise requires, all reference in this registration statement to “ViryaNet”, “we”, “our”, “us” and the “Company” refer to ViryaNet Ltd. and its consolidated subsidiaries. Reference to “dollars” or $ are to United States dollars. References to “NIS” are to New Israeli Shekels.

All references herein to “Ordinary Shares” refer to our Ordinary Shares, par value 1.0 NIS per share, and are made on a post reverse stock split basis, taking into account the 10 to 1 reverse stock split of our Ordinary Shares, effected on May 1, 2002.

SPECIAL NOTES REGARDING FORWARD-LOOKING INFORMATION

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

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

The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant 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 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, including the achievement of the anticipated levels of profitability, growth, cost, the timely development and acceptance of new products, the impact of competitive pricing, the impact of general business and global economic conditions and other important factors described from time to time in the reports filed by us with the Securities and Exchange Commission. Except to the extent required by law, neither we, nor any of our respective agents, employees or advisors intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained or incorporated by reference in this document.

THE COMPANY

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

Our registered office is located at 8 HaMarpe Street, Science Based Industries Campus, P.O. Box 45041, Har Hotzvim, Jerusalem, 91450, Israel, and our telephone number is 972-2-584-1000. We have appointed our United States subsidiary, ViryaNet, Inc., located at 2 Willow Street, Southborough, Massachusetts 01745-1027, as our agent for service of process. Our website address is www.viryanet.com. The information contained on, or linked from, our website is not a part of this prospectus.

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.

We target companies in the utility, telecommunications, 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.

Our principal product, the ViryaNet Service Hub, supports a wide range of work order needs: from short-duration tasks to complex, multi-day, multi-resource projects. The ViryaNet Service Hub manages the entire lifecycle of a work order, including, scheduling and dispatching, mobile technology, field-level reporting, tracking materials, managing assets, and ensuring support for entitlements and compliance with service level agreements (SLAs).

Our 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 Melbourne, Australia, a provider of front-office automation solutions to the utilities sector. These acquisitions have provided us with domain expertise; an installed base of customers in the utilities market, our primary market focus; and significant partnerships, and have enabled us to incorporate additional features, functions and technology into our advanced product platform.

RISK FACTORS

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

Risks Related to our Business

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

We have incurred substantial net losses during each of the last six fiscal years and may not achieve profitability in 2005 or in future years. As of December 31, 2004, we had an accumulated deficit of approximately $107.7 million. In order to achieve 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. While our revenues in 2004, 2003, and 2002 were $11.9 million, $12.0 million, and $11.8 million, respectively, we incurred a net loss of $4.2 million, $1.7 million and $5.9 million during these periods. We cannot assure you that we will be able to increase our revenues, or, that even if we are able to increase our revenues we will be able to achieve profitability or maintain profitability, if achieved, on a consistent basis.

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

Our quarterly 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 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 and timing of contracts;

• delays in implementation;

• the mix of revenue generated by product licenses and professional services;

• price and product competition;

• increases 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;

• the failure to maintain compliance with The Nasdaq Capital Market listing standards;

• reductions in the level of our cash balance and our ability to raise cash;

• consolidation of our customers;

• the geographic mix of revenue;

• 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.

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 an indication for future performance. Also, it is possible that our quarterly results of operations may be below the expectations of public market analysts and investors. If this happens, the price of our Ordinary Shares will likely decrease.

We have substantially expanded our number of employees during 2004 and the first half of 2005 and may be unable to maintain our expanded staff or may incur increased losses because of it.

During 2004, we substantially increased our overall headcount from 86 at the end of 2003 to 126 at the end of 2004. Part of this increase was related to the assumption of 25 employees from the acquisition of Utility Partners. In June 2005, we added another 23 employees with the acquisition of e-Wise Solutions. Although we believe we currently have sufficient resources available to meet and support our current obligations in relation to the expansion of our staff, we may not be able to maintain this expanded headcount. If we are forced to reduce headcount, our ability to meet our growth goals and our business and operations may be negatively impacted. Furthermore, we have a history of losses and the increase in headcount during 2004 and the first half of 2005 may result in a continuation of or increase in the amount of the net loss as the additional cost of the higher headcount level may not be offset by increased revenue.

We may need to further expand our sales, marketing, research and development and professional services organizations but may lack the resources to do so, which may hinder our ability to grow and meet customer demands.

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

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

We had negative cash flow from operations for several years. In the past four years, we had an aggregate negative cash flow in the amount of $28.0 million. We raised gross proceeds of approximately $5.0 million from private equity financing transactions during 2003, $2.5 million in a convertible note financing in July 2004, $1.3 million from a private equity financing transaction in February 2005, $1.2 million in a convertible note and equity financing in August 2005 and $1.0 million in another convertible note and equity financing in September 2005. However, we expect that we will need additional financing to fund our business operations. Any additional financing may require the consent of our main creditors, Bank Hapoalim, LibertyView and a group of investors including Alpha Capital Aktiengesellschaft, Ellis International Ltd., Globis Capital Partners LP, Omega Capital SmallCap Fund, Ltd., and Iroquois Master Fund Ltd. (the “September 2005 Investor Group”). We cannot assure you that additional financing will be available on terms favorable to us, or at all or that our creditors will consent to such additional financing. In the event that the market price of our Ordinary Shares declines, we may not be able to consummate a private equity financing transaction to raise additional financing. 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, marketing and sales efforts, pursue potential acquisitions, take advantage of unanticipated opportunities, develop or enhance our website content, features or services, or otherwise respond to competitive pressures would be severely constrained. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing shareholders will be reduced, and any newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders.

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

As of December 15, 2005, we had one quarterly payment remaining on the outstanding balance of our long-term loan arrangement with Bank Hapoalim of $267,000, and we also had an outstanding balance in our short-term borrowings with Bank Hapoalim of approximately $1.9 million. On December 22, 2005, we restructured our debt arrangement with Bank Hapoalim by converting $1.8 million of the outstanding short-term borrowings to long-term debt payable in twenty-four quarterly installments of $75,000, with the first payment due on April 1, 2006 and with interest payable quarterly at a rate of LIBOR plus 2.25%.

This restructured long-term debt is subject to the following covenants: (i) our shareholders equity, on a quarterly basis, starting on January 1, 2006, shall be at least the higher of (a) 17% of our total assets, or (b) $3.0 million, and (ii) our cash balance (a) on January 1, 2006 shall not be less than $1.0 million, and (b) on a quarterly basis, beginning July 1, 2006 shall not be less than $1.0 million. We may need to obtain funding from third parties to meet the payment obligations under the abovementioned loan arrangement in a timely manner, and there is no assurance that Bank Hapoalim will grant us an extension to these payment dates in the future, if requested. There can be no assurance that we will meet these covenants or that the bank will waive the compliance with any such covenants in the event that we do not meet them. If we fail to meet the quarterly payments to Bank Hapoalim or to meet these covenants, the bank may demand immediate repayment of the outstanding debts and all interest thereon and shall be entitled to exercise the remedies available to it. This would have a material adverse effect on our business.

We may not be able to maintain compliance with the listing rules of The Nasdaq Capital Market in which case our shares would be delisted, which could adversely affect the market price and trading market of our Ordinary Shares.

Our Ordinary Shares have been listed on The Nasdaq Capital Market since December 31, 2002. We were previously listed on The Nasdaq National Market but were unable to comply with some of its maintenance standards. The Nasdaq Capital Market has several maintenance standards for continued listing, including the requirements (i) that we maintain (a) shareholders’ equity of at least $2,500,000, (b) market value of $35,000,000 or (c) net income from operations of $500,000 in the last fiscal year or in two of the last three fiscal years, (ii) that we have at least 500,000 shares held by persons or entities other than our officers, directors and beneficial owners of more than 10% of our Ordinary Shares (the “Public Float”), (iii) that we have an aggregate market value of Public Float of at least $1,000,000, (iv) that we have at least two market makers, (v) that we have at least 300 shareholders who hold at least 100 Ordinary Shares each, and (vi) that we shall be in compliance with all corporate governance under rules 4350 and 4351 (the foregoing requirements are collectively referred to as the “Maintenance Standards”). On July 17, 2003, we were notified by Nasdaq that we were not in compliance with the listing standard for shareholders’ equity and were required to provide Nasdaq with a plan to regain compliance or our shares would be subject to delisting. On August 8, 2003, our plan was submitted to Nasdaq and acknowledged. On December 5, 2003, we issued a Report on Form 6-K to publicly demonstrate that we had regained compliance as a result of the proceeds received from our recent financing activities.

On June 2, 2005, we were notified by Nasdaq that we were not in compliance with the listing standard for shareholders’ equity and were required to provide Nasdaq with a plan to achieve and sustain compliance by July 5, 2005 or our shares would be subject to delisting. We have prepared a plan to regain compliance and submitted it to Nasdaq for their review on July 5, 2005. Since July 5, 2005, we have completed two transactions that affected our stockholders’ equity: (i) on August 5, 2005, we completed a financing transaction with LibertyView Special Opportunities L.P., a current shareholder. The transaction included an equity investment of $0.7 million at a price of $2.10 per Ordinary Share with warrants to purchase up to 116,666 Ordinary Shares at an exercise price of $2.10 per Ordinary Share, and an increase in the amount of the existing $2.5 million convertible loan with LibertyView to $2.98 million, and (ii) on August 9, 2005, we exercised our right pursuant to the Amendment #2 dated June 28, 2005 to the Asset Purchase Agreement with e-Wise Solutions dated June 1, 2005 and issued to e-Wise Unit Trust 282,511 Ordinary Shares as the component two consideration for the acquisition of e-Wise Solution’s business. As a result of the transactions completed above, on August 15, 2005, we received notification from Nasdaq under which they informed us that based on our Form 6-K filed on August 10, 2005, they have determined that we comply with Marketplace Rules 4320(c)(2)(B).

However, Nasdaq will continue to monitor our ongoing compliance of the stockholders’ equity requirement and, if at the time of our next periodic report we do not evidence compliance, our Ordinary Shares may be subject to delisting. The delisting of our Ordinary Shares from The Nasdaq Capital Market may materially impair the ability of our shareholders to buy and sell our Ordinary Shares, even if they qualify for inclusion on the Over-the-Counter Bulletin Board (OTCBB), and could have an adverse effect on the market price and the trading market for our Ordinary Shares. In addition, the delisting of our Ordinary Shares could significantly impair our ability to raise capital should we desire to do so in the future or utilize our Ordinary Shares in consideration for acquisitions. Furthermore, if our Ordinary Shares are delisted from The Nasdaq Capital Market, the loans provided to us by LibertyView and the September 2005 Investment Group under the respective Convertible Notes may be recalled.

If we fail to maintain effective system of internal controls over financial reporting, we may not be able to report our financial results accurately. As a result, we could be subject to costly litigation, and current and potential shareholders could lose confidence in our financial reporting, which could harm our business and the trading price of our Ordinary Shares.

Effective internal controls over financial reporting are required for us to provide reliable financial reports. We have determined in 2005 that we had material weakness of internal control over financial reporting by having ineffective controls to identify errors in the application of complex accounting standards to our software licensing transactions. Since then, we believe that we have managed to eliminate the aforementioned material weakness. However, if we fail to implement and maintain an effective system of internal controls, we could be subject to costly litigation, investors could lose confidence in our reported financial information and our brand and operating results could be harmed, which could have a negative effect on the trading price of our Ordinary Shares.

We face risks relating to the restatement of our financial statements.

On two occasions we restated our financial statements which affected our results for 2000, 2001, 2002, and 2003. The restatements were reported on December 9, 2004 and March 17, 2005 and the impact on our financial statements was reported first in our Report on Form 20-F/A dated March 25, 2005 for the fiscal year ended December 31, 2003. These restatements or any other restatement of our financial statements may lead to litigation claims against us. The defense of any claims which may arise in connection with these or any other restatement may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such claims are not resolved in our favor. Any litigation, even if resolved in our favor, may cause us to incur significant legal and other expenses.

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 the Ordinary Shares may fluctuate substantially due to a variety of factors, including:

• any actual or anticipated 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;

• Changes in accounting principles;

• sales of our Ordinary Shares by existing shareholders;

• limited market for our shares;

• the need to raise additional capital through private or public debt or equity financings;

• our ability to maintain compliance with all The Nasdaq Capital Market listing standards; and

• changes in the political conditions in Israel.

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 similar 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.

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.

The amount of our outstanding Ordinary Shares has increased substantially since August 4, 2003. The increase in the amount of outstanding Ordinary Shares is due primarily to the private financings that have occurred which resulted in the issuance of 1,611,089 Ordinary Shares in exchange for approximately $5.0 million during the third and fourth quarters of 2003, the acquisition of Utility Partners, Inc. which resulted in the issuance of 898,485 Ordinary Shares in July 2004, the issuance of 581,659 Ordinary Shares in exchange for approximately $1.3 million in February 2005, the acquisition of e-Wise Solutions which resulted in the issuance of an aggregate of 555,778 Ordinary Shares in June and August of 2005, the issuance of 333,333 Ordinary Shares in exchange for approximately $0.7 million in August 2005, and the issuance of 238,096 Ordinary Shares in exchange for approximately $0.5 million in September 2005. As of December 15, 2005, we had outstanding warrants to purchase 720,116 Ordinary Shares, and we have reserved up to 1,640,000 Ordinary Shares for issuance under our option plans, of which 181,669 options have been exercised as of December 15, 2005. In addition, our amended convertible note with LibertyView may be converted by LibertyView at any time into 1,351,474 Ordinary Shares, and our convertible note with the September 2005 Investor Group may be converted by the September 2005 Investor Group at any time into 226,758 Ordinary Shares. The sale, or availability for sale, of substantial quantities of our Ordinary Shares may have the effect of further depressing their market price. 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 have provided registration rights in the past to certain shareholders and in connection with certain of these rights filed a Registration Statement on Form F-3/A with the SEC which was deemed effective on August 26, 2005 and increased the number of our Ordinary Shares eligible for resale into the public market by 2,080,057 and this registration statement is expected to increase the number of our Ordinary Shares eligible for resale into the public market by an additional 4,067,305. In addition, a significant number of shares are eligible for resale in the future (i.e. those shares in the form of warrants that may be issued if the holders of these warrants decide to exercise such warrants as well as those shares that may be issued if the holders of convertible notes decide to convert such notes). Issuance of these shares will dilute existing shareholders.

We may continue to issue convertible notes, warrants and options and the issuance of these securities could be dilutive to our shareholders. Certain convertible notes, warrants and options, when issued, may be valued at fair value and we may reflect the appropriate charges in our financial statements at that time.

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 2002, three customers each accounted for approximately 9% or more of our revenues, and represented an aggregate of approximately 31% of our total revenues. In 2003, three customers each accounted for approximately 10% or more of revenues, and represented an aggregate of 41% of our total revenues. In 2004, two customers each accounted for approximately 10% or more of revenues, and represented an aggregate of 25% of our total revenues. We do not expect that these two customers accounting for 25% of our revenue during 2004 will represent 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 other customers will purchase our products and services in the future. The failure to secure new key customers, the loss of key customers or the occurrence of significant reductions in sales from 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 cycle lengthens, 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 quarterly revenue and operating results.

Our business is still impacted by the effects of the slowdown in the worldwide economy.

Our business is dependent on current and anticipated market demand for enterprise software products. The demand for these products has been negatively impacted by the slowdown in the global economy that began in the second half of 2000 and by the terrorist attacks of September 11, 2001, and, more recently, by continuing actions against global terrorism such as the war in Iraq and attacks in Afghanistan by coalition forces led by the United States. Many of our customers and prospective customers are still experiencing economic downturns, including those in some of our traditional target markets, including the telecommunications and general services markets.

The uncertainty regarding the growth rate of the worldwide economies has caused companies to reduce purchasing and capital investment. Specifically, many companies struggled with the timing of investment decisions on technology spending in light of their desire to return to positive growth and the continuation of geopolitical uncertainties which may have affected their outlook.

Should economic conditions fail to improve, our ability to sell our products and services as well as our operating results could be negatively impacted. Furthermore, even if we are successful in selling our products and services, our ability to collect outstanding receivables may be significantly impacted by liquidity issues of our customers, which may have a material adverse impact on our business, operating results and financial condition.

We cannot predict if or when the growth rate of the global economy will rebound or whether the growth rate of our business will rebound when the global economy begins to grow. The effects of the economic decline have resulted and are likely to continue to result in intensified price competition, reduced margins, lower revenue growth rates, and longer payment terms, and may result in decreased revenues, increased losses or an inability to achieve profitability.

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

The market for mobile workforce management software solutions is still 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 and those resources are utilized mainly for responding to the needs of our current customers. Therefore, we may be unable to timely develop products that meet the market’s future needs. If we were to experience a significant increase in the number of customers, or were to decide to effect a significant increase in our development of new product offerings, or both, we would need to expend significant amounts of money, time and other resources. This could strain our personnel and financial resources.

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

Our margins on service revenues were 23% in 2004 compared to 36% in 2003 and 16% in 2002. In order to improve our margins on services revenues, we will need to increase the efficiency and utilization of our services personnel, continue to 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 further in the future.

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

We rely upon resellers and channel partners to generate a substantial portion of our revenues. We expect this reliance to continue due to our limited internal sales and marketing resources in existing markets and to increase due to our desire to penetrate new 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 those resellers and channel partners 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 resellers and channel partners 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. We will be subject to significant risk as we cannot control the level and quality of service provided by these third parties.

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

Our software products are complex and may 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 have otherwise discovered other defects in our products after their commercial shipment. Our products are frequently more critical to our customers’ operations compared to other software solutions used by such customers, and as a result, our customers may have a greater sensitivity to product defects relating to our products.

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

• a delay or failure of our products to achieve market acceptance;

• adverse customer reaction;

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

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

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

We utilize third-party software products to enhance the functionality of our products. Our business would be disrupted if functional versions of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to spend additional capital to either redesign our software to function with alternate third-party software or develop these components ourselves. If functional versions of third-party software were either no longer

available to us or no longer offered to us on commercially reasonable terms, we might be forced to limit the features available in our current or future product offerings and the commercial release of our products could be delayed, which could materially adversely affect our business, financial condition and results of operations.

Since 2001, we have depended upon our principal product, the ViryaNet Service Hub and related applications, and the failure of this product in the marketplace in the future could adversely affect our revenues.

In the past, we have depended on and expect to continue to depend on the success of our principal product, ViryaNet Service Hub, and related applications. If our product does not achieve or maintain market acceptance or if our competitors release new products that achieve quicker or greater market acceptance, have more advanced features, offer better performance or are more price competitive, our revenues may not grow and may even decline.

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.

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

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

• be expensive and time-consuming to defend;

• cause product shipment and installation delays;

• divert management’s attention and resources; or

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

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

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

We market and sell our products and services in the United States, Europe and the Middle East, and the Far East. We received 43% of our total revenues in 2002, 30% of our total revenue in 2003, and 21% of our total revenue in 2004 from sales to customers located outside of the United States. In addition to our operations in the United States, we have sales and support facilities and offices in Israel, Japan, Singapore and Australia. These operations require, and the expansion of our existing operations and entry into additional international markets will require, significant management attention and financial resources. In addition, since our financial results are reported in dollars, decreases in the rate of exchange of non-dollar currencies in which we make sales relative to the dollar will decrease the dollar-based reported value of those sales. To the extent that decreases in exchange rates are not offset by a reduction in our costs, they may materially adversely affect our results of operation. Historically, we have not hedged our foreign currency-denominated account receivables and expenses risks. We are also subject to a number of risks customary for international operations, 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;

• greater difficulty in accounts receivable collection and longer collection periods;

• unexpected changes in regulatory requirements;

• the uncertainty of protection for intellectual property rights in some countries; and

• multiple and possibly overlapping tax structures.

We depend on key personnel, and the loss of any key personnel could affect our ability to compete and our ability to attract additional key personnel may be impaired.

We believe our future success will depend on the continued service of our executive officers and other key sales and marketing, product development and professional services personnel. The loss of the services of Mr. Samuel HaCohen, the co-founder and Executive Chairman of our Company, and other members of our senior management team could harm our business significantly. We have employment agreements with our executive officers, including Mr. HaCohen. Although these agreements generally require notification prior to departure, relationships with these officers and key employees are at will. The loss of any of our key personnel could harm our ability to execute our business or financial strategy and compete.

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

As of December 15, 2005, our executive officers and directors serving as of such date, and entities affiliated with them, in the aggregate, beneficially owned approximately 28.5% of our outstanding Ordinary Shares, including options and warrants to purchase Ordinary Shares which are exercisable or will become exercisable within 60 days of December 15, 2005. 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.

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

On February 25, 2002 we completed the acquisition of all of the outstanding shares of iMedeon, Inc. (“iMedeon”), a provider of mobile workforce management solutions to the utilities sector and on July 29, 2004, we completed the acquisition of all of the outstanding shares of Utility Partners, Inc. On June 15, 2005, we completed the acquisition of substantially all of the assets of e-Wise Solutions of Melbourne, Australia. We may, in the future, acquire or make investments in other complementary businesses, technologies, services or products if appropriate opportunities arise and we may engage in discussions and negotiations with companies about our acquiring or investing in those companies’ businesses, products, services or technologies. We cannot make 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.

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

The amount of our operations which occurs outside the United States is growing. Our facilities are located in North America, Israel, Japan, Singapore, and Australia. This geographic dispersion is expected to continue for the next few years and requires 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:

• 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

• political and economic instability.

We expect international revenue to increase as a percentage of total revenue and we believe 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 meet or exceed our business plan and our revenues may decline.

Risks Related to the Internet and Wireless Technologies

Our business is dependent on the Internet and if customers do not continue to use the Internet, our business will suffer.

Our market is relatively new and evolving. Our future success will depend on the adoption by customers of business-to-business Internet solutions as an integral part of their business model. Demand for and market acceptance of recently introduced Internet-based services are each subject to a high level of uncertainty.

The level of demand and acceptance of Internet business-to-business services may not increase for a number of reasons, including:

• inadequate network infrastructure and congestion of traffic on the Internet;

• actual or perceived lack of security of information;

• inconsistent quality of service;

• lack of availability of cost-effective, high-speed service;

• lack of access and ease of use;

• excessive governmental regulation; and

• uncertainty over intellectual property ownership.

In addition, any well-publicized compromise of security could deter businesses from using the Internet to conduct transactions that involve transmitting confidential information. Computer viruses that spread over the Internet could disable or damage the systems we develop for our customers. Decreased Internet traffic as a result of general security concerns or viruses could cause companies to reduce their amount of technology spending, which could hurt our results of operations.

Our business is dependent on the projected growth and adoption of wireless and mobile technologies.

The wireless data and mobile application market is gaining acceptance but remains fragmented. There are few applications that have received widespread acceptance. Our future success relies on the adoption of wireless and mobile technologies in support of mobile field service applications across all targeted vertical markets.

The success of our solution will require that continued improvements be made in the mobile infrastructure to ensure projected growth. If the adoption and standardization does not occur in the future, wireless mobile applications could grow more slowly than anticipated. This adoption of mobile applications has to do with several aspects that are dependent on market maturity:

• the cost of equipping field personnel with mobile devices;

• a lack of standardization of wireless protocols;

• the lack of ubiquitous and affordable network coverage;

• the cost of transmitting data over wireless networks;

• increased training required for workers to utilize applications, including higher demand on help desks or call centers;

• actual or perceived slow connection and transmission speeds;

• the use of standard browser based environments; and

• the cost of third-party middleware.

Utilizing Internet applications in a wireless environment will also require ongoing education to mainstream perceptions including,

• the perception that Web applications must be used in a connected environment; and

• Web applications are cumbersome and require a lot of bandwidth.

We cannot assure you that improvements will be made to the mobile infrastructure and the adoption of wireless and mobile technologies will occur within our targeted vertical markets for use within field service applications.

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. Many of our executives, directors, certain research and development employees, and some of the experts named in this annual report are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside 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. In addition, since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and a series of armed clashes between Israel and the armed forces of the Palestinian Authority. There can be no assurance that the recent relative calm and renewed discussions with Palestinian representatives will continue.

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 days of military reserve duty annually. Additionally, all Israeli residents of this age 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 of these requirements on our workforce or business if political and military conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.

We may be adversely affected if the rate of inflation in Israel exceeds the rate of devaluation of the NIS against the dollar.

Most of our revenues are in dollars or are linked to the dollar, while a portion of our expenses, principally salaries and the related expenses for our Israeli operations, are in NIS. We do not utilize hedging to manage currency risk and, therefore, are exposed to the risk 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 this devaluation lags behind inflation in Israel. This would have the effect of increasing the dollar cost of our operations. In 1999 and in 2000, while the rate of inflation was low, there was a devaluation of the dollar against the NIS, and in 2001 the rate of devaluation of the NIS against the dollar exceeded the rate of inflation. In 2002, the devaluation of the NIS against the dollar was similar to the rate of inflation. In 2003, the NIS gained in value against the dollar while the rate of inflation was negative and in 2004 the NIS gained 2% in value against the dollar while the rate of inflation was 1%. We cannot predict any future trends in the rate of inflation in Israel or the rate of 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.

The tax benefits that we currently receive from the Investment Center of the Israeli Ministry of Industry, Trade and Labor require us to meet several conditions and may be terminated or reduced in the future, which would increase our taxes.

We receive tax benefits under Israeli law for capital investments that are designated as approved enterprises. To maintain our eligibility for these tax benefits, we must continue to meet conditions stipulated in applicable law and in our specific approvals, including making specified investments in fixed assets. If we fail to comply with these conditions, in whole or in part, with respect to any approved enterprise program we establish, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and we would likely be denied these benefits in the future. We may submit requests for new programs to be designated as approved enterprises. These requests might not be approved, particularly in light of difficult economic conditions in Israel. In addition, in March 2005, the law governing these tax benefits was amended to revise the criteria for investments that qualify for tax benefits as an approved enterprise. We cannot assure you that we will, in the future, be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits could seriously harm our financial condition and results of operations.

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

We currently have non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors. Recently, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to

demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

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

From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel (“OCS”). 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 various conditions, including payment by us to the OCS of a percentage of the consideration paid to us or our shareholders in the transaction in which the technology is transferred. In connection with a merger or similar transaction, the amount payable would be a fraction of the consideration equal to the relative amount invested by the OCS in the development of the relevant technology compared to the total investment in our company, net of financial assets that we have at the time of the transaction, but in no event less than the amount of the grant. In addition, in the event that the committee believes that the consideration to be paid in a transaction requiring payment to the OCS pursuant to the provisions of the law described above does not reflect the true value of the technology or the company being acquired, it may determine an alternate value to be used as the basis for calculating the requisite payments. These restrictions may impair our ability to enter into agreements for those products or technologies, without OCS approval. 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.

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

Although we believe that we will not be treated as a passive foreign investment company in 2004, we cannot assure the shareholders that we will not be treated as a passive foreign investment company in 2003 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 the shareholders will be subject to adverse tax consequences, including:

• taxation at the highest ordinary income tax rates in effect during your holding period on some distributions on our Ordinary Shares and gain from the sale or other disposition of our Ordinary Shares;

• paying 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 your death.

THE OFFER AND LISTING

The Offering

Ordinary Shares offered	4,067,305 shares
Price	As determined by each Selling Shareholder
Use of proceeds	We will not receive any of the proceeds from the sale of the Ordinary Shares by the Selling Shareholders in this offering
NASDAQ Capital Market Symbol	VRYA

Shares will be offered on a registered basis and not as bearer shares.

REASONS FOR THE OFFER AND USE OF PROCEEDS

The Ordinary Shares registered hereunder are registered pursuant to written commitments that we have to the Selling Shareholders. We will not receive any proceeds from the sale of the shares by the Selling Shareholders in this offering. We will pay all the expenses of registration of this offering provided however that the Selling Shareholders will bear their own selling or placement agent or broker fees and commissions and transfer taxes, if any, in connection with the sale of the Ordinary Shares.

SELLING SHAREHOLDERS

The Ordinary Shares covered by this prospectus were issued to the Selling Shareholders pursuant to the transactions described in this section.

On July 29, 2004, we acquired the outstanding shares of Utility Partners Inc. (“UP”), a provider of mobile workforce management solutions to the utilities sector, in consideration for the issuance of 898,485 Ordinary Shares to UP’s stockholders. We are registering such 898,485 Ordinary Shares as part of our commitment to UP’s stockholders under the Stockholders Agreements signed with the stockholders of UP.

On February 10, 2005, we completed a private placement of our Ordinary Shares to Telvent Investments, S.L. (“Telvent”) and in exchange for approximately $1.3 million issued 581,659 Ordinary Shares. As part of such private placement we also entered into a Registration Rights Agreement with Telvent and are registering such 581,659 Ordinary Shares pursuant to that agreement.

On March 14, 2005, in connection with a credit line made available to us by Bank Hapoalim Limited, we issued to the bank a warrant to purchase 50,000 of our Ordinary Shares at an exercise price of $2.06 per Ordinary Share, and we are registering such 50,000 Ordinary Shares as part of our commitment to the bank under that warrant.

On May 27, 2005, we entered into an agreement with LibertyView Special Opportunities Fund, LP (“LibertyView”) under which we issued to LibertyView 50,000 Ordinary Shares as consideration for our inability to meet certain registration deadlines under the note with LibertyView dated July 28, 2004 (the “Note”), and we are registering such 50,000 Ordinary Shares pursuant to that agreement.

On April 15, 2005 and July 15, 2005 we issued to LibertyView 50,643 and 23,023 Ordinary Shares, respectively, as payment of interest under the Note, and are registering such aggregate 73,666 Ordinary Shares pursuant to our obligation under the Note.

On June 29, 2005, we entered into an additional letter agreement with LibertyView under which LibertyView agreed, for the period ending on January 1, 2006, to waive its right to require us to repurchase the Note if we cease to be traded on The Nasdaq Capital Market. In connection with such waiver, we issued 10,000 of our Ordinary Shares to LibertyView, and we are registering such 10,000 Ordinary Shares pursuant to that agreement.

On August 8, 2005, we consummated with LibertyView a private placement that involved (i) the issuance of 333,333 of our Ordinary Shares for consideration of $700,000, (ii) the issuance of a warrant to purchase additional 116,666 Ordinary Shares, and (iii) the replacement of the loan under the Note with a $2.98 million loan under a new note, which is convertible at a fixed conversion price of $2.205 per Ordinary Shares into 1,351,474 Ordinary Shares. As part of such private placement we entered into a Registration Rights Agreement with LibertyView and are registering all such Ordinary Shares pursuant to that agreement.

On September 27, 2005, we consummated with the September 2005 Investor Group a private placement that involved (i) the issuance of 238,096 of our Ordinary Shares for consideration of $500,000, (ii) the issuance of a warrant to purchase additional 162,699 Ordinary Shares at an exercise price of $2.10 per share, (iii) a note for $500,000 which is convertible at a fixed conversion price of $2.205 per Ordinary Share into 226,758 Ordinary Shares, and (iv) the issuance of 32,540 Ordinary Shares to one of the investors as a finder’s fee for this transaction. The number of Ordinary Shares issuable upon conversion of the note may not result in the beneficial ownership of the converting holder and its affiliates to exceed 4.99% of the outstanding Ordinary Shares of the Company on such conversion date. As part of such private placement, the subscription agreement with the September 2005 Investor Group contains certain registration rights and obligations, and we are registering all such Ordinary Shares pursuant to that agreement.

The following table presents information provided by the Selling Shareholders with respect to beneficial ownership of our Ordinary Shares as of December 22, 2005, and as adjusted to reflect the sale of the shares offered by this prospectus by the Selling Shareholders, assuming that all shares being offered by this prospectus are ultimately sold in the offering. Our registration of these securities does not necessarily mean that the Selling Shareholders will sell any or all of the registered securities.

On December 22, 2005, we issued 30,000 Ordinary Shares to Bank Hapoalim Limited in consideration for the par value in connection with the restructuring of our debt arrangement with the bank. We are registering these 30,000 Ordinary Shares as part of our commitment to the bank for this issuance.

The Selling Shareholders have informed us that they purchased the Ordinary Shares for their own account and not with a present view to the distribution of any part thereof, and that they do not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations to any such person or to any third person, with respect to any of the Ordinary Shares.

The Company has been informed by LibertyView that they may be affiliated with registered broker-dealers and that such Selling Shareholders acquired their securities in the ordinary course of business. The Company has been informed by the September 2005 Investor Group that one of the investors in this group may have some principals that advise broker-dealers but does not have ownership of those or any broker-dealers.

Name and Address of Selling Shareholder	Number of Shares beneficially owned prior to the Offering(1)	Percent of Outstanding Shares prior to the Offering(2)		Number of Shares to be Offered	Number of Shares beneficially owned after the Offering	Percent of Outstanding Shares after the Offering(2),(3)
Bank Hapoalim Limited (4) 41-45 Rothschild Blvd. Tel Aviv, Israel	114,160	1.55	%	80,000	34,160	0.46	%
Telvent Investments, S.L. (5) Valgrande, 6 28108 Alcobendas Madrid, Spain	1,134,667	15.47	%	581,659	553,008	7.54	%
LibertyView Special Opportunities Fund, LP (6) 111 River Street Hoboken, NJ, 07030 USA	2,123,099	24.07	%	1,935,139	187,960	2.13	%
Alpha Capital Aktiengesellschaft (7) Pradafant 7 9490 Furstentums Vaduz, Liechenstein	251,020	3.36	%	251,020	0	0.00	%
Ellis International Ltd. (8)(17) 53rd Street Urbanizacion Obarrio Swiss Tower, 16th Floor, Panama Republic of Panama	189,428	2.55	%	189,428	0	0.00	%
Globis Capital Partners LP (9) 60 Broad Street, 38th Floor New York, NY 10004	94,133	1.28	%	94,133	0	0.00	%
Omega Capital SmallCap Fund, Ltd. (10) 1403 44th Street, Suite 214 Brooklyn, NY 11219	62,756	0.85	%	62,756	0	0.00	%
Iroquois Master Fund Ltd. (11) 641 Lexington Avenue, 26th Floor New York, NY 10022	62,756	0.85	%	62,756	0	0.00	%
Brooks, Paul V. (12) 3929 South Nine Drive Valrico, Florida 33594	89,618	1.22	%	70,868	18,750	0.26	%
Camp, Blaine Robert (12) 5409 Reflections Boulevard Lutz, Florida 33558	5,545	0.08	%	4,295	1,250	0.02	%

CoCon Systems, Inc. (12) (13) 201 ATP Tour Boulevard Ponte Vedra, Florida 32082	70	0.00	%	70	0	0.00	%
Colaco, Amudha M. (12) 18016 Avalon Lane Tampa, Florida 33647	4,795	0.07	%	4,295	500	0.01	%
Donovan, Pamela Kay (12) 1916 Sky Drive Clearwater, Florida 33755	17,431	0.24	%	16,931	500	0.01	%
Elkins, Bradley S. (12) 1708 Mapleleaf Boulevard Oldsmar, Florida 34677	4,795	0.07	%	4,295	500	0.01	%
Flink, Ellis B. (12) 4530 Roundview Ct. Land O’ Lakes, Florida 34639	17,403	0.24	%	17,153	250	0.00	%
GeoCapital IV, LP (12) (14) Attention: Richard A. Vines 4004 Ben Franklin Blvd Durham, NC 27704	224,012	3.06	%	224,012	0	0.00	%
Gursky, Jr., Michael (12) 3908 South Nine Drive Valrico, Florida 33594	36,629	0.50	%	34,129	2,500	0.03	%
Kanitz, Jr., Eric C. (12) 23059 Deerfly Road Brooksville, Florida 34602	5,045	0.07	%	4,295	750	0.01	%
Kozlin, Ronald S. (12) 5904 Cherry Oak Drive Valrico, Florida 33594	48,916	0.67	%	46,416	2,500	0.03	%
Krufka, Edward (12) 2642 Cabot Road Land O’ Lakes, Florida 34639	37,536	0.51	%	35,036	2,500	0.03	%
Leonard, Michael W. (12) 844 45 Avenue N.E. St. Petersburg, Florida 33703	24,079	0.33	%	23,329	750	0.01	%
May, Arnold P. (12) Testa Hurwitz & Thibeault High Street Tower 125 High Street Boston, MA 02110	814	0.01	%	814	0	0.00	%
Nelsen, Kenneth, L. (12) 5543 Avenue Du Soleil Lutz, Florida 33558	27,805	0.38	%	27,055	750	0.01	%
Nolan, Michael A. (12) 504 Jayne Place Lutz, Florida 33549	24,775	0.34	%	24,025	750	0.01	%
Ordaz, Candace (12) 16715 Eagle Oak Drive Odessa, Florida 33556	19,309	0.26	%	19,059	250	0.00	%
Madison, Dianne Palmieri(12) 4312 Worthington Road Palm Harbor, Florida 34685	4,295	0.06	%	4,295	0	0.00	%

Papp, Suzanne Louise (12) 10453 Manila Avenue San Diego, CA 92126	19,620	0.27	%	19,370	250	0.00	%
Persaud, Nalinie (12) 17541 Cedarwood Loop Lutz, Florida 33558	17,514	0.24	%	17,264	250	0.00	%
Reed, Timothy A. (12) 550 West Flamingo, Unit 401 Venice, Florida 34285	71,733	0.98	%	71,733	0	0.00	%
ReGen Capital 1 (12) (15) Attention: Elliot Herskowitz 2109 Broadway, Suite 206 New York, NY 10023	125	0.00	%	125	0	0.00	%
Sadusky, Patrick (12) 10942 May Apple Court Land O’ Lakes, Florida 34638	20,053	0.28	%	19,303	750	0.01	%
Smith, Michelle (12) 18142 Sweet Jasmine Drive Tampa, Florida 33647	17,210	0.24	%	16,710	500	0.01	%
Tang, Ve (12) 4665 31st Avenue North St. Petersburg, Florida 33713-2012	17,403	0.24	%	17,153	250	0.00	%
Terasen Gas Inc. (12) (16) 1111 West Georgia Street Vancouver, BC Canada V6E 4M4	55,348	0.76	%	55,348	0	0.00	%
Tran, Chinh Ngoc (12) 5524 Turtle Crossing Lp Tampa, Florida 33625	15,357	0.21	%	15,107	250	0.00	%
Wilson, Steve (12) 3505 Eastmonte Drive Valrico, Florida 33594	18,679	0.26	%	17,929	750	0.01	%

(1) Assumes the exercise of all warrants and options and conversion of all convertible notes held by the Selling Shareholders that are exercisable or convertible within 60 days from December 22, 2005.

(2) Based on (i) 7,322,589 Ordinary Shares outstanding as of December 22, 2005, plus (ii) in connection with any Selling Shareholder, the Ordinary Shares that may be issued to such Selling Shareholder only in connection with exercise of options, warrants or convertible notes to purchase Ordinary Shares.

(3) Assumes all Ordinary Shares registered hereunder are sold by the Selling Shareholder.

(4) Poalim Capital Markets, managed by Mr. Nir Brunstein, has voting and investment powers over the shares to be resold.

(5) Mr. Jose Ignacio del Barrio and Mr. Manuel Sánchez Ortega have joint voting and investment powers over the shares to be resold.

(6) Neuberger Berman, LLC., the investment adviser to LibertyView Special Opportunities Fund, LP, has voting and investment powers over the shares to be resold by LibertyView Special Opportunities Fund, LP.

(7) Mr. Konrad Ackermann has voting and investment powers over the shares to be resold by Alpha Capital Aktiengesellschaft.

(8) Mr. Wilhelm Unger has voting and investment powers over the shares to be resold by Ellis International Ltd.

(9) Mr. Paul Packer has voting and investment powers over the shares to be resold by Globis Capital Partners LP.

(10) Mr. Herman Segal has voting and investment powers over the shares to be resold by Omega Capital SmallCap Fund, Ltd.

(11) Mr. Joshua Silverman has voting and investment powers over the shares to be resold by Iroquois Master Fund Ltd.

(12) Denotes former shareholder of Utility Partners Inc. whose shares were acquired by ViryaNet, Inc. on July 29, 2004.

(13) Mr. Felix Crombach, Mr. Jochen Crombach, Mr. Maren Crombach, Ms. Nadja Crombach, Dr. Ulrich Crombach, and Silina, Inc. have voting and investment powers over the shares to be resold by CoCon Systems

(14) GeoCapital IV Management, comprised of general partners Mr. Richard A. Vines, Mr Stephen J. Clearman, and Mr. Lawrence Lepard, have voting and investment powers over the shares to be resold by GeoCapital

(15) Mr. Elliot Herskowitz and Mr. Neal Herskowitz have voting and investment powers over the shares to be resold by ReGen Capital

(16) The board of directors for Terasen Gas Inc. has voting and investment powers over the shares to be resold by Terasen Gas Inc. As of the date herof, the members of the board of directors are: Mr. Randy C. Aldridge, Mr. Thomas S. Chambers, Mr. Pierre Choquette, Mr. Mark C. Cullen, Ms. Ida J. Goodreau, Mr. Eric P. Newell, Mr. Michael W. O’Brien, Mr. John M. Reid, Mr. James M. Stanford, and Mr. Douglas W. G. Whitehead.

(17) Includes 32,540 Ordinary Shares issued to this investor as a finder’s fee related to the investment by the September 2005 Investor Group.

TIMETABLE AND PLAN OF DISTRIBUTION

The Selling Shareholders may sell, directly or through brokers, the Ordinary Shares in one or more long or short transactions at fixed prices, at market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices.

Although none of the Selling Shareholders has advised us of the manner in which such Shareholders currently intend to sell Ordinary Shares offered hereby, the Selling Shareholders may choose to sell all or a portion (or none) of such shares from time to time in one or more of the following transactions:

• on any national securities exchange or quotation service on which the Ordinary Shares may be listed or quoted at the time of sale, including The Nasdaq Capital Market;

• on the over-the-counter market;

• in private transactions;

• through options or other derivative instruments;

• by pledge to secure debts or other obligations;

• through block transactions;

• any other legally available means; or

• a combination of any of the above transactions.

In connection with such sales, the Selling Shareholders and any participating broker may be deemed to be “underwriters” of the shares within the meaning of the Securities Act, although the offering of these securities may not be underwritten by a broker-dealer firm. If a Selling Shareholder qualifies as an “underwriter” under the Securities Act and the rules and regulations and interpretations thereunder, such person will be subject to the prospectus delivery requirements of the Act. Such broker-dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the Selling Shareholders. Any such commissions and profits realized on any resale of the shares might be deemed to be underwriting discounts and commissions under the Securities Act. Sales in the market may be made to broker-dealers making a market in the Ordinary Shares or other broker-dealers, and such broker-dealers, upon their resale of such securities, may be deemed to be underwriters in this offering.

In addition, any Ordinary Shares offered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than pursuant to this prospectus.

We will bear all costs and expenses of the registration under the Securities Act and certain state securities laws of the Ordinary Shares, other than any discounts or commissions payable with respect to sales of such securities.

From time to time this prospectus may be supplemented or amended as required by the Securities Act. During any time when a supplement or amendment is required, the Selling Shareholders are required to stop making sales until the prospectus has been supplemented or amended. Further, we are required to maintain the effectiveness of the Registration Statement for a period of up to nine months or until the distribution contemplated by this Registration Statement has been completed. We will make copies of this prospectus available to the Selling Shareholders and have informed the Selling Shareholders of the need for delivery of a copy of this prospectus to each purchaser of the Ordinary Shares prior to or at the time of such sale.

Pursuant to the terms under which the Ordinary Shares were issued to certain of the Selling Shareholders, we have agreed to indemnify certain of the Selling Shareholders and certain of their associates against such liabilities as they may incur as a result of any untrue statement of a material fact in the Registration Statement, or any omission therein to state a material fact required to be stated therein or necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. Such indemnification includes liabilities under the Securities Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), state securities laws and the rules thereunder, but excludes liabilities for statements or omissions that were based on written information provided by or on behalf of the Selling Shareholders specifically for use in the Registration Statement, as to which the Selling Shareholders have agreed to indemnify us. We have also agreed to reimburse such persons for legal and other expenses reasonably incurred in connection with investigating or defending any action relating to such statements or omissions which result in such persons’ becoming entitled to such indemnification.

Each Selling Shareholders and any other persons participating in a distribution of securities will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M, which may restrict certain activities of, and limit the timing of purchases and sales of securities by, Selling Shareholders and other persons participating in a distribution of securities. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distribution, subject to specified exceptions or exemptions. All of the foregoing may affect the marketability of the securities offered hereby.

LEGAL MATTERS

The validity of the Ordinary Shares offered hereby is being passed upon by Meitar Liquornik Geva & Leshem Brandwein, Tel-Aviv, Israel. The partners of Meitar Liquornik Geva & Leshem Brandwein and the firm itself, beneficially own, in the aggregate, 70,524 of our outstanding shares, including shares which may be issued upon the exercise of options, warrants or other convertible securities.

EXPERTS

Our consolidated financial statements as of December 31, 2004 and 2003, and for each year in the three-year period ended December 31, 2004, included in our Annual Report on Form 20-F for the year ended December 31, 2004, and incorporated by reference in this prospectus and Registration Statement, have been audited by Kost, Forer, Gabbay & Kasierer, independent registered public accounting firm, a member of Ernst & Young Global, as set forth in their report included thereon and incorporated by reference herein. The consolidated financial statements referred to above are included in reliance on such reports given on the authority of such firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a Registration Statement on Form F-3 with the Securities and Exchange Commission, or the “SEC”, for the shares we are offering by this prospectus. This prospectus does not include all of the information contained in the Registration Statement. You should refer to the Registration Statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the Registration Statement for copies of the actual contract, agreement or other document.

We are required to file annual and special reports and other information with the SEC. You can read our SEC filings, including the Registration Statement, over the Internet at the SEC’s web site at http://www.sec.gov., or through our web site at www.viryanet.com. You may also read and copy any document we file with the SEC at its public reference facilities at 450 Fifth Street, NW, Washington, DC 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, NW, Room 1024, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

We are subject to certain of the informational requirements of the Exchange Act. As a “foreign private issuer,” we are exempt from the rules under the Exchange Act prescribing certain disclosure and procedural requirements for proxy solicitations and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchases and sales of Ordinary Shares. In addition, we

are not required to file quarterly reports or to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to file with the SEC, within 180 days after the end of each fiscal year, an annual report on Form 20-F containing financial statements that will be examined and reported on, with an opinion expressed by an independent accounting firm, as well as quarterly reports on Form 6-K containing unaudited financial information, within 60 days after the end of each calendar quarter.

INFORMATION INCORPORATED BY REFERENCE

The SEC allows us to “incorporate by reference” information into this prospectus. This means that we can disclose important information to you by referring you to another document filed by us with the SEC. Information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by this prospectus or by information we file with the SEC in the future.

The following documents are incorporated by reference:

• Our Annual Report on Form 20-F for the year ending December 31, 2004, filed with the SEC on July 15, 2005, and amendments filed with the SEC on July 25, 2005, August 17, 2005, August 24, 2005 and August 25, 2005.

• Forms 6-K submitted to the SEC on January 18, 2005, February 22, 2005, March 17, 2005, May 6, 2005, June 1, 2005, June 16, 2005, July 8, 2005, August 9, 2005, August 10, 2005, September 29, 2005, September 30, 2005, November 7, 2005, and December 22, 2005.

• Our Registration Statement on Form 8-A filed with the SEC on September 12, 2000

In addition, all subsequent annual reports filed on Form 20-F prior to the termination of this offering are incorporated by reference into this prospectus. Also, we may incorporate by reference our future reports on Form 6-K by stating in those Forms that they are being incorporated by reference into this prospectus.

We will provide without charge to any person (including any beneficial owner) to whom this prospectus has been delivered, upon oral or written request, a copy of any document incorporated by reference in this prospectus but not delivered with the prospectus (except for exhibits to those documents unless a document states that one of its exhibits is incorporated into the document itself). Such requests should be directed to Albert A. Gabrielli, Chief Financial Officer, 2 Willow Street, Southborough, MA 01745-1027, (508) 490-8600.

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in Israel, and many of our directors and many of the executive officers and the Israeli experts named herein are not residents of the United States and substantially all of their assets and our assets are located outside the United States. Service of process upon our non-U.S. resident directors and executive officers or the Israeli experts named herein and enforcement of judgments obtained in the United States against us, and our directors and executive officers, or the Israeli experts named herein, may be difficult to obtain within the United States. ViryaNet, Inc. is the U.S. agent authorized to receive service of process in any action against us arising out of this offering or any related purchase or sale of securities. We have not given consent for this agent to accept service of process in connection with any other claim.

We have been informed by our legal counsel in Israel, Meitar Liquornik Geva & Leshem Brandwein, that there is doubt as to the enforceability of civil liabilities under the Securities Act or the Exchange Act in original actions instituted in Israel. However, subject to certain time limitations, an Israeli court may declare a foreign civil judgment enforceable if it finds that:

• the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment,

• the judgment is no longer appealable,

• the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy, and

• the judgment is executory in the state in which it was given.

Even if the above conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel. An Israeli court also will not declare a foreign judgment enforceable if (i) the judgment was obtained by fraud, (ii) there was no due process, (iii) the judgment was rendered by a court not competent to render it according to the laws of private international law in Israel, (iv) the judgment is at variance with another judgment that was given in the same matter between the same parties and which is still valid, or (v) at the time the action was brought in the foreign court a suit in the same matter and between the same parties was pending before a court or tribunal in Israel. Judgments rendered or enforced by Israeli courts will generally be payable in Israeli currency. Judgment debtors bear the risk associated with converting their awards into foreign currency, including the risk of unfavorable exchange rates.

4,067,305 Ordinary Shares

VIRYANET LTD.

PROSPECTUS

December     , 2005

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 8. Indemnification of Directors and Officers.

Our Articles of Association provide that we shall be entitled to undertake in advance to indemnify an officer or director of ours, provided that the undertaking is restricted to the events of a kind which our board of directors may anticipate at the time it makes such undertaking at an amount which the board of directors determines is reasonable under the circumstances. In addition, we can indemnify an officer or director for specific occurrences retroactively. We have previously agreed to indemnify our officer or director to the fullest extent permitted under the Companies Law.

Our Articles of Association further provide that we may indemnify an officer or director of ours for liability or expense he incurs as a result of an action done by him in his capacity as our officer or director as follows:

1. any monetary obligation imposed on the officer or director in favor of a third party pursuant to a judgment, including a compromise judgment given in a settlement or a judgment of an arbitrator, approved by the court.

2. reasonable litigation expenses, including legal fees, incurred by the officer or director or which he was ordered to pay by the court:

(a) within the framework of proceedings filed against him by us or on our behalf or by a third party, or

(b) in a criminal proceeding in which he was acquitted, or

(c) in a criminal proceeding in which he was convicted of a felony which does not require a proof of criminal intent.

In no event may we indemnify an officer or director for:

1. a breach of the duty of loyalty toward us, unless the officer or director acted in good faith and had reasonable grounds to assume that the action would not prejudice our interests;

2. a breach of the duty of care which was done intentionally or recklessly;

3. an intentional act which was done to unlawfully yield a personal profit; or

4. a criminal fine or penalty.

In addition, we have a directors and officers liability insurance policy insuring our directors’ and officers’.

Item 9. Exhibits.

The following exhibits are incorporated herein by reference:

Exhibit No.	Description
4.1	Form of Stockholders Agreement dated July 29, 2004 with the stockholders of Utility Partners Inc. (*)
4.2	Registration Rights Agreement dated February 7, 2005, with Telvent Investments, S.L (*)
4.3	Registration Rights Agreement dated August 5, 2005 with LibertyView Special Opportunities Fund, LP
4.4	Warrant dated March 14, 2005, with Bank Hapoalim Limited (*)
4.5	Subscription Agreement dated September 26, 2005 among ViryaNet and the September 2005 Investor Group
4.6	Letter dated December 22, 2005 from ViryaNet to Bank Hapoalim Limited.
5	Opinion of Meitar Liquornik Geva & Leshem Brandwein, our Israeli counsel, as to the validity of the Ordinary Shares
23.1	Consent of Meitar Liquornik Geva & Leshem Brandwein (included in the opinion attached as Exhibit 5)
23.2	Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global
24	Power of Attorney (included on signature page)

(*) Previously filed as exhibits to the Company’s Annual Report on Form 20-F dated July 15, 2005 for the year ended December 31, 2004.

Item 10. Undertakings.

(a) The undersigned Registrant hereby undertakes:

(1) To file during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the Securities Act;

(ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement.

(iii) to include any material information with respect to the Plan of Distribution not previously disclosed in the Registration Statement or any other material change to such information in the Registration Statement.

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is

contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement.

(2) That, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4) To file a post-effective amendment to the Registration Statement to include any financial statements required by Item 8.A of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Securities Act need not be furnished, provided that the Registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to Registration Statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Securities Act or Item 8.A of Form 20-F if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the Form F-3.

(b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Southborough, on December 22, 2005.

VIRYANET LTD.
By:	/s/    ALBERT A. GABRIELLI
	Albert A. Gabrielli, CFO

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/S/ SAMUEL I. HACOHEN Samuel I. Hacohen	Executive Chairman of the Board	December 22, 2005
/S/ PAUL V. BROOKS Paul V. Brooks	President and Chief Executive Officer (Principal Executive Officer)	December 22, 2005
/S/ ALBERT A. GABRIELLI Albert A. Gabrielli	Chief Financial Officer (Principal Financial and Accounting Officer)	December 22, 2005
/S/ VLADIMIR MORGENSTERN Vladimir Morgenstern	Director	December 22, 2005
/S/ MANUEL SANCHEZ ORTEGA Manuel Sanchez Ortega	Director	December 22, 2005
/S/ LIOR BREGMAN Lior Bregman	Director	December 22, 2005
/S/ RONIT LERNER Ronit Lerner	Director	December 22, 2005
/S/ PETER GYENES Peter Gyenes	Director	December 22, 2005

Authorized Representative in the U.S.:
ViryaNet, Inc.
By:	/s/    PAUL V. BROOKS
Name:	Paul V. Brooks
Title:	President and Chief Executive Officer
Date:	December 22, 2005

EX-4.3

Exhibit 4.3

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (the “Agreement”) is made and entered into as of this 5^th day of August, 2005 by and among ViryaNet Ltd., an Israeli corporation (the “Company”), and the “Investors” named in that certain Note Purchase Agreement by and among the Company and the Investors (the “Purchase Agreement”).

The parties hereby agree as follows:

1. Certain Definitions.

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

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

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

“Conversion Shares” means the Ordinary Shares issuable upon the conversion of the Notes.

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

“Notes” means, the Company’s convertible notes issued to the Investors pursuant to the Purchase Agreement, the form of which is attached to the Purchase Agreement as Exhibit A, including the Restated Notes (as defined in the Purchase Agreement).

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

“Payment Shares” means Ordinary Shares issued as payment pursuant to Section 7 of the Notes.

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

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

“Registrable Securities” shall mean (i) the Shares, (ii) the Warrant Shares, (iii) the Conversion Shares, (iv) the Payment Shares, and (v) any other securities issued or issuable with respect to or in exchange for Registrable Securities; provided, that, a security shall cease to be a Registrable Security upon (A) sale pursuant to a Registration Statement or Rule 144 under the

1933 Act, or (B) such security becoming eligible for sale by the Investors pursuant to Rule 144(k).

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

“Required Investors” means the Investors holding a majority of the Registrable Securities.

“SEC” means the U.S. Securities and Exchange Commission.

“Shares” means the Ordinary Shares purchased by the Investors pursuant to the Purchase Agreement.

“Warrants” means, the Warrants issued to the Investors pursuant to the Purchase Agreement, the form of which is attached to the Purchase Agreement as Exhibit B.

“Warrant Shares” means the Ordinary Shares issuable upon the exercise of the Warrants.

“1933 Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

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

2. Registration.

(a) Registration Statements.

(i) Promptly following the Closing Date (as defined in the Purchase Agreement) but no later than thirty (30) days after the Closing Date (the “Filing Deadline”), the Company shall prepare and file with the SEC one Registration Statement on Form F-3 (or, if Form F-3 is not then available to the Company, on such form of registration statement as is then available to effect a registration for resale of the Registrable Securities, subject to the Required Investors’ consent), covering the resale of the Registrable Securities. Such Registration Statement shall include the plan of distribution attached hereto as Exhibit A. Such Registration Statement also shall cover, to the extent allowable under the 1933 Act and the rules promulgated thereunder (including Rule 416), such indeterminate number of additional Ordinary Shares resulting from stock splits, stock dividends or similar transactions with respect to the Initial Registrable Securities. The Company shall use its reasonable best efforts to obtain from each person who now has piggyback registration rights a waiver of those rights with respect to the Registration Statement. The Registration Statement (and each amendment or supplement thereto, and each request for acceleration of effectiveness thereof) shall be provided in accordance with Section 3(c) to the Investors and their counsel prior to its filing or other submission. If a Registration Statement covering the Registrable Securities is not filed with the SEC on or prior to the Filing Deadline, the Company will make pro rata payments to each Investor, as liquidated damages and not as a penalty, in an amount equal to 1.0% of the aggregate amount invested by such Investor pursuant to the Purchase Agreement for each 30-day period or pro rata for any portion thereof following the date by which such Registration Statement should

-2-

have been filed for which no Registration Statement is filed with respect to the Registrable Securities. Such payments shall be in partial compensation to the Investors, and shall not constitute the Investors’ exclusive remedy for such events. Such payments shall be made to each Investor in cash. For the avoidance of doubt and as an example only, in the event that the Company files a Registration Statement three days after the Filing Deadline, the Company would be liable for liquidated damages in the amount of US$1,200.00.

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

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

-3-

(c) Effectiveness.

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

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

-4-

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

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

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

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

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

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

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

-5-

general taxation in any jurisdiction where it would not otherwise be so subject but for this Section 3(f), or (iii) file a general consent to service of process in any such jurisdiction;

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

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

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

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

-6-

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

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

5. Obligations of the Investors.

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

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

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

-7-

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

6. Indemnification.

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

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

-8-

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

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

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

-9-

7. Miscellaneous.

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

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

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

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

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

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

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

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

-10-

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

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

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

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

-11-

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

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

-12-

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

-13-

Exhibit A

Plan of Distribution

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

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

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

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

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

• an exchange distribution in accordance with the rules of the applicable exchange;

• privately negotiated transactions;

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

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

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

• a combination of any such methods of sale.

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

-14-

shares in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

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

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

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

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

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

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

-15-

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

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

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

-16-

EX-4.5

Exhibit 4.5

SUBSCRIPTION AGREEMENT

THIS SUBSCRIPTION AGREEMENT (this “Agreement”), dated as of September 26, 2005, by and among Viryanet Ltd., a corporation organized under the laws of the State of Israel (the “Company”), and the subscribers identified on the signature page hereto (each a “Subscriber” and collectively “Subscribers”).

WHEREAS, the Company and the Subscribers are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “1933 Act”); and

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Subscribers, as provided herein, and the Subscribers, in the aggregate, shall purchase (i) Five Hundred Thousand Dollars ($500,000) of principal amount of promissory notes of the Company (each a “Note”), which Notes are convertible into the Company’s ordinary shares, NIS 1.00 par value (the “Ordinary Shares”) at a per share conversion price set forth in the Note (the “Conversion Price”), a form of which is annexed hereto as Exhibit A; (ii) 238,095 Ordinary Shares at a per share purchase price of $2.10 for an aggregate purchase price of $500,000 (“Initial Shares”); and (iii) share purchase warrants (the “Warrants”) to purchase up to 162,699 Ordinary Shares (the “Warrant Shares”). The Notes, Initial Shares, Ordinary Shares issuable upon conversion of the Notes (the “Note Shares”), the Warrants and the Warrant Shares are collectively referred to herein as the “Securities”. The purchase price to be paid for the Notes and Initial Shares is collectively referred to as the “Purchase Price”.

WHEREAS, the aggregate proceeds of the sale of the Notes, Initial Shares and the Warrants contemplated hereby shall be held in escrow pursuant to the terms of a Funds Escrow Agreement to be executed by the parties substantially in the form attached hereto as Exhibit B (the “Escrow Agreement”).

NOW, THEREFORE, in consideration of the mutual covenants and other agreements contained in this Agreement the Company and the Subscribers hereby agree as follows:

1. Conditions to Closing.

Subject to the satisfaction or waiver of the terms and conditions of this Agreement, at the Closing, each Subscriber shall purchase and the Company shall sell to each Subscriber (i) a Note in the principal amount designated on the signature page hereto, (ii) the Initial Shares and (iii) a Warrant as described in Section 3 below for the amount of Ordinary Shares set forth on the signature page hereto.

1

(Subscription Agreement)

2. Closing; Closing Deliveries.

The consummation of the transactions contemplated herein (the “Closing”) shall take place at the offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, promptly following receipt thereby of all of the Company Documents and the Subscriber Deliverables (as such terms are defined in the Escrow Agreement) (“Closing Date”).

3. Warrants.

On the Closing Date, the Company will issue and deliver Warrants to the Subscribers for the amounts of Ordinary Shares set forth on the signature page. A form of Warrant is annexed hereto as Exhibit C.

4. Subscriber’s Representations and Warranties.

Each Subscriber hereby represents and warrants to and agrees with the Company only as to such Subscriber that:

(a) Organization and Standing of the Subscribers. If the Subscriber is an entity, such Subscriber is a corporation, partnership or other entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

(b) Authorization and Power. Each Subscriber has the requisite power and authority to enter into and perform this Agreement and to purchase the Notes, Initial Shares and Warrants being sold to it hereunder. The execution, delivery and performance of this Agreement by such Subscriber and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Subscriber or its Board of Directors, stockholders, partners or members, as the case may be, is required. This Agreement has been, and each other document to be signed by the Subscriber hereunder has been or will be, duly authorized, executed and delivered by Subscriber and constitutes a valid and binding obligation of the Subscriber, enforceable against the Subscriber in accordance with the terms thereof.

(c) No Conflicts. The execution, delivery and performance of this Agreement and the consummation by Subscriber of the transactions contemplated hereby or relating hereto do not and will not (i) result in a violation of such Subscriber’s charter documents or bylaws or other organizational documents, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time

2

or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument or obligation to which such Subscriber is a party or by which its properties or assets are bound, or (iii) result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Subscriber or its properties (except, with respect to clauses (ii) and (iii), for such conflicts, defaults and violations as would not, individually or in the aggregate, have a material adverse effect on such Subscriber). Such Subscriber is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver and perform any of its obligations under this Agreement or to purchase the Notes, Initial Shares and the Warrants in accordance with the terms hereof, provided that for purposes of the representation made in this sentence, such Subscriber is assuming and relying upon the accuracy of the relevant representations and agreements of the Company herein.

(d) Information on Company. The Subscriber has been furnished with or has had access at the EDGAR Website of the Commission to the Company’s Form 20-F for the year ended December 31, 2004 and all amendments thereto as filed with the Commission, together with all subsequently submitted Forms 6-K and other filings made with the Commission available at the EDGAR website (hereinafter referred to collectively as the “Reports”). The Subscriber has had an opportunity to ask questions and receive answers from representatives of the Company. In addition, the Subscriber has received in writing from the Company such other information concerning its operations, financial condition and other matters as the Subscriber has requested in writing (such other information is referred to collectively as the “Other Written Information”), and considered all factors the Subscriber deems material in deciding on the advisability of investing in the Securities.

(e) Information on Subscriber. The Subscriber is, and will be at the time of the conversion of the Notes and exercise of the Warrants, an “accredited investor”, as such term is defined in Regulation D promulgated by the Commission under the 1933 Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable the Subscriber to utilize the information made available by the Company to evaluate the merits and risks of and to make an

3

informed investment decision with respect to the proposed purchase, which represents a speculative investment. The Subscriber has the authority and is duly and legally qualified to purchase and own the Securities. The Subscriber is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof. The information set forth on the signature page hereto regarding the Subscriber is accurate. The Subscriber is not required to be registered as a broker-dealer under Section 15 of the Securities Exchange Act of 1934, as amended (the “1934 Act”) and the Subscriber is not a broker-dealer.

(f) Purchase of Notes, Initial Shares, and Warrants. On the Closing Date, the Subscriber will purchase the Notes, Initial Shares and Warrants as principal for its own account for investment only and not with a view toward, or for resale in connection with, the public sale or any distribution thereof.

(g) Compliance with Securities Act. The Subscriber understands and agrees that the Securities have not been registered under the 1933 Act or any applicable state securities laws, by reason of their issuance in a transaction that does not require registration under the 1933 Act (based in part on the accuracy of the representations and warranties of Subscriber contained herein), and that such Securities must be held indefinitely unless a subsequent disposition is registered under the 1933 Act or any applicable state securities laws or is exempt from such registration.

(h) Shares Legend. The Note Shares, Initial Shares and Warrant Shares shall bear the following or similar legend:

“THE ORDINARY SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE ORDINARY SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO VIRYANET LTD. THAT SUCH REGISTRATION IS NOT REQUIRED.”

(i) Warrants Legend. The Warrants shall bear the following or similar legend:

“THIS WARRANT AND THE ORDINARY SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

4

AMENDED. THIS WARRANT AND THE ORDINARY SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO VIRYANET LTD. THAT SUCH REGISTRATION IS NOT REQUIRED.”

(j) Note Legend. The Note shall bear the following legend:

“THIS NOTE AND THE ORDINARY SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE ORDINARY SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO VIRYANET LTD. THAT SUCH REGISTRATION IS NOT REQUIRED.”

(k) Communication of Offer. The offer to sell the Securities was directly communicated to the Subscriber by the Company. At no time was the Subscriber presented with or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicited or invited to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer.

(l) Authority; Enforceability. This Agreement and other agreements delivered together with this Agreement or in connection herewith have been duly authorized, executed and delivered by the Subscriber and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity; and Subscriber has full corporate or other applicable power and authority necessary to enter into this Agreement and such other agreements and to perform its obligations hereunder and under all other agreements entered into by the Subscriber relating hereto.

5

(m) Restricted Securities. Subscriber understands that the Securities have not been registered under the 1933 Act and such Subscriber will not sell, offer to sell, assign, pledge, hypothecate or otherwise transfer any of the Securities unless pursuant to an effective registration statement under the 1933 Act, or unless an exemption from registration is available. Notwithstanding anything to the contrary contained in this Agreement, such Subscriber may transfer (without restriction and without the need for an opinion of counsel) the Securities to its Affiliates (as defined below) provided that each such Affiliate is an “accredited investor” under Regulation D and such Affiliate agrees in writing (with a copy to the Company) to be bound by the terms and conditions of this Agreement. For the purposes of this Agreement, an “Affiliate” of any person or entity means any other person or entity directly or indirectly controlling, controlled by or under direct or indirect common control with such person or entity (including each Subsidiary (as defined in Section 5(a) of such person). For purposes of this definition, “control” means the power to direct the management and policies of such person or firm, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

(n) No Governmental Review. Each Subscriber understands that no United States federal or state agency or any other governmental or state agency has passed on or made recommendations or endorsement of the Securities or the suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

(o) Correctness of Representations. Each Subscriber represents as to such Subscriber that the foregoing representations and warranties are true and correct as of the date hereof and, unless a Subscriber otherwise notifies the Company prior to the Closing Date shall be true and correct as of the Closing Date.

(p) Survival. The foregoing representations and warranties shall survive the Closing Date for a period of two years.

5. Company Representations and Warranties.

The Company represents and warrants to and agrees with each Subscriber that:

(a) Due Incorporation. The Company and each of its Subsidiaries is a corporation or other entity duly incorporated or organized, validly existing and in good standing (where such concept exists) under the laws of the jurisdiction of its incorporation or organization and has the requisite corporate power to own its properties and to carry

6

on its business as presently conducted. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which such qualification is not required or where the failure to so qualify would not have a Material Adverse Effect. For purposes of this Agreement, a “Material Adverse Effect” shall mean a material adverse effect on the financial condition, results of operations, properties or business of the Company and its Subsidiaries taken as a whole. For purposes of this Agreement, “Subsidiary” means, with respect to any entity at any date, any corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity of which more than 50% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity. All the Company’s Subsidiaries as of the Closing Date are set forth on Schedule 5(a) hereto.

(b) Outstanding Stock. All issued and outstanding shares of capital stock of the Company has been duly authorized and validly issued and are fully paid and nonassessable.

(c) Authority; Enforceability. This Agreement, the Note, the Warrants and any other agreements delivered together with this Agreement or in connection herewith (collectively, “Transaction Documents”) have been or will be, as the case may be, duly authorized, executed and delivered by the Company and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity. The Company has full corporate power and authority necessary to enter into and deliver the Transaction Documents and to perform its obligations thereunder.

(d) Additional Issuances. There are no outstanding agreements or preemptive or similar rights affecting the Company’s Ordinary

7

Shares or equity and no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, or agreements or understandings with respect to the sale or issuance of any Ordinary Shares or equity of the Company or other equity interest in any of the Subsidiaries of the Company, except as described on Schedule 5(d).

(e) Consents. No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company, or any of its Affiliates, the Nasdaq SmallCap Market (“SmallCap”), Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel (“OCS”), the Israeli Investment Center nor the Company’s shareholders is required for the execution by the Company of the Transaction Documents and compliance by the Company with, and performance by the Company of, its obligations under the Transaction Documents, including, without limitation, the issuance and sale of the Securities, except for such consents that shall be obtained by the Company prior to Closing.

(f) No Violation or Conflict. Assuming the representations and warranties of the Subscribers in Section 4 are true and correct, neither the issuance and sale of the Securities nor the performance of the Company’s obligations under this Agreement and all other agreements entered into by the Company relating thereto by the Company will:

(i) violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under (A) the articles or certificate of incorporation or association, charter or bylaws of the Company, (B) to the Company’s knowledge, any decree, judgment, order, law, treaty, rule, regulation or determination applicable to the Company of any court, governmental agency or body, or arbitrator having jurisdiction over the Company or over the properties or assets of the Company or any of its Affiliates, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company or

8

any of its Affiliates is a party, by which the Company or any of its Affiliates is bound, or to which any of the properties of the Company or any of its Affiliates is subject, or (D) the terms of any “lock-up” or similar provision of any underwriting or similar agreement to which the Company, or any of its Affiliates is a party (except, with respect to clauses (B), (C) and (D) above, the violation, conflict, breach, or default of which would not have a Material Adverse Effect); or

(ii) result in the creation or imposition of any Lien (as defined below) upon the Securities or any of the assets of the Company or any of its Affiliates except as described herein; or

(iii) result in the activation of any anti-dilution rights or a reset or repricing of any debt or security instrument of any other creditor or equity holder of the Company, nor result in the acceleration of the due date of any obligation of the Company; or

(iv) result in the activation of any piggy-back registration rights of any person or entity holding securities of the Company or having the right to receive securities of the Company.

(g) The Securities. The Securities upon issuance:

(i) are, or will be, free and clear of any Liens, subject to restrictions upon transfer under the 1933 Act and any applicable state securities laws;

(ii) have been, or will be, duly and validly authorized and on the date of issuance of the Initial Shares and upon conversion of the Notes and exercise of the Warrants, the Initial Shares, Note Shares and Warrant Shares, respectively, will be duly and validly issued, fully paid and nonassessable and, if registered pursuant to the 1933 Act and resold pursuant

9

to an effective registration statement, will be freely tradable and unrestricted;

(iii) will not have been issued or sold in violation of any preemptive or other similar rights of the holders of any securities of the Company;

(iv) will not subject the holders thereof to personal liability by reason of being such holders; and

(v) assuming the representations and warranties of the Subscribers as set forth in Section 4 hereof are true and correct, will not result in a violation of Section 5 under the 1933 Act.

(h) Litigation. There is no pending or, to the best knowledge of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates that would affect the execution by the Company or the performance by the Company of its obligations under the Transaction Documents. Except as disclosed in the Reports and schedules hereto, there is no pending or, to the best knowledge of the Company, basis for or threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates which litigation if adversely determined would have a Material Adverse Effect.

(i) Reporting Company. The Company is a publicly-held company subject to reporting obligations pursuant to Section 13 of the 1934 Act and has a class of Ordinary Shares registered pursuant to Section 12(g) of the 1934 Act. Pursuant to the provisions of the 1934 Act, the Company has timely filed all reports and other materials required to be filed thereunder with the Commission pursuant to the 1934 Act during the preceding twelve months.

(j) No Market Manipulation. The Company and its Affiliates have not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Ordinary Shares to facilitate the sale or resale of the Securities or affect the price at which the Securities may be issued or resold.

10

(k) Information Concerning Company. The Reports contain all material information relating to the Company and its operations and financial condition as of their respective dates which information is required to be disclosed therein. Since the date of the financial statements included in the Reports, and except as modified in the Other Written Information or in the Schedules hereto, there has been no Material Adverse Event relating to the Company’s business, financial condition or affairs not disclosed in the Reports. The Reports do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made.

(l) Stop Transfer. The Company will not issue any stop transfer order or other order impeding the sale, resale or delivery of any of the Securities, except as may be required by any applicable federal or state securities laws and unless contemporaneous notice of such instruction is given to the Subscriber.

(m) Defaults. The Company is not in violation of its articles of association. Except as described on Schedule 5(q), the Company is (i) not in default under or in violation of any other material agreement or instrument to which it is a party or by which it or any of its properties are bound or affected, which default or violation would have a Material Adverse Effect, (ii) not in default with respect to any order of any court, arbitrator or governmental body or subject to or party to any order of any court or governmental authority arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters, or (iii) to the Company’s knowledge not in violation of any statute, rule or regulation of any governmental authority which violation would have a Material Adverse Effect.

(n) No Integrated Offering. Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offer of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the SmallCap. Nor will the Company or any of its Affiliates take any action or steps that would cause the offer or issuance of the Securities to be integrated with other offerings. The Company will not conduct any offering other than the transactions contemplated

11

hereby that will be integrated with the offer or issuance of the Securities which offering would impair the exemption relied upon in this Offering (as defined in Section 8(b)).

(o) No General Solicitation. Neither the Company, nor any of its Affiliates, nor to its knowledge, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities.

(p) Listing. The Ordinary Shares are listed on the SmallCap. The Company has not received any oral or written notice that the Ordinary Shares are not eligible nor will become ineligible for quotation and listing on the SmallCap nor that the Ordinary Shares do not meet all requirements for the continuation of such listing and the Company satisfies all the requirements for the continued listing of the Ordinary Shares on the SmallCap.

(q) No Undisclosed Liabilities. The Company has no liabilities or obligations which are material, individually or in the aggregate, which are not disclosed in the Reports and Other Written Information, other than those incurred in the ordinary course of the Company’s businesses since December 31, 2004 and which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, except as disclosed on Schedule 5(q).

(r) No Undisclosed Events or Circumstances. Since December 31, 2004, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the Reports.

(s) Capitalization. As of the date hereof, the authorized share capital of the Company consists of 11,000,000 Ordinary Shares, par value NIS 1.00 per share, and the Company has outstanding 7,019,953 Ordinary Shares. All of the outstanding Ordinary Shares of the Company have been duly and validly authorized and issued and are fully paid and nonassessable.

(t) Dilution. The Company’s executive officers and directors understand the nature of the Securities being sold hereby and recognize that the issuance of the Securities will have a potential dilutive effect on the equity holdings of other holders of the

12

Company’s equity or rights to receive equity of the Company. The board of directors of the Company has concluded, in its good faith business judgment that the issuance of the Securities is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Shares upon conversion of the Notes, and the Warrant Shares upon exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company or parties entitled to receive equity of the Company.

(u) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company, including but not limited to disputes or conflicts over payment owed to such accountants and lawyers.

(v) DTC Status. The Company’s transfer agent is a participant in and the Ordinary Shares are eligible for transfer pursuant to the Depository Trust Company Automated Securities Transfer Program.

(w) Investment Company. Neither the Company nor any Affiliate is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

(x) Subsidiary Representations. The Company makes each of the representations contained in Sections 5(a), (b), (d), (f), (h), (k), (m), (q) through (s), (u) and (w) of this Agreement, as same relate to each Subsidiary of the Company.

(y) Company Predecessor. All representations made by or relating to the Company of a historical or prospective nature and all undertaking described in Sections 9(g) and 9(h) shall relate and refer to the Company, its predecessors, if any, and the Subsidiaries.

(z) Correctness of Representations. The Company represents that the foregoing representations and warranties are true and correct as of the date hereof in all material respects, and, unless the Company otherwise notifies the Subscribers prior to the Closing Date, shall be true and correct in all material respects as of the Closing Date.

13

(aa) Non-Public Information. Neither the Company nor any other person acting on its behalf has provided any Subscriber or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Subscriber has agreed in writing to receive such information. The Company understands and confirms that each Subscriber shall be relying on the foregoing representations in effecting transactions in securities of the Company.

(bb) Survival. The foregoing representations and warranties shall survive the Closing Date for a period of two years.

6. Regulation D Offering.

The offer and issuance of the Securities to the Subscribers is being made pursuant to the exemption from the registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder. [On the Closing Date, the Company will provide an opinion reasonably acceptable to Subscriber from the Company’s legal counsel opining on the availability of an exemption from registration under the 1933 Act as it relates to the offer and issuance of the Securities and other matters reasonably requested by Subscribers]. A form of the legal opinion is annexed hereto as Exhibit D. The Company will provide, at the Company’s expense, such other legal opinions in the future as are reasonably necessary for the issuance and/or resale of the Initial Shares, the and the Ordinary Shares issuable upon conversion of the Notes and exercise of the Warrants pursuant to an effective registration statement.

7. Conversion of Note.

(a) Conversion of Note.

(i) Upon the conversion of a Note or part thereof, the Company shall, at its own cost and expense, take all necessary action, including executing and delivering to the Company’s transfer agent written instructions to issue stock certificates in the name of Subscriber (or its nominee) or such other persons as designated by Subscriber (provided that each such other person provides to the Company in writing the representations set forth in Section 4 hereof) and in such denominations to be specified at conversion representing the number of Ordinary Shares issuable upon such conversion. The Company warrants that no

14

instructions other than these instructions have been or will be given to the transfer agent of the Company’s Ordinary Shares (other than instructions that may be given to the Company’s transfer agent pursuant to orders issued by the Commission, any state securities commission or any other regulatory authority) and that, unless waived by the Subscriber, the Note Shares will be free-trading, and freely transferable, and will not contain a legend restricting the resale or transferability of the Note Shares provided that the Note Shares are being sold pursuant to an effective registration statement covering the Note Shares or are otherwise exempt from registration.

(ii) Subscriber will give notice of its decision to exercise its right to convert the Note, interest, any sum due to the Subscriber under the Transaction Documents or part thereof by telecopying an executed and completed Notice of Conversion (a form of which is annexed as Exhibit A to the Note) to the Company via confirmed telecopier transmission or otherwise pursuant to Section 10(e) of this Agreement. The Subscriber will not be required to surrender the Note until the Note has been fully converted or satisfied (but until such surrender the Note will be convertible only with respect to any portion thereof not already converted). Each date on which a Notice of Conversion is telecopied to the Company in accordance with the provisions hereof shall be deemed a Conversion Date. The Company will immediately notify its transfer agent to transmit the Company’s Ordinary Share certificates representing the Note Shares issuable upon conversion of the Note to the Subscriber via express courier for receipt by such Subscriber within five (5) business days after receipt by the Company of the Notice of Conversion (such third day being the “Delivery Date”). In the event the Note

15

Shares are electronically transferable, then delivery of the Shares must be made by electronic transfer provided request for such electronic transfer has been made by the Subscriber and the Subscriber has complied with all applicable securities laws in connection with the sale of the Ordinary Shares, including, without limitation, the prospectus delivery requirements. A Note representing the balance of the Note not so converted will be provided by the Company to the Subscriber if requested by Subscriber, provided the Subscriber delivers the original Note to the Company. In the event that a Subscriber elects not to surrender a Note for reissuance upon partial payment or conversion, the Subscriber hereby indemnifies the Company against any and all loss or damage attributable to a third-party claim in an amount in excess of the actual amount then due under the Note.

(iii) The Company understands that a delay in the delivery of the Note Shares in the form required pursuant to Section 7 hereof, after the Delivery Date could result in economic loss to the Subscriber. As compensation to the Subscriber for such loss, the Company agrees to pay (as liquidated damages and not as a penalty) to the Subscriber for late issuance of Note Shares in the form required pursuant to Section 7 hereof upon Conversion of the Note in the amount of $100 per business day after the Delivery Date for each $10,000 of Note principal amount being converted for which the corresponding Note Shares are not timely delivered. The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Subscriber, in the event that the Company fails for any reason to effect delivery of Note Shares by the Delivery Date, the Subscriber will be entitled to revoke all or

16

part of the relevant Notice of Conversion by delivery of a notice to such effect to the Company whereupon the Company and the Subscriber shall each be restored to their respective positions immediately prior to the delivery of such notice, except that the liquidated damages described above shall be payable through the date notice of revocation or rescission is given to the Company.

(iv) Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the Subscriber and thus refunded to the Company.

(b) Acceleration of Repayment of the Note. In the event the Company is prohibited from issuing Note Shares, or fails to timely deliver Note Shares on a Delivery Date, or upon the occurrence of any other Event of Default (as defined in the Note or in this Agreement) that is not cured during any applicable cure period and an additional ten days thereafter, then at the Subscriber’s election, the Company must pay to the Subscriber ten business days after request by the Subscriber, at the Subscriber’s election, a sum of money determined by multiplying up to the outstanding principal amount of the Note designated by the Subscriber by 115% together with accrued but unpaid interest thereon and any other sums arising and outstanding under the Transaction Documents (“Mandatory Repayment”). The Mandatory Repayment must be received by the Subscriber on the same date as the Note Shares otherwise deliverable or within ten (10) business days after request, whichever is sooner (“Mandatory Repayment Date”). Upon receipt of the Mandatory Repayment, the corresponding Note principal and interest will be deemed paid and no longer outstanding.

(c) Maximum Conversion. Except pursuant to a Mandatory Conversion by the Company pursuant to Section 2.4 of the Note,

17

the Subscriber shall not be entitled to convert on a Conversion Date that amount of the Note in connection with that number of Ordinary Shares which would be in excess of the sum of (i) the number of Ordinary Shares beneficially owned by the Subscriber and its Affiliates on a Conversion Date, plus (ii) the number of Ordinary Shares issuable upon the conversion of the Note with respect to which the determination of this provision is being made on a Conversion Date, will not result in beneficial ownership by each Subscriber and its Affiliates of more than 4.99% of the outstanding Ordinary Shares of the Company on such Conversion Date. Beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act, and Regulation 13d-3 thereunder. Subject to the foregoing, the Subscriber shall not be limited to aggregate conversions of only 4.99% and aggregate conversions by the Subscriber may exceed 4.99%. The Subscriber may waive the conversion limitation described in this Section 7(c), in whole or in part, or increase the permitted beneficial ownership amount upon and effective after 61 days prior written notice to the Company. The Subscriber may allocate which of the equity of the Company deemed beneficially owned by the Subscriber shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%.

(d) Injunction Posting of Bond. In the event a Subscriber shall elect to convert a Note or part thereof or exercise the Warrant in whole or in part, the Company may not refuse conversion or exercise based on any claim that such Subscriber or any Affiliate of such Subscriber has been engaged in any violation of law, or for any other reason, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of such Note or exercise of all or part of such Warrant shall have been sought and obtained by the Company and the Company has posted a surety bond for the benefit of such Subscriber in the amount of 120% of the amount of the Note, or aggregate purchase price of the Warrant Shares which are sought to be subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Subscriber to the extent Subscriber obtains judgment therefor.

(e) Buy-In. In addition to any other rights available to the Subscriber, if the Company fails to deliver to the Subscriber Note Shares issuable upon conversion of a Note by the Delivery Date and if after seven (7) business days after the Delivery Date the Subscriber purchases (in an open market transaction or otherwise) Ordinary Shares to deliver in satisfaction of a sale by such Subscriber of the

18

Note Shares which the Subscriber was entitled to receive upon such conversion (a “Buy-In”), then the Company shall pay in cash to the Subscriber (in addition to any remedies available to the Subscriber) the amount by which (A) the Subscriber’s total purchase price (including brokerage commissions, if any) for the Ordinary Shares so purchased exceeds (B) the aggregate principal and/or interest amount of the Note for which such conversion was not timely honored, together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if the Subscriber purchases Ordinary Shares having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of Note principal and/or interest, the Company shall be required to pay the Subscriber $1,000, plus interest. The Subscriber shall provide the Company written evidence with respect to the amounts payable to the Subscriber in respect of the Buy-In.

(f) Adjustments. The Conversion Price, Warrant exercise price and amount of Note Shares or Warrant Shares issuable upon conversion of the Notes and exercise of the Warrants shall be equitably adjusted and as otherwise described in this Agreement, the Notes and Warrants.

(g) Redemption. The Note and Warrants shall not be callable or redeemable.

8. Finder/Legal Fees.

(a) Finder’s Fee. The Company on the one hand, and each Subscriber (for himself only) on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities incurred by the other to any persons claiming brokerage commissions or finder’s fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby and arising out of such party’s actions. The Company represents that there are no parties entitled to receive fees, commissions, or similar payments in connection with the Offering except as described on Schedule 8 hereto.

(b) Legal Fees. The Company shall pay to Grushko & Mittman, P.C., a fee of $20,000 (“Legal Fees”) (of which $5,000 has already been paid) as reimbursement for services rendered to the Subscribers in connection with this Agreement and the purchase and sale of the Notes, Initial Shares and Warrants (the “Offering”) and acting as

19

Escrow Agent for the Offering. The Legal Fees will be payable out of funds held pursuant to the Escrow Agreement.

9. Covenants of the Company.

The Company covenants and agrees with the Subscribers as follows:

(a) Stop Orders. The Company will advise the Subscribers, promptly after it receives notice of issuance by the Commission, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Ordinary Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose.

(b) Listing. The Company shall promptly secure the listing of the Initial Shares, Note Shares and the Warrant Shares upon each national securities exchange, or electronic or automated quotation system upon which they are or become eligible for listing and shall maintain such listing so long as any Notes or Warrants are outstanding. The Company will use its best efforts to maintain the listing of its Ordinary Shares on the American Stock Exchange, SmallCap, Nasdaq National Market System, OTC Bulletin Board, or New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Ordinary Shares (the “Principal Market”)), and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Principal Market, as applicable. The Company will provide the Subscribers copies of all notices it receives notifying the Company of the threatened and actual delisting of the Ordinary Shares from any Principal Market. As of the date of this Agreement and the Closing Date, the SmallCap is and will be the Principal Market.

(c) Market Regulations. The Company shall notify the Commission, the Principal Market and applicable state authorities, in accordance with their requirements and as required under their requirements or under applicable law, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to the Subscribers and promptly provide copies thereof to Subscriber.

(d) Filing Requirements. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until

20

all the Note Shares, Initial Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to any Registration Statement or pursuant to Rule 144, without regard to volume limitation, the Company will comply in all respects with its reporting and filing obligations under the 1934 Act, comply in all respects with its reporting and filing obligations, comply with all reporting requirements that are applicable to an issuer with a class of shares registered pursuant to Section 12(b) or 12(g) of the 1934 Act, as applicable, and comply with all filing requirements related to any registration statement filed pursuant to this Agreement. The Company will use its best efforts not to take any action or file any document (whether or not permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said acts until three (3) years after the Closing Date. Until the earlier of the resale of the Note Shares, Initial Shares and Warrant Shares by each Subscriber or until three (3) years after the Warrants have been exercised, the Company will use its best efforts to continue the listing or quotation of the Ordinary Shares on a Principal Market and to comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Principal Market. The Company agrees to timely file a Form D with respect to the Securities if required under Regulation D and to provide a copy thereof to each Subscriber promptly after such filing. Each Subscriber shall provide to the Company any information required to be include din such Form D with respect to such Subscriber, promptly after receipt of written request therefore from the Company.

(e) Use of Proceeds. The proceeds of the Offering will be used for expenses of the Offering and general working capital.

(f) Reservation. Prior to the Closing Date, the Company undertakes to reserve, pro rata, on behalf of each holder of a Note or Warrant, from its authorized but unissued Ordinary Shares, a number of Ordinary Shares equal to 100% of the amount of Ordinary Shares necessary to allow each holder of a Note to be able to convert the principal of all such outstanding Notes and reserve the amount of Warrant Shares issuable upon exercise of the Warrants. By December 31, 2005, the authorized share capital of the Company shall be increased and the Company will reserve a number of Ordinary Shares equal to 130% of the amount of (i) Ordinary Shares necessary to allow each holder of a Note to be able to convert the principal of all such outstanding Notes and interest and (ii) Warrant Shares issuable upon exercise of the Warrants. Failure to have sufficient shares reserved pursuant to this Section 9(f) for

21

three (3) consecutive business days or ten (10) days in the aggregate following the applicable dates shall be a material default of the Company’s obligations under this Agreement and an Event of Default under the Note.

(g) Books and Records. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Note Shares, Initial Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis.

(h) Governmental Authorities. From the date of this Agreement and until the sooner of (i) three (3) years after the Closing Date, or (ii) until all the Note Shares, Initial Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company shall duly observe and conform in all material respects to all valid requirements of governmental authorities relating to the conduct of its business or to its properties or assets.

(i) Blackout. The Company undertakes and covenants that until the sooner of (i) the Registration Statement shall have been current and available for use in connection with the resale of the Registrable Securities (as defined in Section 11(i)) for a period of 120 days, or (ii) until all the Shares, Initial Shares, and Warrant Shares have been resold or transferred by the Subscribers pursuant to the Registration Statement or Rule 144, without regard to volume limitations (“Exclusion Period”), the Company will not enter into any acquisition, merger, exchange or sale or other transaction that would be reasonably expected to have the effect of delaying the effectiveness of any pending registration statement or causing an already effective registration statement to no longer be effective or current for a period twenty (20) consecutive days nor more than forty-five (45) or more days during any 365 day period.

(j) Negative Pledge. So long as any amounts are outstanding under the Notes, the Company shall not, and shall cause each of its Subsidiaries not to, create, incur, assume or suffer to exist any pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, mortgage, security

22

deed or deed of trust, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction) (each, a “Lien”) upon any of its property, whether now owned or hereafter acquired other than (i) Liens securing all amounts due to Bank Hapoalim under the Loan Agreement, dated July 14, 2003, the Factoring Agreement, dated June 25, 2002, the Credit Line and the Overdraft Facility made available to the Company, (ii) (a) Liens imposed by law for taxes that are not yet due or are being contested in good faith and for which adequate reserves have been established in accordance with generally accepted accounting principles; (b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or that are being contested in good faith and by appropriate proceedings; (c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) Liens created with respect to the financing of the purchase of new property in the ordinary course of the Company’s business up to the amount of the purchase price of such property, or (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property (each of (a) through (f), a “Permitted Lien”) and (iii) indebtedness for borrowed money which is subordinated in right of payment to the Notes on terms reasonably satisfactory to the Subscriber. The repayment by the Company of the amounts underlying the Notes shall be pari passu with the repayment by the Company of loans extended to the Company by LibertyView Special Opportunities Fund, L.P. (“LibertyView”) pursuant to a convertible note dated as of July 27, 2005 issued by the Company to LibertyView (“LibertyView Note”). Anything to the contrary in any Transaction Document notwithstanding, there shall be no restriction on the Subscriber’s right to convert into equity any amount due under the

23

Note or described in Section 12(b) of this Agreement, nor to collect any sums due from the Company prior to receipt of notice that LibertyView has declared a default under the LibertyView Note, and such default has not been cured.

(k) Non-Public Information. The Company covenants and agrees that neither it nor any other person acting on its behalf will provide any Subscriber or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Subscriber shall have agreed in writing to receive such information. The Company understands and confirms that each Subscriber shall be relying on the foregoing representations in effecting transactions in securities of the Company.

10. Covenants of the Company and Subscriber Regarding Indemnification.

(a) The Company agrees to indemnify, hold harmless, reimburse and defend the Subscribers, the Subscribers’ officers, directors, agents, Affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Subscriber or any such person which results, arises out of or is based upon (i) any material misrepresentation by the Company or material breach of any warranty by the Company in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by the Company of any covenant or undertaking to be performed by the Company hereunder, or any other agreement entered into by the Company and Subscriber relating hereto.

(b) Each Subscriber agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company’s officers, directors, agents, Affiliates, control persons , and principal shareholders against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company or any such person which results, arises out of or is based upon (i) any material misrepresentation by such Subscriber in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by such Subscriber of any covenant or undertaking to be performed by such Subscriber hereunder, or any other agreement entered into by the Company and Subscribers, relating hereto.

24

(c) In no event shall the liability of any Subscriber or any permitted successor thereof hereunder or under any Transaction Document or other agreement delivered in connection herewith be greater in amount than the dollar amount of the net proceeds actually received by such Subscriber upon the sale of Registrable Securities (as defined herein).

(d) The procedures set forth in Section 11.6 shall apply to the indemnification set forth in Sections 10(a) and 10(b) above.

11.1 Registration Rights. The Company hereby grants the following registration rights to holders of the Securities.

(i) On one occasion, during the period commencing thirty (30) days after the Closing Date, but not later than two (2) years after the Closing Date (“Request Date”), upon a written request therefor from any record holder or holders of more than 50% of the Initial Shares, Note Shares issued and issuable upon conversion of the Notes and Warrant Shares actually issued upon exercise of the Warrants, the Company shall prepare and file with the Commission a registration statement under the 1933 Act registering the Initial Shares, Note Shares issuable upon conversion of all sums due under the Notes and Warrant Shares issuable upon exercise of the Warrants (collectively “Registrable Securities”) which are the subject of such request for unrestricted public resale by the holder thereof. For purposes of Sections 11.1(i) and 11.1(ii), Registrable Securities shall not include Securities (A) which are registered for resale in an effective registration statement, (B) included for registration in a pending registration statement, or (C) which have been issued without further transfer restrictions after a sale or transfer pursuant to Rule 144 under the 1933 Act. Upon the receipt of such request, the Company shall promptly give written notice to all other record holders of the Registrable Securities that such registration statement is to be filed and shall include in such registration statement Registrable Securities for which it has received written requests within ten (10) days after the Company gives such written notice. Such other requesting record holders shall be deemed to have exercised their demand registration right under this Section 11.1(i).

(ii) If the Company at any time proposes to register any of its securities under the 1933 Act for sale to the public, whether for its own account or for the account of other security holders or both, except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Registrable Securities

25

for sale to the public, provided the Registrable Securities are not otherwise registered for resale by the Subscribers or Holder pursuant to an effective registration statement, each such time it will give at least fifteen (15) days’ prior written notice to the record holder of the Registrable Securities of its intention so to do. Upon the written request of the holder, received by the Company within ten (10) days after the giving of any such notice by the Company, to register any of the Registrable Securities not previously registered, the Company will cause such Registrable Securities as to which registration shall have been so requested to be included with the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent required to permit the sale or other disposition of the Registrable Securities so registered by the holder of such Registrable Securities (the “Seller” or “Sellers”). In the event that any registration pursuant to this Section 11.1(ii) shall be, in whole or in part, an underwritten public offering of Ordinary Shares of the Company, the number of shares of Registrable Securities to be included in such an underwriting may be reduced by the managing underwriter if and to the extent that the Company and the underwriter shall reasonably be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the Company shall notify the Seller in writing of any such reduction. Notwithstanding the foregoing provisions, or Section 11.4 hereof, the Company may withdraw or delay or suffer a delay of any registration statement referred to in this Section 11.1(ii) without thereby incurring any liability to the Seller.

(iii) If, at the time any written request for registration is received by the Company pursuant to Section 11.1(i), the Company has determined to proceed with the actual preparation and filing of a registration statement under the 1933 Act in connection with the proposed offer and sale for cash of any of its securities for the Company’s own account and the Company actually does file such other registration statement, such written request shall be deemed to have been given pursuant to Section 11.1(ii) rather than Section 11.1(i), and the rights of the holders of Registrable Securities covered by such written request shall be governed by Section 11.1(ii).

(iv) The Company shall file with the Commission a Form F-3 registration statement (the “Registration Statement”) (or such other form that it is eligible to use) in order to register the Registrable Securities for resale and distribution under the 1933 Act) not later than five (5) days after the Closing Date (the “Filing

26

Date”), and cause it to be declared effective not later than one hundred and twenty (120) days after the Closing Date (the “Effective Date”). The Company will register not less than a number of Ordinary Shares in the aforedescribed registration statement that is equal to 100% of the Note Shares issuable upon conversion of the Notes and all of the Initial Shares and Warrant Shares issuable upon exercise of the Warrants. The Registrable Securities shall be reserved and set aside exclusively for the benefit of each Subscriber and Warrant holder, pro rata, and not issued, employed or reserved for anyone other than each such Subscriber and Warrant holder. The Registration Statement will be amended or additional registration statements will be immediately filed by the Company as necessary to register additional Ordinary Shares to allow the public resale of all Ordinary Shares included in and issuable by virtue of the Registrable Securities. Without the written consent of the Subscriber, no securities of the Company other than the Registrable Securities will be included in the Registration Statement except as described on Schedule 11.1. It shall be deemed a Non-Registration Event if at any time after the date the Registration Statement is declared effective by the Commission (“Actual Effective Date”) the Company has registered for unrestricted resale on behalf of a Subscriber fewer than 100% of the amount of Ordinary Shares issuable upon full conversion of all sums due under the Notes and 100% of the Initial Shares and Warrant Shares issuable upon exercise of the Warrants. It shall be deemed a Non-Registration Event if at any time after three hundred and thirty-five days after the Closing Date the Company has registered for unrestricted resale on behalf of a Subscriber fewer than 100% of the amount of Ordinary Shares issuable upon full conversion of all principal and interest under the Notes and 100% of the Initial Shares and Warrant Shares issuable upon exercise of the Warrants.

11.2. Registration Procedures. If and whenever the Company is required by the provisions of Section 11.1(i), 11.1(ii), or 11.1(iv) to effect the registration of any Registrable Securities under the 1933 Act, the Company will, as expeditiously as possible:

(a) subject to the timelines provided in this Agreement, prepare and file with the Commission a registration statement required by Section 11, with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as herein provided), promptly provide to the holders of the Registrable Securities copies of all filings and Commission letters of comment and notify Subscribers (by telecopier and by e-mail addresses provided by Subscribers) and Grushko & Mittman, P.C.

27

(by telecopier and by email to Counslers@aol.com) on or before 3:00 PM EST on the sooner of (i) the third Business Day after the day that the Company receives notice that the Commission has no comments or no further comments on the Registration Statement, or that the registration statement has been declared effective, or (ii) the same Business Day that any other holder of securities registered in the Registration Statement is notified of the foregoing. Failure to timely provide notice as required by this Section 11.2(a) shall be a material breach of the Company’s obligation and an Event of Default as defined in the Notes and a Non-Registration Event as defined in Section 11.4 of this Agreement;

(b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until such registration statement has been effective for a period of two (2) years, and comply with the provisions of the 1933 Act with respect to the disposition of all of the Registrable Securities covered by such registration statement in accordance with the Sellers’ intended method of disposition set forth in such registration statement for such period;

(c) furnish to the Sellers, at the Company’s expense, such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or their disposition of the securities covered by such registration statement;

(d) use its commercially reasonable best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or “blue sky” laws of New York and such jurisdictions as the Sellers shall request in writing, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction;

(e) if applicable, list the Registrable Securities covered by such registration statement with any securities exchange on which the Ordinary Shares of the Company are then listed;

(f) notify the Subscribers within two hours of the Company’s becoming aware that a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event of which the Company has knowledge as a result of which the

28

prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing or which becomes subject to a Commission, state or other governmental order suspending the effectiveness of the registration statement covering any of the Shares; and

(g) provided same would not be in violation of the provision of Regulation FD under the 1934 Act, make available for inspection by the Sellers, and any attorney, accountant or other agent retained by the Seller or underwriter, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the Seller, attorney, accountant or agent in connection with such registration statement.

11.3. Provision of Documents. In connection with each registration described in this Section 11, each Seller will furnish to the Company in writing such information and representation letters with respect to itself and the proposed distribution by it as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws.

11.4. Non-Registration Events. The Company and the Subscribers agree that the Sellers will suffer damages if the Registration Statement is not filed by the Filing Date and not declared effective by the Commission by the Effective Date, and any registration statement required under Section 11.1(i) or 11.1(ii) is not filed within 60 days after written request and declared effective by the Commission within 120 days after such request, and maintained in the manner and within the time periods contemplated by Section 11 hereof, and it would not be feasible to ascertain the extent of such damages with precision. Accordingly, if (A) the Registration Statement is not filed on or before the Filing Date, (B) the Registration Statement is not declared effective on or before the Effective Date, (C) the Registration Statement is not declared effective within three (3) business days after receipt by the Company or its attorneys of a written or oral communication from the Commission that the Registration Statement will not be reviewed or that the Commission has no further comments, (D) the registration statement described in Sections 11.1(i) or 11.1(ii) is not filed within 60 days after such written request, or is not declared effective within 120 days after such written request, or (E) any registration statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is filed and declared effective but shall thereafter cease to be effective for a period of time which shall exceed 20 consecutive days or more than 45 days in the aggregate per year (defined as a period of 365 days commencing on the date the Registration Statement is declared effective) (each such event referred to in clauses (A) through (E) of this Section 11.4 is referred to herein as a “Non-Registration Event”), then the Company shall deliver to the holder of Registrable Securities, as liquidated damages, an amount equal to one percent

29

(1%) for each thirty (30) days (or a pro rata portion thereof), thereafter of the Purchase Price of the Initial Shares and Note Shares remaining unconverted and purchase price of Note Shares issued upon conversion of the Notes owned of record by such holder which are subject to such Non-Registration Event. The Company must pay the liquidated damages in cash. The liquidated damages must be paid within ten (10) days after the end of each thirty (30) day period or shorter part thereof for which liquidated damages are payable. In the event a Registration Statement is filed by the Filing Date but is withdrawn prior to being declared effective by the Commission, then such Registration Statement will be deemed to have not been filed. All oral or written comments received from the Commission relating to the Registration Statement must be satisfactorily responded to within ten (10) business days after receipt of comments from the Commission. Failure to timely respond to Commission comments is a Non-Registration Event for which liquidated damages shall accrue and be payable by the Company to the holders of Registrable Securities at the same rate set forth above. Notwithstanding the foregoing, the Company shall not be liable to the Subscriber under this Section 11.4 for any events or delays occurring as a consequence of the acts or omissions of the Subscribers contrary to the obligations undertaken by Subscribers in this Agreement. Liquidated damages will not accrue nor be payable pursuant to this Section 11.4 nor will a Non-Registration Event be deemed to have occurred for times during which Registrable Securities are transferable by the holder of Registrable Securities pursuant to Rule 144(k) under the 1933 Act.

11.5. Expenses. All expenses incurred by the Company in complying with Section 11, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or “blue sky” laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance and reasonable fee of one counsel for all Sellers are called “Registration Expenses.” All underwriting discounts and selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of all counsels to the Seller except the one counsel referred to in the immediately preceding sentence, are called “Selling Expenses.” The Company will pay all Registration Expenses in connection with the registration statement under Section 11. Selling Expenses in connection with each registration statement under Section 11 shall be borne by the Seller and may be apportioned among the Sellers in proportion to the number of shares sold by the Seller relative to the number of shares sold under such registration statement or as all Sellers thereunder may agree.

11.6. Indemnification and Contribution.

(a) In the event of a registration of any Registrable Securities under the 1933 Act pursuant to Section 11, the Company will, to the extent permitted by law, indemnify and hold harmless the Seller, each officer of the Seller, each director of the Seller, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls such Seller or underwriter within the meaning of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, to which the Seller,

30

or such underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the 1933 Act pursuant to Section 11, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made, and will, subject to the provisions of Section 11.6(c), reimburse the Seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to the Seller to the extent that any such damages arise out of or are based upon an untrue statement or omission made in any preliminary prospectus if (i) the Seller failed to send or deliver a copy of the final prospectus delivered by the Company to the Seller with or prior to the delivery of written confirmation of the sale by the Seller to the person asserting the claim from which such damages arise, (ii) the final prospectus would have corrected such untrue statement or alleged untrue statement or such omission or alleged omission, or (iii) to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such Seller, or any such controlling person in writing specifically for use in such registration statement or prospectus.

(b) In the event of a registration of any of the Registrable Securities under the 1933 Act pursuant to Section 11, each Seller severally but not jointly will, to the extent permitted by law, indemnify and hold harmless the Company, and each person, if any, who controls the Company within the meaning of the 1933 Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the 1933 Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities were registered under the 1933 Act pursuant to Section 11, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of

31

or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Seller, as such, furnished in writing to the Company by such Seller specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of the Seller hereunder shall be limited to the net proceeds actually received by the Seller from the sale of Registrable Securities covered by such registration statement.

(c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 11.6(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 11.6(c), except and only if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 11.6(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties, as a group, shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense

32

of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred.

(d) In order to provide for just and equitable contribution in the event of joint liability under the 1933 Act in any case in which either (i) a Seller, or any controlling person of a Seller, makes a claim for indemnification pursuant to this Section 11.6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 11.6 provides for indemnification in such case, or (ii) contribution under the 1933 Act may be required on the part of the Seller or controlling person of the Seller in circumstances for which indemnification is not provided under this Section 11.6; then, and in each such case, the Company and the Seller will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Seller is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (y) the Seller will not be required to contribute any amount in excess of the public offering price of all such securities sold by it pursuant to such registration statement; and (z) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.

11.7. Delivery of Unlegended Shares.

(a) Within five (5) business days (such fifth business day being the “Unlegended Shares Delivery Date”) after the business day on which the Company has received (i) a notice that Note Shares, Initial Shares or Warrant Shares have been sold pursuant to the Registration Statement or Rule 144 under the 1933 Act, (ii) a representation that the prospectus delivery requirements, or the requirements of Rule 144, as applicable and if required, have been satisfied, (iii) the original share certificates representing the Ordinary Shares that have been sold, and (iv) in the case of sales under Rule 144, customary representation letters of the Subscriber and/or Subscriber’s broker regarding compliance with the requirements of Rule 144, the Company at its expense, (y) shall deliver, and shall cause legal counsel selected by the Company to deliver to its transfer agent (with copies to Subscriber) an appropriate instruction and opinion of such counsel, directing the delivery of Ordinary Shares without any legends including the legend set forth in Section 4(h) above, reissuable pursuant to

33

any effective and current Registration Statement described in Section 11 of this Agreement or pursuant to Rule 144 under the 1933 Act (the “Unlegended Shares”); and (z) cause the transmission of the certificates representing the Unlegended Shares together with a legended certificate representing the balance of the submitted certificates, if any, to the Subscriber at the address specified in the notice of sale, via express courier, by electronic transfer or otherwise on or before the Unlegended Shares Delivery Date. Transfer fees shall be the responsibility of the Seller.

(b) In lieu of delivering physical certificates representing the Unlegended Shares, if the Company’s transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program, upon request of a Subscriber, so long as the certificates therefor do not bear a legend and the Subscriber is not obligated to return such certificate for the placement of a legend thereon, the Company shall cause its transfer agent to electronically transmit the Unlegended Shares by crediting the account of Subscriber’s prime Broker with DTC through its Deposit Withdrawal Agent Commission system. Such delivery must be made on or before the Unlegended Shares Delivery Date.

(c) The Company understands that a delay in the delivery of the Unlegended Shares pursuant to Section 11 hereof later than the Unlegended Shares Delivery Date could result in economic loss to a Subscriber. As compensation to a Subscriber for such loss, the Company agrees to pay late payment fees (as liquidated damages and not as a penalty) to the Subscriber for late delivery of Unlegended Shares in the amount of $100 per business day after the Delivery Date for each $10,000 of purchase price of the Unlegended Shares subject to the delivery default. Failure to timely deliver unlegended Shares for an aggregate thirty (30) days shall be an Event of Default under the Note.

(d) In addition to any other rights available to a Subscriber, if the Company fails to deliver to a Subscriber Unlegended Shares as required pursuant to this Agreement, within seven (7) business days after the Unlegended Shares Delivery Date and the Subscriber purchases (in an open market transaction or otherwise) Ordinary Shares to deliver in satisfaction of a sale by such Subscriber of the Ordinary Shares which the Subscriber was entitled to receive from the Company (a “Buy-In”), then the Company shall pay in cash to the Subscriber (in addition to any remedies available to or elected by the Subscriber) the amount by which (A) the Subscriber’s total purchase price (including brokerage commissions, if any) for the Ordinary Shares so purchased exceeds (B) the aggregate purchase price of the Ordinary Shares delivered to the Company for reissuance as Unlegended Shares together with interest thereon at a rate of 15% per annum, accruing until such

34

amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if a Subscriber purchases Ordinary Shares having a total purchase price of $11,000 to cover a Buy-In with respect to $10,000 of purchase price of Ordinary Shares delivered to the Company for reissuance as Unlegended Shares, the Company shall be required to pay the Subscriber $1,000, plus interest. The Subscriber shall provide the Company written evidence of the amounts payable to the Subscriber in respect of the Buy-In.

(e) In the event a Subscriber shall request delivery of Unlegended Shares as described in Section 11.7 and the Company is required to deliver such Unlegended Shares pursuant to Section 11.7, the Company may not refuse to deliver Unlegended Shares based on any claim that such Subscriber or any one associated or affiliated with such Subscriber has been engaged in any violation of law, or for any other reason, unless, an injunction or temporary restraining order from a court, on notice, restraining and or enjoining delivery of such Unlegended Shares or exercise of all or part of said Warrant shall have been sought and obtained and the Company has posted a surety bond for the benefit of such Subscriber in the amount of 120% of the amount of the aggregate purchase price of the Initial Shares, Ordinary Shares and Warrant Shares which are subject to the injunction or temporary restraining order, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Subscriber to the extent Subscriber obtains judgment in Subscriber’s favor.

12. (a) Right of First Refusal. Until the Actual Effective Date, the Subscribers shall be given not less than seven (7) business days prior written notice of any proposed sale by the Company of its Ordinary Shares or other securities or debt obligations, except in connection with (i) full or partial consideration in connection with a strategic merger, acquisition, consolidation or purchase of substantially all of the securities or assets of a corporation or other entity which holders of such securities or debt are not granted registration rights, (ii) the Company’s issuance of securities in connection with strategic license agreements and other partnering arrangements so long as such issuances are not for the purpose of raising capital which holders of such securities or debt are not granted registration rights, (iii) the Company’s issuance of Ordinary Shares or the issuances or grants of options to purchase Ordinary Shares pursuant to stock option plans described on Schedule 5(d) hereto, (iv) the Company’s issuance of Ordinary Shares or the issuances or grants of options to purchase Ordinary Shares pursuant to employee stock purchase or compensation plans, provided such Ordinary Shares are not included in a registration statement for so long as any Notes are outstanding, (v) as a result of the exercise of Warrants or conversion of Notes which are granted or issued pursuant to this Agreement or warrants, options or notes which are outstanding as of the date hereof and

35

described in the Reports, all on the precise terms and conditions in effect on the Closing Date, (vi) the payment of any interest on the Notes and liquidated damages, (vii) as otherwise described in the Reports, or Other Written Information filed with the Commission or delivered to the Subscribers prior to the Closing Date, and (vii) as described on Schedule 11.1 (collectively the foregoing are “Excepted Issuances”). The Subscribers who exercise their rights pursuant to this Section 12(a) shall have the right during the seven (7) business days following receipt of the notice to agree to purchase such offered common stock, debt or other securities in accordance with the terms and conditions set forth in the notice of sale in the same proportion to each other as their purchase of Notes in the Offering. In the event such terms and conditions are modified during the notice period, the Subscribers shall be given prompt notice of such modification and shall have the right during the seven (7) business days following the notice of modification to exercise the rights described in this Section 12(a). Each Subscriber may tender Initial Shares valued at the purchase price of such Initial Shares as payment for such other securities or debt of the Company as may be acquired pursuant to this Section 12(a).

(b) Paid In Kind. The Subscriber may demand that some or all of the sums payable to the Subscriber pursuant to Sections 7.1(c), 7.2, 7.5, 11.4, 11.7(c), 11.7(d) and 11.7(e) that are not paid within ten business days of the required payment date be paid in Ordinary Shares valued at the Conversion Price in effect at the time Subscriber makes such demand, provided that at such time there will be authorized and unissued Ordinary Shares in an amount sufficient for such issuance and other issuances to which the Company may be obligated at such time. In addition to any other rights granted to the Subscriber herein, the Subscriber is also granted the registration rights set forth in Section 11(ii) hereof in relation to such Ordinary Shares and the Ordinary Shares issuable pursuant to this Section 12(b). For purposes only of determining any liquidated damages pursuant to the Transaction Documents, the entire Purchase Price shall be allocated to the Notes and Initial Shares and none to the Warrants. The Warrant Shares shall be valued at the actual exercise price thereof.

(c) Maximum Exercise of Rights. In the event the exercise of the rights described in Section 12(b) would result in the issuance of an amount of Ordinary Shares of the Company that, together with other Ordinary Shares issued to the Subscriber prior to the exercise of such rights, would exceed the maximum amount that may be issued to a Subscriber calculated in the manner described in Section 7(c) of this Agreement, then the issuance of such additional Ordinary Shares of the Company to such Subscriber will be deferred in whole or in part until such time as such Subscriber is able to beneficially own such Ordinary Shares without exceeding the maximum amount set forth calculated in the manner described in Section 7(c) of this

36

Agreement. The determination of when such Ordinary Shares may be issued shall be made by each Subscriber as to only such Subscriber.

13. Miscellaneous.

(e) Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: (i) if to the Company, to: Viryanet Ltd., 8 HaMarpe St., Science Based Industries Campus, Har Hotzvim, Jerusalem, 91450, Israel, Attn: Paul V. Brooks, President and CEO, telecopier number: 011-972-2-581-5507, with an additional copy by telecopier only to: Ra’anan Lerner, Meitar Liquornik Geva & Leshem Brandwein, 16 Abba Hillel Road, Ramat Gan 52506, telecopier number: 011-972-3-61-3111, and (ii) if to the Subscribers, to the one or more addresses and telecopier numbers indicated on the signature pages hereto, with an additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-3575.

(f) Entire Agreement; Assignment. This Agreement and other documents delivered in connection herewith represent the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by both parties. Neither the Company nor the Subscribers have relied on any representations not contained or referred to in this Agreement and the documents delivered herewith. No right or

37

obligation of the Company shall be assigned without prior notice to and the written consent of the Subscribers.

(g) Counterparts/Execution. This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile signature and delivered by facsimile transmission.

(h) Law Governing this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws principles that would result in the application of the substantive laws of another jurisdiction. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state of New York. The parties and the individuals executing this Agreement and other agreements referred to herein or delivered in connection herewith on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement.

(i) Specific Enforcement, Consent to Jurisdiction. The Company and Subscriber acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to one or more preliminary and final injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. Subject to Section 13(d) hereof, each of the Company, Subscriber and any signatory hereto in his personal capacity hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction in New York of such court, that the suit, action or

38

proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law.

(j) Independent Nature of Subscribers. The Company acknowledges that the obligations of each Subscriber under the Transaction Documents are several and not joint with the obligations of any other Subscriber, and no Subscriber shall be responsible in any way for the performance of the obligations of any other Subscriber under the Transaction Documents. The Company acknowledges that each Subscriber has represented that the decision of each Subscriber to purchase Securities has been made by such Subscriber independently of any other Subscriber and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any other Subscriber or by any agent or employee of any other Subscriber, and no Subscriber or any of its agents or employees shall have any liability to any Subscriber (or any other person) relating to or arising from any such information, materials, statements or opinions. The Company acknowledges that nothing contained in any Transaction Document, and no action taken by any Subscriber pursuant hereto or thereto (including, but not limited to, the (i) inclusion of a Subscriber in the Registration Statement and (ii) review by, and consent to, such Registration Statement by a Subscriber) shall be deemed to constitute the Subscribers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Subscribers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Company acknowledges that each Subscriber shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of the Transaction Documents, and it shall not be necessary for any other Subscriber to be joined as an additional party in any proceeding for such purpose. The Company acknowledges that it has elected to provide all Subscribers with the same terms and Transaction Documents for the convenience of the Company and not because Company was required or requested to do so by the Subscribers. The Company acknowledges that such procedure with respect to the Transaction Documents in no way creates a presumption that the Subscribers are in any way acting in concert

39

or as a group with respect to the Transaction Documents or the transactions contemplated thereby.

[THIS SPACE INTENTIONALLY LEFT BLANK]

40

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

VIRYANET LTD. a State of Israel corporation
By:
Name:	Paul V. Brooks
Title:	President & CEO
Dated:	September         , 2005

SUBSCRIBER	NOTE PRINCIPAL		INITIAL SHARES	WARRANTS
ALPHA CAPITAL AKTIENGESELLSCHAFT Pradafant 7 9490 Furstentums Vaduz, Lichtenstein Fax: 011-42-32323196	$	200,000.00	95,238	65,079

(Signature)

By:

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

VIRYANET LTD. a State of Israel corporation
By:
Name:	Paul V. Brooks
Title:	President & CEO
Dated:	September         , 2005

SUBSCRIBER	NOTE PRINCIPAL		INITIAL SHARES	WARRANTS
ELLIS INTERNATIONAL LTD. 53rd Street Urbanizacion Obarrio Swiss Tower, 16th Floor, Panama Republic of Panama Fax: (516) 887-8990	$	125,000.00	59,524	40,675

(Signature)

By:

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (C)

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

VIRYANET LTD. a State of Israel corporation
By:
Name:	Paul V. Brooks
Title:	President & CEO
Dated:	September         , 2005

SUBSCRIBER	NOTE PRINCIPAL		INITIAL SHARES	WARRANTS
GLOBIS CAPITAL PARTNERS LP 60 Broad Street, 38th Floor New York, NY 10004 Fax: (212) 847-4433	$	75,000.00	35,714	24,405

(Signature)

By:

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (D)

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

VIRYANET LTD. a State of Israel corporation
By:
Name:	Paul V. Brooks
Title:	President & CEO
Dated:	September         , 2005

SUBSCRIBER	NOTE PRINCIPAL		INITIAL SHARES	WARRANTS
OMEGA CAPITAL SMALLCAP FUND, LTD. 1403 44th Street, Suite 214 Brooklyn, New York 11219 Fax: (718) 228-9570	$	50,000.00	23,810	16,270

(Signature)

By:

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (E)

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

VIRYANET LTD. a State of Israel corporation
By:
Name:	Paul V. Brooks
Title:	President & CEO
Dated:	September         , 2005

SUBSCRIBER	NOTE PRINCIPAL		INITIAL SHARES	WARRANTS
IROQUOUIS MASTER FUND LTD. 641 Lexington Avenue, 26th Floor New York, NY 10022 Fax: (212) 207-3452	$	50,000.00	23,810	16,270

(Signature)

By:

LIST OF EXHIBITS AND SCHEDULES

Exhibit A	Form of Note
Exhibit B	Escrow Agreement
Exhibit C	Form of Warrant
Schedule 5(a)	Subsidiaries
Schedule 5(d)	Additional Issuances / Capitalization
Schedule 5(h)	Litigation
Schedule 5(q)	Undisclosed Liabilities
Schedule 8	Broker

SCHEDULE 8

FINDER

The Company will pay the amount of 7% of the total investment made by the Subscribers hereunder as a finder’s fee to Ellis International Ltd. Such fee shall be paid through the issuance of 32,540 Ordinary Shares of the Company, which shall be entitled to the same Registration Rights set forth in Section 11 of the Subscription Agreement.

EX-4.6

Exhibit 4.6

[ViryaNet letterhead]

Mr. Meiri Alterman

Bank Hapoalim Limited

63 Yehuda Halevi Street

Tel Aviv, Israel

Dear Meiri,

This letter is to acknowledge our understanding and agreement that ViryaNet Limited (the “Company”) shall issue to you, on the date of this letter, 30,000 Ordinary Shares of the Company, of NIS 1.0 par value per share (the “Shares”) in consideration for the payment by you of the par value of the Shares.

The issuance of the Shares is done as consideration for the restructuring of the Company’s debts to you, effective as of January 1, 2006.

The Company also confirms that it agrees to include the Shares in the next registration statement on Form F-3 to be filed by the Company with the SEC on or after the date hereof.

Sincerely yours,

ViryaNet Limited

By: /s/ Samuel HaCohen

Name: Samuel HaCohen

Title: Executive Chairman of the Board

Date: December 22, 2005

EX-5

[LOGO OF MLG&LB APPEARS HERE] Exhibit 5

[LETTERHEAD OF MEITAR LIQUORNIK GEVA & LESHEM BRANDWEIN]

December 22, 2005

ViryaNet Ltd.

8 HaMarpe St.

Har Hotzvim

P.O. Box 45041

Jerusalem 91450, Israel

Ladies and Gentlemen:

We have acted as Israeli counsel to ViryaNet Ltd., an Israeli company (the “Company”), in connection with the preparation and filing of the Registration Statement of the Company on Form F-3 dated as of December 22, 2005, under the Securities Act of 1933, as amended (the “Registration Statement”).

In so acting, we have examined originals or copies (certified or otherwise identified to our satisfaction), of such corporate records, agreements, documents and other instruments (including but not limited to the agreements (the “Agreements”), the convertible notes (the “Notes”) and the warrants (the “Warrants”) detailed in the “Selling Shareholders” paragraph in Registration Statement) and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth.

In such examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of documents submitted to us as certified or conformed copies and the authenticity of the originals of such latter documents. As to all questions of fact material to this opinion that have not been independently established, we have relied solely upon certificates or comparable documents of officers and representatives of the Company. In making our examination of documents executed by parties other than the Company, we have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and due execution and delivery by such parties of such documents and the validity and binding effect thereof.

Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that (i) the Ordinary Shares of the Company, NIS 1.0 par value per share (the “Ordinary Shares”), issued under the Agreements, the Notes and the Warrants have been duly authorized for issuance and validly issued and are fully paid and non-assessable, (ii) the Ordinary Shares that may be issued in connection with the exercise and conversion of the Notes and the Warrants have been duly authorized and, when issued and paid for in full in accordance with the terms of the Notes and the Warrants, will be validly issued, fully paid and non-assessable.

This opinion is subject to the following qualifications:

1. This opinion is based on the facts existing on the date hereof and of which we are aware without making any special investigation.

2. Members of our firm are admitted to the Bar in the State of Israel, and we do not express any opinion as to the laws of any other jurisdiction.

3. We render no opinion in relation to any representation made or given in the Registration Statement.

This opinion is furnished to you solely in connection with the Registration Statement and is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express prior written permission.

We hereby consent to the filing of this opinion with the Securities and Exchange Commission as Exhibit 5 to the Registration Statement.

Very truly yours,

/s/     Meitar Liquornik Geva & Leshem Brandwein

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption “Experts” in the Registration Statement on Form F-3, and related Prospectus of ViryaNet Ltd. for the registration of 4,067,305 of its Ordinary Shares and to the incorporation by reference therein of our report dated June 29, 2005, with respect to the consolidated financial statements of ViryaNet Ltd. included in its Annual Report (Form 20-F) for the year ended December 31, 2004 filed with the Securities and Exchange Commission.

	/s/    KOST, FORER GABBAY and KASIERER
Tel-Aviv, Israel	KOST, FORER GABBAY and KASIERER
December 19, 2005	A Member of Ernst & Young Global